NETGEAR Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 31, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Would now like to turn the conference over to Eric Bylin. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to NETGEAR's Q2 of 2024 financial results conference call. Joining us from the company are Mr. CJ Prober, CEO and Mr. Brian Murray, CFO.

Speaker 1

The format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the Q2 and guidance for the Q3 provided by Brian. We'll then have time for any questions. If you have not received a copy of today's release, please visit NETGEAR's Investor Relations website atwww.netgear.com. Before we begin the formal remarks, we advise you that today's conference call contains forward looking statements. Forward looking statements include statements regarding expected revenue, operating margins, tax expense, expenses and fit your business outlook.

Speaker 1

Actual results or trends could differ materially from those contemplated by these forward looking statements. For more information, please refer to the risk factors discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10 Q. Any forward looking statements that we make on the call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these statements as a result of new information or future events, except as required by law. In addition, several non GAAP financial measures will be mentioned on this call. A reconciliation of the non GAAP to GAAP measures can be found in today's press release on our Investor Relations website.

Speaker 1

At this time, I would now like to turn the call over to C. J.

Speaker 2

Good afternoon, and welcome to today's call. On our call last quarter, I outlined a plan for transforming Netgear with a focus on creating long term value for shareholders. Q2 was a foundational first step in this transformation, and I'm happy to report that it was a very successful quarter. We outlined a series of decisive actions to address some of our immediate challenges and the team delivered with stellar execution. Some of these actions represent a dramatic shift in how NETGEAR has operated over the past several years, and we were able to adapt without losing a beat in the midst of a significant strategic reorganization.

Speaker 2

This gives me a ton of confidence in our ability to build on this momentum and deliver on our long term value creation goals. I'll take a few minutes to highlight some of the specific accomplishments for this past quarter. We were successful at destocking the channel at the high end of our $25,000,000 to $30,000,000 target, which puts us in a position to drive more linearity in the business by more closely matching sell in with sell through on a go forward basis. I can say with confidence that the channel destocking is now behind us. We also made great progress in lowering our inventory position by executing on its $22,000,000 decrease, which was above our target for the quarter and resulted in an inventory position that is down 24% since the beginning of the year.

Speaker 2

We continue to focus on reducing our inventory position with the goal of exiting the year with approximately 3 months of supply. While this quarter's results were obviously challenged by our destocking and balance sheet inventory reduction efforts, our revenue and non GAAP operating margin also came in above the high end of our guidance range, another example for how we're delivering on our commitments. We generated $16,000,000 in free cash flow and executed $10,000,000 in share repurchases, which represents the Q4 in a row where we've generated free cash flow and the 2nd quarter in a row where we've executed on $10,000,000 or more of share repurchases. We exited the quarter with over $294,000,000 of cash, and we expect to continue to generate cash during the second half of the year. In addition to the financial results, our NETGEAR for Business segment achieved some exciting milestones.

Speaker 2

We had a record quarter of sell through for our ProAV managed switch business, and this business is now back on a growth trajectory in all three of our global markets. We now have over 300 ProAV manufacturing partners with the addition of some key new integrations, and we continue to increase the number of large deployments with enterprise scale customers. In addition to ProAV, we remain focused on growing our Wi Fi land business, and we won some important large projects in our target verticals in Q2, improving the trajectory for this business. More broadly, we executed on a number of organizational changes to set NETGEAR for Business up for long term success. Most importantly, we hired a new leader for this business.

Speaker 2

Pramod Bajadi joined us as the President and GM last week. Pramod has spent his entire career in B2B networking with long stints at Cisco and Ruckus and most recently at Arista. Promote's last two roles were leading the end to end Ruckus business as their GM and as the Group Vice President and GM for the Cognitive Campus Business at Arista. Promote's track record and industry experience are exactly what's needed as we transform this business and we have a shared belief that there's an opportunity to drive significant growth and profitability in NFB. We also reorganized our global sales team to have an organization that is dedicated to the growth of the NETGEAR for business, and we are in the process of hiring a sales executive to lead this global team.

