NETGEAR, Inc. (NTGR) Earnings

Management highlights

### Strategic Transformation Progress - The company is successfully executing its transformation to a software-differentiated, enterprise-led business focused on profitable growth and shareholder value expansion. Q2 26 delivered top and bottom line results above the high end of prior guidance, confirming transformation momentum. - NETGEAR updated its standard industrial classification (SIC) code to align with enterprise solution peers, effective as of the call, to improve positioning with investors. The company added industry veteran Douglas Murray (CEO of AI-driven IT management software firm Auvik) to its board of directors, and hired seasoned APAC executive Surajit Sen to lead APAC enterprise go-to-market transformation. - The company has fully insourced enterprise software development, reducing reliance on external contractors; the enterprise software team now has over 200 in-house engineers. AI is embedded as a core accelerant for development, with no legacy process constraints, putting the team ahead of the adoption curve. ### Product and Ecosystem Milestones - Launched the Align cloud-managed platform for AV infrastructure at Infocom, which won 7 industry awards including Best of Show. Align will host existing network management apps and support third-party AV integrations, and will drive recurring revenue growth via required Insight licenses. - Announced major updates to the Insight platform, including a simplified user interface, updated licensing to boost recurring revenue, initial Exium security service integration, and a framework for AI-powered network operations and AI-defined networking. - Surpassed 600 Pro AV manufacturing partners, added over 125 certified Apex partners (the company's highest partnership tier), and won new major enterprise customers including National Geographic, Shopify, and Salesforce. The company secured 86 school district wins for the 2026 E-Rate season, over half of which are new to NETGEAR. ### Consumer Business Strategy - The consumer business continues optimizing for gross profit amid challenging supply chain and market conditions. The company is insourcing consumer software development to drive product innovation, and preserving value creation optionality for the core consumer business for the medium term. - Management noted that recent U.S. regulatory changes for consumer networking could create a medium-term tailwind, as only one other competitor (eero) has received conditional approval for future product launches. The US direct-to-consumer channel delivered strong 20% year-over-year growth.

Guidance

- Third quarter FY26 net revenue is projected between $165 million to $175 million. Service provider revenue is expected to decline ~19% year-over-year to around $22 million, in line with the ongoing harvesting of this business line. - Memory cost headwinds are expected to create a 200-basis-point combined gross margin headwind for the second half of FY26 relative to the first half, with the impact concentrated in Q3 due to near-term supply constraints. Enterprise margin impact will be nominal, offset by recent price increases and higher ASPs, while consumer will see larger headwinds that are expanding to other bill of materials components. - Q3 FY26 non-GAAP operating margin is guided between -3% to 0%, with GAAP operating margin projected between -12% to -9%. Non-GAAP tax expense is expected to range from $1 million to $2 million. - Management expects a 400-basis-point sequential improvement in non-GAAP operating margin in Q4 FY26 relative to the Q3 guidance midpoint, driven by seasonal revenue increases and reduced air freight costs from resolved near-term production issues. Full year FY26 revenue and non-GAAP operating margin are expected to be above street consensus estimates, following Q2's outperformance. - No formal FY27 guidance is provided, but management reaffirms prior Investor Day targets: enterprise revenue growth is expected to outpace operating expense investment in FY27, leading to expanded enterprise profitability. Consumer will target neutral contribution profit while the company prepares for the next Wi-Fi standard launch.

Segment performance

NETGEAR reported total Q2 FY26 revenue of $168.6 million, a 1.2% year-over-year decrease and a 6.1% sequential increase. 1. **Enterprise Segment**: Revenue was $89 million, up 7.7% year-over-year and 6.1% sequentially. This segment contributed 53% of total company revenue, representing a 400 basis point year-over-year improvement in revenue mix. Non-GAAP gross margin hit an all-time high of 54.1%, up 740 basis points year-over-year. Non-GAAP contribution margin reached 25.9%, up 660 basis points year-over-year and 200 basis points sequentially. The segment accounted for approximately 69% of the company's total gross profit. Double-digit year-over-year growth was driven by Pro AV managed switch products, with strong growth in The Americas and EMEA regions, partially offset by a 16% year-over-year revenue decline in APAC during the segment's ongoing go-to-market transformation. 2. **Consumer Segment (including service provider business)**: Revenue was $79.6 million, down 9.4% year-over-year and up 6.1% sequentially. Non-GAAP gross margin was 27.3%, a 210 basis point year-over-year decline, pressured by rising memory costs and aggressive competitive pricing. Service provider revenue (a sub-category of consumer) was down approximately 13% year-over-year as the company continues to harvest this declining business line. The US direct-to-consumer channel grew over 20% year-over-year, partially offsetting broader headwinds. Total company annual recurring revenue (ARR) across both segments grew 15% year-over-year to $41.6 million, with 558 thousand total recurring subscribers.

