Netgear’s revenue plummeted to $211 million in Q1 2022, a massive 33.8% decrease compared to Q1 2021 and a 16.2% decrease compared to Q4 2021. The revenue declined for the sixth straight quarter despite a rapid increase in the number of broadband users in key regions such as North America, Europe and Asia Pacific.

Lockdowns halt supply, increased cost of components hit margins

• In January this year, China was hit by another strong wave of COVID-19, which forced the authorities to shut down factories in all the major regions. This marred Netgear’s supply chain as it is heavily dependent on Chinese EMS and ODMs.
• Logistics cost has hit north ever since COVID-19 started. This year, too, it has been increasing continuously, thereby further reducing operating margins.
• Alternative raw material sources have proven to be expensive, which too has contributed to the weakened operating margin, thereby pushing it into negative territory, a first in many years for Netgear.

SMB segment grew 4.1% despite component shortages

• The consumer segment declined further by 25.1% QoQ. The brand has been losing business in the low-price and mid-price bands due to a strategic shift towards offering premium products. According to Netgear, the US consumer broadband market has contracted to pre-pandemic levels as opposed to the expectation of 15% above pre-pandemic levels, which has resulted in a revenue shortfall and a revised estimate for the consumer business for 2022.
• The strategy to offer more premium products is paying dividends as the Orbi 8 and Orbi 9, which cost more than $1,000 for a 3-pack, have seen great demand and are leading the market in the super-premium segment. Significant demand for higher-end gaming and Wi-Fi routers is coming up due to customers opting for stable and better internet connectivity for working from home and learning from home applications.
• SMB products consisting of enterprise-grade routers, access points, switches and video analytics software Pro AV have seen great demand, but the brand is still not able to fulfill its orders due to supply chain disruptions. Still, the category grew by 4.1%. Pro AV and managed access points, in particular, have proven to be successful and are getting good reception in terms of demand. Netgear has been revolutionizing the surveillance industry by facilitating a transition from the older analog technologies to newer and faster IP AV technologies.

Shipments of routers, gateways down 12.8%; APAC, Europe’s revenue loss above 25%

• The brand shipped around 2.4 million units of wired and wireless networking devices. It shipped around 0.78 million units of all types of routers and gateways. Wireless remains the dominant segment, driving the revenues with a 63% share. Revenues from EMEA and APAC regions declined by 26.3% and 30.4% respectively, negatively impacting the brand’s future prospect of growing in these highly competitive regions. North America saw a decline of 9.3% due to supply chain disruptions and a decrease in the overall market for routers and gateways. The paid subscriber base for services such as Netgear Armor and Meural grew by 7.4% to 627,000.

Focus on Premium

• Optimizing inventory levels will be important for Netgear as it is still having a large unsold inventory, especially for the consumer segment, which is expected to clear off the shelves by the end of this year. It will be realigning the inventory levels with its suppliers, distributors and retailers in the coming quarter as per reduced demand in the consumer segment.
• Supply constraints are expected to ease starting Q2 2022, which may reduce the overall supply and component costs, helping improve the operating margins. Netgear expects the revenue to be in the range of $205-$220 million as it sees the service provider revenue increasing to $30 million and the SMB revenue remaining above Q1 2022 levels. However, this will still be around 30% lower than Q2 2021.
• Sequential growth in managed access points, other SMB routers, mobile hotspots and mesh solutions is expected going forward along with a decline in demand for low- and mid-tier consumer gateways. Revenue from services grew 47% YoY to reach $7.6 million, which reasserts the company’s focus on creating and growing the super-premium segment for consumer business.
• Wi-Fi 5 will be phased out from its product line soon with Wi-Fi 6 and Wi-Fi 6E taking center stage. The company expects a lot of demand for such routers as more businesses are opening with the pandemic situation easing in North America and EMEA regions and will implement upgrades to improve network connectivity. Netgear expects to launch Wi-Fi 7 by early next year based on the availability of chipsets from leading OEMs. It has launched a new powerful 5G hotspot – Nighthawk M6 Pro – which comes with Wi-Fi 6E, an industry first for the MiFi segment. It can prove to be a hugely successful product with lots of consumers working on the go.
• D2C model is gaining traction in its consumer business, for which Netgear aims to expand the presence in key target regions for better visibility. The company aims to bring unique editions of its products to offer differentiated products on its online channels.

Key Takeaways

• There is significant demand for premium products in developed markets such as the US and Europe where consumers are ready to pay a higher premium for better products and better online internet security services on their internet connection.
• Netgear is targeting to create more such premium and super-premium products to improve margins. However, it should also not lose focus from the low- and mid-price band market, which has been driving its revenues for years and should continue to grow significantly as more households get a high-speed broadband connection.
• All the major telcos and ISPs have been significantly expanding their fiber networks across the rural and suburban US, driven by government initiatives.
• Partnerships with ISPs and telcos with premium subscriber base will lead to increased contribution of higher-ASP products in the overall sales mix.
• The brand is focusing on cellular-based routers through its range of mobile hotspot routers and CPE, which shall bring in significant revenue in the latter half of this year.

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