Speaker 2

In the meantime, we're greenlighting incremental second CHP side On the CHP side of things, we've made great progress implementing the near term strategy adjustments we outlined on last quarter's call. As a reminder, the main elements of this are, 1st, developing products that serve a broader segment of the market with a good, better, best product strategy 2nd, evolving our marketing message to focus on our points of differentiation relative to low cost foreign competition third, partnering with key ecosystem players to drive innovation and improve the customer experience and finally, simplifying our subscription offering to increase our attach rate and recurring revenue while deemphasizing high churn subscriptions acquired through product bundles. On subscriptions, we continue to see strong growth in our subscriber count and we ended this quarter with 958,000 subscribers. Of these subscribers, 544,000 were acquired outside of our product bundling effort and are recurring in the sense that they have explicitly signed up to our service with a credit card that enables recurring billing. Recurring subscription revenue for the quarter grew over 30% year over year.

Speaker 2

Going forward, we plan to focus our reporting exclusively on these recurring subscribers given the differentiated value they bring to our business and given we're in the process of sunsetting our high churn subscription and hardware bundles. On the product side, we launched 2 new Wi Fi 7 products in Q2 that are at mainstream price points. These were very well received by the market and are outperforming our expectations, validating our good, better, best product strategy. Our recently launched cable modems are also performing very well, and we've been chasing supply to keep up with the incremental demand. As we design and greenlight lower cost products, we remain highly focused on preserving gross margin.

Speaker 2

We were also pleased to have a very good Prime Day and nicely outperformed our targets. As we shared, we're broadening our set of offerings to cover a wider range of price points. As we add to our portfolio, we believe this will help us with Amazon's algorithms, so it's nice to kick off the back half of the year with good performance on this front. In terms of our U. S.

Speaker 2

Consumer networking market trajectory in Q2, we saw a smaller year over year decline than we were expecting and the market was approximately flat quarter over quarter. We believe this represents the beginning of an improved market dynamic as the upgrade cycle, driven by the availability of Wi Fi 7, starts to accelerate and our new products become more widely available. As I wrap up the CHP update, this is a good time to highlight another addition to our team. Laura Orvides joined our Board of Directors in July. Laura spent 18 years at Amazon, most recently as the VP of Consumer Electronics and is now CEO of OnX Maps, a leader in app based consumer subscriptions.

Speaker 2

Given the importance of growing our share on Amazon and scaling our recurring revenue for our consumer business, Laura is a perfect fit for the Board. And since Laura served on my last company Board, I know firsthand the positive impact she brings. One other development for the quarter that I'm cautiously optimistic about is our legal win against TP Link. The ITC administrative judge in our offensive action against TP Link determined that TP Link's multi band Wi Fi devices, including their routers, extenders and mesh networking systems violate our patents. The ITC judge is recommending to the full commission that these infringing products be barred from importation and sale in the U.

Speaker 2

S, which would be a big win for NETGEAR and our IP enforcement efforts. The final determination from the commission is expected in early October. Given that TP Link is a formidable foreign competitor, a successful final determination in this case could have a significant positive impact on our U. S.-based consumer business. In terms of next steps in our transformation, we are making great progress in the development of our long term strategies for each business unit, and we'll have more to share on that on our next earnings call.

Speaker 2

Some early observations I can share now. For both businesses, the focus will be on driving top line growth and expanding recurring revenue, both of which are key to achieving better leverage in our operating model. Given the size, growing nature and recurring revenue opportunities of the ProAV and Wi Fi land markets, I'm expecting our NFB strategic initiatives to be centered around growing these 2 businesses. The opportunities here are significant, and we're building the team and capabilities to more effectively compete to capture the market opportunity. On the CHP side of things, the market dynamics of consumer networking have created significant headwinds over the past few years.

Speaker 2

While we expect these dynamics to improve significantly as the upgrade cycle kicks in, we will be developing strategies to grow our share in this market while also evaluating opportunities to expand our TAM in the broader consumer space. While the specifics of these strategies will inform our capital allocation, we're in the meantime increasing our authorized share repurchase by 3,000,000 shares or approximately $48,000,000 based on this week's opening share price. When combined with the shares remaining on our previous authorization, this brings our total available to repurchase up to 3,900,000 shares or approximately $62,000,000 based on this week's opening share price. We expect to continue to be opportunistic buyers of our stock, which we believe is an important part of our capital allocation strategy. So in summary, the turnaround is happening.

Speaker 2

Q2 was an important first step on this journey, and we delivered on our initiatives. We supplemented our talented team with several industry leaders and implemented a reorganization to set us up for long term success, and we're excited to share more on our long term strategies during our next earnings call. With that, I'll look forward to your questions and hand it over to Bryan in the meantime.

