NETGEAR INC

The following table sets forth the unaudited condensed consolidated statements of operations for the periods presented.

Net Revenue by Geographic Region

Our net revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, and net changes in deferred revenue.

For reporting purposes, revenue is generally attributed to each geographic region based upon the location of the customer.

Americas

Net revenue in Americas decreased in the three and six months ended June 30, 2024, driven by declines in Connected Home segment’s net revenue of 14.7% and 10.8%, and in NETGEAR for Business segment’s net revenue of 24.9% and 20.4%, respectively, compared to the prior year periods. The declines in Connected Home net revenue were primarily due to market contraction, leading to year-over-year declines in the retail channel, compared to the prior year periods. The decline in Connected Home net revenue in the six months ended June 30, 2024 was partially offset by higher net revenue from the service provider channel, compared to the prior year period. The declines in NETGEAR for Business net revenue were mainly due to our continuous work with our channel partners to optimize their inventory carrying levels.

EMEA

Net revenue in EMEA decreased in the three and six months ended June 30, 2024, compared to the prior year periods, driven by declines in NETGEAR for Business segment’s net revenue of 26.0% and 20.0%, and in Connected Home segment’s net revenue of 20.8% and 27.4%, respectively. The net revenue declines in NETGEAR for Business segment were mainly driven by our continuous work with our channel partners to optimize their inventory carrying levels. The net revenue declines in Connected Home segment were mainly due to market contraction, leading to year-over-year declines in the retail channel in the three and six months ended June 30, 2024.

APAC

Net revenue in APAC was flat in the three months ended June 30, 2024, compared to the prior year. Net revenue in APAC increased in the six months ended June 30, 2024, compared to the prior year period, mainly driven by a net revenue increase from the service provider channel in our Connected Home segment.

For further discussions specific to our Connected Home and NETGEAR for Business, refer to the "Segment Information" section below.

Cost of Revenue and Gross Margin

Cost of revenue consists primarily of the following: the cost of finished products from our third party manufacturers; overhead costs, including purchasing, product planning, inventory control, warehousing and distribution logistics; third-party software licensing fees; inbound freight; import duties/tariffs; warranty costs associated with returned goods; write-downs for excess and obsolete inventory; amortization of certain acquired intangibles and software development costs; and costs attributable to the provision of service offerings.

We outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costs and gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns, changes in average selling prices, end-user customer rebates and other channel sales incentives, changes in our cost of goods sold due to fluctuations and increases in prices paid for components, net of vendor rebates, royalty and licensing fees, warranty and overhead costs, inbound freight and duty/tariffs, conversion costs, charges for excess or obsolete inventory, amortization of acquired intangibles and capitalized software development costs. The following table presents costs of revenue and gross margin, for the periods indicated:

Our gross margin percentage decreased for the three and six months ended June 30, 2024, compared to the prior year periods, primarily attributable to higher cost of inventory, higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory, lower mix of NETGEAR for Business products, which generally carry higher gross margin, and higher promotional marketing spending in the retail market.

We expect our gross margin in the third fiscal quarter to start improving as the mix of NETGEAR for Business products increases with our channel partners having optimized their inventory carrying levels in the second fiscal quarter of 2024, and the impact from efforts to accelerate the depletion of our slower moving inventory is reduced. Forecasting gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels. Our cost of revenue as a percentage of net revenue can vary significantly based upon factors such as: uncertainties surrounding revenue levels, broad-based inflationary pressures and the uncertain macroeconomic environment, future pricing and/or potential discounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, competition, the timing of sales, and related production level variances; import customs duties and imposed tariffs; changes in technology; changes in product mix; expenses associated with writing off excessive or obsolete inventory; variability of stock-based compensation costs; royalties to third parties; fluctuations in freight costs; manufacturing and purchase price variances; changes in prices on commodity components; and warranty costs. We expect that revenue derived from paid subscription service plans will continue to increase in the future, which may have a positive impact on our gross margin. However, we will continue to experience fluctuations in our gross margin due to the factors discussed above.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes, IT and facility allocations, and other consulting fees. Research and development expenses are recognized as they are incurred. Our research and development organization is focused on enhancing our ability to introduce innovative and easy-to-use products and services. The following table presents research and development expenses, for the periods indicated:

