Founder, BWS Financial Inc

Hamed Khorsand

Founder

Independent Stock Specific Research

BWS Financial Inc

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Equity Bottom-Up

<ul>
<li>NTGR used its annual investor day to describe the current state of the business and why management has chosen to focus on the premium and super premium</li>
<li>The high end of the market consists of customers who are willing to pay for the best quality wireless networks and it is where NTGR is turning its attention to</li>
<li>NTGR’s objective from the new strategy is to generate greater gross margin than prior years from customers who would be loyal and willing to purchase higher end devices and service</li>
</ul>


NTGR used its annual investor day to describe the current state of the business and why management has chosen to focus on the premium and super premium
The high end of the market consists of customers who are willing to pay for the best quality wireless networks and it is where NTGR is turning its attention to
NTGR’s objective from the new strategy is to generate greater gross margin than prior years from customers who would be loyal and willing to purchase higher end devices and service


<ul type="disc"><li>
NETGEAR (NTGR) is reimaging itself from a leading mainstream home networking company to a luxury, or as NTGR refers to itself as “super-premium”, home connectivity brand. NTGR’s management has been referring to this submarket for the past year, and as demand for Wi-Fi routers has started to wane NTGR has put greater emphasis on moving up market.</li></ul> <ul type="disc"><li>The transition is creating an inventory backlog for the US retail market that could take more time than originally projected. While NTGR’s ambitions to leave the lower end of the market could prove profitable, it could create revenue headwinds in the process.</li></ul> <ul type="disc"><li>We are moving to the sidelines as this new story could take more than another quarter of inventory digestion. We are downgrading to Neutral from Buy.</li></ul> Our Buy Rating returned 49.1 percent over 17 months.


NETGEAR (NTGR) is reimaging itself from a leading mainstream home networking company to a luxury, or as NTGR refers to itself as “super-premium”, home connectivity brand. NTGR’s management has been referring to this submarket for the past year, and as demand for Wi-Fi routers has started to wane NTGR has put greater emphasis on moving up market. The transition is creating an inventory backlog for the US retail market that could take more time than originally projected. While NTGR’s ambitions to leave the lower end of the market could prove profitable, it could create revenue headwinds in the process. We are moving to the sidelines as this new story could take more than another quarter of inventory digestion. We are downgrading to Neutral from Buy. Our Buy Rating returned 49.1 percent over 17 months.

<ul type="disc"><li>
NETGEAR (NTGR) used the third quarter to push through some of its excess channel inventory through several promotions. The Company should report third quarter results at the end of October. NTGR is anticipated to report softer sales than the usual third quarter sequential increase the firm experiences, but it’s inventory level that would matter.</li></ul> <ul type="disc"><li>When NTGR reported second quarter results the Company had asserted the consumer was more interested in traveling and being outside than in purchasing a wireless router. NTGR had oversupplied the channel with wireless routers. The strategy was to run promotions during the third quarter to prompt consumers to buy routers for back to school.</li></ul> <ul type="disc"><li>Continued government mandated closures related to new outbreaks in Southeast Asia could have resulted in lower production and shipments of wireless routers to end markets. We believe this delay could help NTGR in the overall need to run promotions.</li></ul> Focus has turned to operating margin as units sold per quarter normalizes.


NETGEAR (NTGR) used the third quarter to push through some of its excess channel inventory through several promotions. The Company should report third quarter results at the end of October. NTGR is anticipated to report softer sales than the usual third quarter sequential increase the firm experiences, but it’s inventory level that would matter. When NTGR reported second quarter results the Company had asserted the consumer was more interested in traveling and being outside than in purchasing a wireless router. NTGR had oversupplied the channel with wireless routers. The strategy was to run promotions during the third quarter to prompt consumers to buy routers for back to school. Continued government mandated closures related to new outbreaks in Southeast Asia could have resulted in lower production and shipments of wireless routers to end markets. We believe this delay could help NTGR in the overall need to run promotions. Focus has turned to operating margin as units sold per quarter normalizes. 

• NETGEAR (NTGR) surprised to the downside citing slower than anticipated sell through of products in the second quarter causing a buildup of channel inventory. The second quarter is seasonally the slowest time of the year, but this year it included Amazon Prime Day, which could have played a role in how much inventory retailers were willing to stock. Unfortunately for NTGR, Prime Day was towards the very end of the quarter giving the Company very little time to react. • The fallout from the disappointing second quarter revenue leads to the third quarter experiencing a sequential decline in revenue versus a seasonal lift. • We have lowered our estimates for the rest of the year bringing our non-GAAP EPS down to $2.89 from $3.50. • Our price target is now $43 from $54 to reflect the weakness in the third quarter and the reduced valuation the shares would likely receive until NTGR proves the inventory situation is a one-quarter event.

• NETGEAR (NTGR) surprised to the downside citing slower than anticipated sell through of products in the second quarter causing a buildup of channel inventory. The second quarter is seasonally the slowest time of the year, but this year it included Amazon Prime Day, which could have played a role in how much inventory retailers were willing to stock. Unfortunately for NTGR, Prime Day was towards the very end of the quarter giving the Company very little time to react. • The fallout from the disappointing second quarter revenue leads to the third quarter experiencing a sequential decline in revenue versus a seasonal lift. • We have lowered our estimates for the rest of the year bringing our non-GAAP EPS down to $2.89 from $3.50. • Our price target is now $43 from $54 to reflect the weakness in the third quarter and the reduced valuation the shares would likely receive until NTGR proves the inventory situation is a one-quarter event. 

United States

NETGEAR, Inc. provides networking products designed for small businesses and homes.  The Company's suite of products enables small businesses and homes to share Internet access, peripherals, digital content, and applications among multiple personal computers and other Internet-enabled devices.  NETGEAR markets and sells its products through distributors to a network of resellers.

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