Speaker 3

Thank you, CJ, and thank you, everyone, for joining today's call. We are pleased with the execution by our team this quarter in delivering both revenue and profitability above our guidance range, while also delivering on our goal to destock the channel in an accelerated fashion and continuing our trajectory of lowering our own on hand inventory. Both sides of the business contributed to this outperformance. In DHP, we saw continued strength in premium products and service provider revenue came in better than expected. Within MFB, we experienced a record quarter in end market sales of our ProAV managed switch products.

Speaker 3

For the quarter ended June 30, 2024, revenue was $143,900,000 down 12.6% on a sequential basis and down 17% year over year, above the high end of our guidance even as we reached the higher end of our accelerated channel inventory destocking plan. We also drove a $22,300,000 decrease in our own inventory during the quarter, helping us generate positive free cash flow. We executed on our plan in accelerating destocking of the channel in the Q2 as we lower channel inventory at the upper end of our targeted range of $25,000,000 to $30,000,000 that we shared last quarter. With particular benefit on the NFB side. With this strong execution, we do not anticipate any further meaningful destocking and are now well positioned to match sell in with sell through going forward.

Speaker 3

This strategic action, although a headwind to our revenue and profitability in the second quarter, was an important step going forward as we NFV businesses for long term success. We now have better positioned both businesses for a more predictable performance that is aligned to the market trends and remove the varied swings that come from shifting channel inventory levels. In the Q2, the CHP business produced net revenue of $84,000,000 down 14.6% on a year over year basis and down 12.4% sequentially, largely due to the U. S. Consumer networking market contraction.

Speaker 3

Service provider revenue was $19,700,000 higher than our expectations, but down sequentially as operators awaited the launch of our new Wi Fi 7 mobile hotspot later this year. The CHP U. S. Retail market slightly outperformed our expectation and is showing signs of recovery with a lower year over year decline than we saw in Q1. Although the overall available market is still down high single digits year over year due to continued pressures with the challenging macroeconomic environment impacting consumer spending.

Speaker 3

This competitive consumer environment continued to result in an extremely promotional market. We also took pricing actions to move slower moving inventory in the Q2 within this business. Despite these headwinds, our premium portfolio of products continue to outperform the market even as other competitors enter this segment of the market following our lead in moving upstream. Enhanced by our recently released Wi Fi 7 products, our premium mesh grew high single digits sequentially. Our newly released cable modems are outperforming our expectations, further underscoring the growth opportunity in broader portions of the market.

Speaker 3

We solidified our leadership in the premium segment and gained a foothold in the cable market. And this quarter's success with our new lower cost Wi Fi 7 product releases begins to validate our good, better and best strategy. However, with our additional new product introductions planned to be released in late 2024 and the first half of twenty twenty five, we expect the full benefits of this new strategy to build over time. On the NFV side, we are pleased to have delivered at the higher end of our destocking goals, while also exceeding our initial top line target for the quarter as we delivered efficiencies in our contra revenue marketing spend in the quarter within this business. With the success in putting destocking behind us, we are now positioned to match sell in with sell through with our channel partners going forward.

Speaker 3

As expected, this reduction in inventory carrying levels at our channel partners impacted our top and bottom line and was compounded by end user demand for our traditional switch business coming in slightly below our expectations, leading to net revenue of $59,900,000 in the 2nd quarter, down 12.8% sequentially and down 20.2% year over year. The efforts we've made to expand into the broadcast market and grow our manufacturing partnerships have helped us capitalize on the underlying ProAV end market demand. And in Q2, our managed switch line grew double digits year over year, marking a record quarter and a return to growth trajectory across all regions. For the Q2 of 2024, net revenue for the Americas was $95,500,000 a decline of 18.1% year over year and down 13.1% on a sequential basis. EMEA net revenue was $27,400,000 a decrease of 24.4% year over year and down 12.3% quarter over quarter.

Speaker 3

Our APAC net revenue was $21,000,000 which is up 1.9% from the prior year comparable period and down 10.3% sequentially. From this point on, my discussion points will focus on non GAAP numbers. The reconciliation from GAAP to non GAAP is detailed in our earnings release distributed earlier today. Non GAAP gross margin in the Q2 of 2024 was 22.4%, down 920 basis points compared to 31.6% in the prior year comparable period and down 7 10 basis points compared to the Q1 of 2024. The promotional retail market, lower mix of NFB revenue, a more aggressive approach to addressing slower moving inventory and higher cost of inventory pressured our 2nd quarter profitability relative to both comparative periods.