Research and development expenses decreased for the three and six months ended June 30, 2024, compared to the prior year periods, primarily driven by decreases in personnel-related expenditures of $0.7 million and $1.2 million, mainly due to lower headcount, decreases in professional service fees of $0.1 million and $1.2 million, and decreases in IT and facility allocation of $0.1 million and $0.5 million, respectively.

We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products and services. We expect research and development expenses in absolute dollar amount in the third fiscal quarter of 2024 to be in line with the prior quarter level. We continue to invest in research and development to grow our cloud platform capabilities, our services and mobile applications and to create and expand our hardware product offerings focused on premium WiFi 7, and WiFi 6/6E, Advanced 4G/5G mobile and 5G coverage solutions, audio and video over Ethernet, web-managed, AV over IP managed switches and NETGEAR for Business wireless products. Research and development expenses may fluctuate depending on the timing and number of development activities and could vary significantly as a percentage of net revenue, depending on actual revenues achieved in any given quarter.

Sales and Marketing

Sales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketing expenses, outbound freight costs, amortization of certain intangibles, personnel expenses for sales and marketing staff, technical support expenses, and IT and facility allocations. The following table presents sales and marketing expenses, for the periods indicated:

The declines in sales and marketing expenses for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily attributable to decreases in brand marketing expenditures of $1.3 million and $3.3 million, and decreases in personnel-related expenditures of $1.0 million and $2.1 million, mainly due to lower headcount, respectively.

We expect sales and marketing expenses in absolute dollar amount in the third fiscal quarter of 2024 to be slightly up from the prior quarter level as we look to make some investments in sales resources in support of our NETGEAR for Business segment. Expenses may fluctuate depending on revenue levels achieved as certain expenses, such as commissions, are determined based upon the revenues achieved. Forecasting sales and marketing expenses is highly dependent on expected revenue levels and could vary significantly depending on actual revenue achieved in any given quarter. Marketing expenses may also fluctuate depending upon the timing, extent and nature of marketing programs. Marketing expenditure committed with a customer is generally recorded as a reduction of revenue per authoritative guidance.

General and Administrative

General and administrative expenses consist of salaries and related expenses for executives, finance and accounting, human resources, information technology, professional fees, including legal costs associated with defending claims against us, allowance for doubtful accounts, IT and facility allocations, and other general corporate expenses. The following table presents general and administrative expenses, for the periods indicated:

The increases in general and administrative expenses for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily driven by increases in personnel-related expenditures of $3.0 million and $4.5 million, respectively, mainly due to higher variable compensation and expenses associated with CEO transition. The increase in general and administrative expenses for the three months ended June 30, 2024, compared to the prior year period, was partially offset by a decrease in legal and professional service fees of $0.6 million, mainly associated with litigation matters.

We expect general and administration expenses in absolute dollar amount in the third fiscal quarter of 2024 to be up from the prior quarter level, primarily due to higher litigation defense costs. General and administrative expenses could fluctuate depending on a number of factors, including the level and timing of expenditures associated with litigation defense costs in connection with the litigation matters described in Note 8, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, as well as legal costs associated with asserting and enforcing our intellectual property portfolio and other factors.

Litigation Reserves, Net

The increases in litigation reserves, net for the three and six months ended June 30, 2024, compared to the prior year periods, were attributable to $8.2 million litigation reserve relating to a contingent liability tied to a successful outcome of the International Trade Commission (ITC) suit against TP-Link.