Risks & headwinds

- Rising memory and broader component costs, along with tight supply availability, are creating significant margin pressure, especially for the lower-margin consumer segment. Cost increases are expanding beyond memory to other components of the product bill of materials. - Production execution issues with a Pro AV manufacturing partner in Q2 created unplanned costs from emergency air freight, impacting near-term gross margin and contributing to Q3's guided weakness. Production is back on track, with volumes expected to return to target in Q3. - The APAC enterprise business is facing near-term revenue headwinds (down 16% year-over-year in Q2) from ongoing channel restructuring, though management expects this to drive long-term growth. - The consumer market faces aggressive competitive promotional pricing in the U.S. retail channel, and ongoing regulatory and supply chain uncertainty. - ODM manufacturing capacity constraints, extended lead times, and tariff/regulatory shifts add additional volatility to the overall supply environment.

Analyst Q&A

• Q: What drove the stronger-than-seasonal enterprise growth in Q2, and were there any one-time impacts like the FIFA World Cup? Are there details on ongoing APAC transformation beyond the new leadership hire? /

  A: Enterprise grew 15% year-over-year in The Americas and ~9% in EMEA, with APAC down 16% due to intentional restructuring. There were no one-time impacts from the FIFA World Cup or other events. APAC’s legacy multi-layered distribution channel model is being restructured to match the successful playbook already implemented in The Americas and EMEA, including reducing distribution layers and onboarding new partners. Near-term headwinds are expected to reverse with sequential growth starting in Q4, and APAC has long-term potential to become NETGEAR’s fastest growing region.

• Q: What has been the material impact of prior acquisitions this quarter, and is there any update to the company’s capital allocation strategy? /

  A: Acquisitions (MOG, Exium, and the Pro AV switch OS source code) have driven strong growth in enterprise non-device recurring revenue, though growth is coming off a small base so specific numbers are not provided. Management reaffirms it remains on track to hit mid-term non-device revenue targets set at Investor Day. Capital allocation strategy remains unchanged: first fund organic enterprise growth and targeted M&A focused on product adjacencies and new capabilities, with discipline around pricing for acquisitions, then return remaining capital to shareholders via share repurchases. $75 million remains in the current repurchase authorization.

• Q: What is the current state of the overall supply chain, specifically for Pro AV products, and is there any backlog to quantify? /

  A: The current supply environment is highly dynamic, with challenges around memory pricing and availability, broader component constraints, ODM capacity issues, and regulatory/tariff volatility. NETGEAR’s 30-year history of building resilient supply chains has allowed it to secure memory through the first half of 2027 and mitigate gross margin impact. Pro AV had a one-off execution issue at a manufacturing partner this quarter that required costly air freight, which is fully reflected in guidance. The issue is resolved, production is back on track, and volumes are expected to return to target in Q3. This is not comparable to the earlier demand-driven Pro AV supply shortage.

• Q: What is the outlook for full year gross margin and Q3 operating profitability? Is there any expense shifting from Q2 to Q3 that explains the guided Q3 weakness? /

  A: The core driver of profitability weakness in the back half is elevated memory costs, with the impact concentrated in Q3 due to near-term supply constraints that required incremental air freight. A 200-basis-point gross margin headwind is expected for the full second half, with a 400-basis-point sequential improvement in non-GAAP operating margin expected in Q4 driven by seasonal revenue growth and reduced air freight costs. Q2’s outperformance and the projected Q4 improvement mean full year FY26 revenue and non-GAAP operating margin will come in above prior consensus estimates.