Speaker 3

The meaningful but important destocking actions we took in the Q2 created a significant top line headwind, which put further pressure on our operating leverage. Despite these challenges, with Sunpro AB and Service Provider outperformance, we were able to deliver 2nd quarter non GAAP operating loss just above our guidance range, coming in at $31,100,000 and an operating margin of negative 21.6 percent. This is down 15.40 basis points compared to the year ago period and down 1190 basis points compared to the prior quarter. We exited the 2nd quarter with 958,000 subscribers and we generated $12,100,000 in service revenue in the quarter, a year over year increase of 17%. Of these paid subscribers, 544,000 were paid recurring subscribers, an increase of 17,000 sequentially and represented $7,700,000 in recurring service revenue, which was up over 30% year over year.

Speaker 3

We continue to see increased emphasis placed by CHP consumers on cybersecurity protection, privacy and premium support. And as we noted last quarter, continue to believe the optimal strategy is to focus on growing recurring revenue. Accordingly, from the Q3 onwards, we will focus on the recurring subscriber metrics. Total Q2 non GAAP operating expenses came in at $63,300,000 down 3.3% year over year and down 2% sequentially. Our headcount was 622 as it ended the quarter, down from 628 in Q1.

Speaker 3

We are currently refining our long term strategy and restructuring the organization to drive alignment and spending with the areas that will deliver long term growth and expanding profitability. Our non GAAP R and D expenses for the 2nd quarter were 13.2% of net revenue as compared to 11.4 percent of net revenue in the prior year comparable period and 11.9% of net revenue in the Q1 of 2024. To continue our technology and product leadership, we are committed to continued investment in R and D. Our non GAAP tax benefit was $7,000,000 in the Q2 of 2024. Looking at the bottom line for Q2, we reported non GAAP net loss of $21,400,000 and non GAAP diluted loss per share of $0.74 Turning to the balance sheet.

Speaker 3

We ended the Q2 of 2024 with $294,300,000 in cash and short term investments, up $4,900,000 from the prior quarter and equating to $10.19 per share, slightly above our expectations after effective stock repurchases. We continue to convert our working capital into cash and made significant progress lowering our inventory in the quarter, which declined by $22,300,000 sequentially. During the quarter, dollars 18,400,000 of cash was provided by operations, which brings our total cash provided by operations over the trailing 12 months to $118,000,000 We used $2,300,000 in purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $9,000,000 We are diligently focused on generating cash and still expect to generate cash in the back half. At this point, we expect to consume cash in the Q3 and generate more than enough cash in the Q4 to overcome that decline. In Q2, we spent $10,000,000 in repurchases of approximately 800,000 shares of NETGEAR common stock at an average price of $12.50 per share.

Speaker 3

We have approximately 875,000 additional shares reserved in our previous authorization, and the Board has recently approved an authorization for an additional 3,000,000 shares or approximately a combined $62,000,000 based on this week's opening stock price. Since the beginning of 2020, we have spent $144,600,000 to repurchase 5,700,000 shares. We are committed to returning value to our shareholders and plan to continue to opportunistically repurchase shares in future periods. Our fully diluted share count is approximately 28,900,000 shares as of the end of the second quarter. Now I'll discuss our Q3 2024 outlook.

Speaker 3

We completed our destocking actions for both the NFB and CHP businesses in the 2nd quarter and expect to see more predictable performance that is aligned to each market. However, while there should be less volatility from shifting channel inventory levels, participating more significantly in the broader CHP market and growing our NFV business momentum will take time to fully execute. We anticipate revenue from the service provider channel to be approximately $15,000,000 in the 3rd quarter as our partners prepare to launch our next generation 5 gs mobile hotspots early in Q4. Accordingly, we expect 3rd quarter net revenue to be in the range of $160,000,000 to $175,000,000 up 16.4% sequentially at the midpoint. We expect gross margins and operating margins to continue to be impacted by our inventory reduction efforts and higher than expected transportation costs due to a variety of factors, including the Red Sea shipping crisis.

Speaker 3

Accordingly, we expect our 3rd quarter GAAP operating margin to be in the range of negative 15.3 percent to negative 12.3 percent and non GAAP operating margin to be in the range of negative 11% to negative 8%. Our GAAP tax expense is expected to be in the range of $1,000,000 to $2,000,000 and our non GAAP tax benefit is expected to be in the range of $1,500,000 to $2,500,000 for the Q3 of 2024. And with that, we can open it for questions.