Restructuring and Other Charges

The changes in restructuring and other charges for the three and six months ended June 30, 2024, compared to the prior year periods, were immaterial. For a detailed discussion of restructuring and other charges, refer to Note 13, Restructuring and Other Charges, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Other Income, Net

Other income, net consists of interest income, which represents amounts earned and incurred on our cash, cash equivalents and short-term investments, and other income and expenses, which primarily represents gains and losses on transactions denominated in foreign currencies, gains and losses on investments, and other non-operating income and expenses, including gain on litigation settlements. The following table presents other income (expenses), net for the periods indicated:

The decreases in other income, net for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily due to $6.0 million cash received relating to a favorable litigation settlement in the prior year but not in the current year, partially offset by higher interest income resulting from higher interest rates and higher cash and short-term investment balances.

Provision for (Benefit from) Income Taxes

The changes in taxes for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily due to the continued full valuation allowance on deferred tax assets for U.S. federal and state purposes that was established during the period ended October 1, 2023. We evaluated the current results as of the period ended June 30, 2024, coupled with the expectations for the remainder of the year, and determined that it continues to not be more likely than not that the deferred tax assets would be realized, and accordingly, did not record any benefits for the forecasted tax loss in for the three and six months ended June 30, 2024. By comparison, for the three and six months ended July 2, 2023, tax benefits were recorded on the pre-tax loss since the valuation allowance on deferred tax assets had not yet been established.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our future foreign tax rate could be affected by changes in the composition in earnings in countries with tax rates differing from the U.S. federal rate. We are under examination in various U.S. and foreign jurisdictions.

Segment Information

In the first fiscal quarter of 2024, resulting from certain segment structure changes, we revised our allocation method by allocating certain historically unallocated operating expenses to our individual operating segments. The prior-year segment financial information has been recast to conform to the current-year presentation. Additional information on the change, a description of our products and services, as well as segment financial data, for each segment and a reconciliation of segment contribution income (loss) to income (loss) before income taxes can be found in Note 11, Segment Information, and information on net revenue by sales channels can be found in Disaggregation of Revenue in Note 3, Revenue, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Connected Home Segment

Connected Home net revenue decreased in the three and six months ended June 30, 2024, compared to the prior year periods, primarily due to market contraction, leading to year-over-year declines in the retail channel. The decrease in Connected Home net revenue in the six months ended June 30, 2024 was partially offset by higher net revenue from the service provider channel in the Americas and APAC regions, compared to the prior year period. Despite the declines in the overall consumer networking market during the three and six months ended June 30, 2024, our premium portfolio of products continued to outperform the market, and we saw growth in our services revenue, as compared to the prior year periods. Geographically, Connected Home net revenue decreased in Americas and EMEA regions in the three and six months ended June 30, 2024, whereas net revenue in APAC decreased in the three months ended June 30, 2024 but increased in the six months ended June 30, 2024, compared to the prior year periods.

Connected Home contribution loss increased in the three and six months ended June 30, 2024, compared to the prior year periods, mainly attributable to lower net revenue, and lower gross margin achievement due to higher promotional marketing spending in the retail market, higher cost of inventory, higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory.

NETGEAR for Business Segment

NETGEAR for Business net revenue decreased for the three and six months ended June 30, 2024, compared to the prior year periods, primarily due to our continuous work with our channel partners to optimize their inventory carrying levels. We continued to experience strong demand for the Pro AV product line of managed switches. Geographically, in the three and six months ended June 30, 2024, NETGEAR for Business net revenue decreased in Americas and EMEA regions, whereas net revenue in APAC region increased, respectively, compared to the prior year periods.

NETGEAR for Business contribution income decreased in the three and six months ended June 30, 2024, compared to the prior year periods, primarily due to lower net revenue, and lower gross margin achievement mainly attributable to higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory, and higher cost of inventory.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, short-term investments and cash generated from operations. As of June 30, 2024, we had cash, cash equivalents and short-term investment of $294.3 million, an increase of $10.7 million from December 31, 2023.

As of June 30, 2024, approximately 27% of our cash and cash equivalents and short-term investments were outside of the U.S., which are subject to fluctuation based on the settlement of intercompany balances. As we repatriate these funds in accordance with our designation of funds not permanently reinvested outside of the U.S., we will be required to pay income taxes in certain U.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. We have recorded deferred taxes for the tax effect of repatriating the funds to the U.S.

Cash Flows

The following table presents our cash flows for the periods presented.

Operating activities

Net cash provided by operating activities was $35.6 million in the six months ended June 30, 2024, as compared to net cash used of $25.5 million in the prior year period, primarily due to favorable working capital movements. Our accounts payable (excluding payables related to property and equipment) decreased from $46.4 million as of December 31, 2023 to $39.2 million as of June 30, 2024, primarily due to the reduction and timing of inventory receipts and supplier payments. Accounts receivable decreased from $185.1 million as of December 31, 2023 to $147.1 million as of June 30, 2024, primarily due to the timing of cash collections and lower revenue. Inventory decreased from $248.9 million as of December 31, 2023 to $188.9 million as of June 30, 2024. We expect to continue generating cash from operating activities in the second half of fiscal 2024 as we continue to reduce our slower moving inventory levels.

Investing activities

Net cash used in investing activities decreased by $2.0 million in the six months ended June 30, 2024, compared to the prior year period, mainly driven by lower net purchases of short-term investments, partially offset by higher purchases of property and equipment.

Financing activities

Net cash used in financing activities was $22.3 million in the six months ended June 30, 2024, compared to net cash provided by financing activities of $0.2 million in the prior year period, primarily due to repurchases of our common stock in the current year period.

Based on our current plans and market conditions, we believe that our existing cash, cash equivalents and short-term investments, together with cash generated from operations, will be sufficient to satisfy our anticipated cash requirements in the short-term and long-term. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology.

Stock Repurchase Program

From time to time, our Board of Directors has authorized programs under which we may repurchase shares of our common stock. Under the authorizations, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of our common stock. During the six months ended June 30, 2024, we repurchased and retired, reported based on trade date, approximately 1.6 million shares of common stock, at a cost of approximately $21.4 million under the repurchase authorization. We did not repurchase any shares of common stock during the six months ended July 2, 2023. As of June 30, 2024, approximately 0.9 million shares remained authorized for repurchase under the repurchase program. On July 16, 2024, the Board of Directors authorized management to repurchase up to 3.0 million shares of our outstanding common stock, incremental to the remaining shares under our previous repurchase program. We also repurchased and retired, reported based on trade date, approximately 197,000 and 147,000 shares of common stock, at a cost of approximately $2.9 million and $2.1 million during the six months ended June 30, 2024 and July 2, 2023, respectively, to administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving Restricted Stock Units. For a detailed discussion of our common stock repurchases, refer to Note 9, Stockholders’ Equity, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. We remain confident in our ability to generate meaningful levels of cash, and plan to continue to opportunistically repurchase shares in future periods.

Contractual and Other Obligations

Except as follows, there were no material changes outside of the ordinary course of business in our contractual obligations as of June 30, 2024, from those as of December 31, 2023, disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

As of June 30, 2024, we had $71.7 million of purchase obligations which represented short-term non-cancellable inventory-related purchase agreements with suppliers, as compared to $42.6 million as of December 31, 2023. Due to an elongation of the time from order placement to production that occurred several years ago, we issued purchase orders to supply chain partners beyond contractual termination periods. As of June 30, 2024, $257.7 million of purchase orders beyond contractual termination periods remained outstanding. These purchase orders may be cancelled by either party, however we may incur expenses for materials and components, such as chipsets purchased by the supplier to fulfill the purchase order, in the event of cancellation. Expenses incurred in respect of cancelled purchase orders have historically not been significant relative to the original order value. For a detailed discussion, refer to Note 8, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

Information with respect to this item may be found in Note 2, Summary of Significant Accounting Policies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which are hereby incorporated by reference.