Operator

Thank you. And your first question comes from the line of Adam Tindle with Raymond James. Your line is open.

Speaker 4

Okay. Thanks. Good afternoon. I just wanted to start maybe both CJ and Brian can weigh in on this one. But on operating results, obviously, kind of in line with expectations, the operating loss just over $30,000,000 in the quarter.

Speaker 4

You also said that channel destock is done and it was about $30,000,000 of a headwind behind us with great confidence. If I look at the Q3 guidance, it looks like at the midpoint, it's implying an operating loss still of $15,000,000 or so. So I guess question would be, what are the drivers that are still weighing on the operating loss and the trajectory beyond Q3 and time to breakeven would be helpful?

Speaker 3

Yes. Maybe I'll take a stab at that, Adam. So I would say some of the biggest headwinds we're still facing is the higher cost of inventory. As we've said, we're going to be saddled with that until we can get to our optimal level of carrying inventory, which is about 3 months. We're making progress there on the finished goods side, but we still have some other raw materials chipsets mainly that we bought as a risk mitigation strategy that we have to work on to kind of get there.

Speaker 3

But you can see we're continuing to work down our inventory. So that's probably in the neighborhood of 300 to 400 basis points of additional headwind. The other significant impact we're still facing here is the higher cost of freight. And coming off the back of the Red Sea crisis, we're seeing surges in container rates that are reaching up over $8,000 a container. And so that's adding another 200 basis points of operating margin pressure.

Speaker 3

The other thing I'll mention is the top line leverage. Q3 obviously is a meaningful step up at 16% sequential growth at the midpoint. But as you can see from the service provider guide, it's down to down quarter at $15,000,000 as we're waiting for the mobile hotspot launch in early part of Q4. So as we continue to round out our portfolio that's attached to the good, better, best strategy and get some additional revenue scale that will give us operating leverage, Those are probably the bigger drivers in terms of improving from where we're at on the operating margin.

Speaker 2

Yes. The two things I would add, Adam. 1 is, it's tied to inventory again. So in addition to having kind of a lower base to distribute our fixed cost against. We are still working through some of the legacy inventory and that really brings down margin, right, because we're looking to exit that more aggressively at lower price points.

Speaker 2

And once we you never completely done that, but once we get through, we still have a fairly decent chunk of that, you'll see kind of margins improve in line with the fixed cost allocation and the headwind we see there. The other thing is we are investing, if you equate it on an annual run rate basis, we're investing about $2,000,000 in our NETGEAR for business go to market efforts. I kind of signaled this on the last call that we'd be doing that. And those investments take time to generate the revenue and ROI associated with them. But we have clear opportunities to further scale that business and we're seeing great momentum, as we said on the call, on ProAV, we're making good progress on Wi Fi LAN.

Speaker 2

And so those investments are going to hit the P and L in the second half, but we'll start to see the payoff later next year.

Speaker 4

Makes sense. That sounds reasonable. So, Brian, I think you also talked about in your prepared remarks talking about restructuring the organization. Obviously, C. J.

Speaker 4

Is just mentioning $2,000,000 in the NFV segment for investments. I guess on a go forward basis as you think about restructuring the organization, is there kind of a ballpark that you're thinking about in terms of run rate quarterly OpEx? It's been fairly consistent somewhere around $65,000,000 or mid-60s per quarter. Are we thinking that there's going to be sort of a different level for NETGEAR going forward and what would that be?

Speaker 3

It's probably a little bit too early to say as we've been talking about we're going through a strategic review that we're making great progress on, but probably we'll carry on to early October timeframe that will help define the kind of longer term strategies of the business and when investments beyond the $2,000,000 that C. J. Referenced that we may want to invest in the business for the long term value creation. So we're going to look at it. I will say in the near term, we're probably looking at a mid to high single digit increase in OpEx in the back half of the year is probably the expected run rate.

Speaker 3

Some of that is due obviously with the increase in revenues. And then we're also continuing to put forth efforts with regards to this TP Link case and some has some incremental legal expenses associated with that.

Speaker 4

Got it. Okay. I want to ask on TP Link and feel free to boot me if there's other questions here, but I'll continue to go. On TP Link, in terms of the outcome, is there a way for us to think about their market share in your core markets and size that opportunity, just any kind of parameters that you're thinking about? I know it's tough in terms of market share for us.

Speaker 4

So anything that you have in terms of sizing that potential opportunity? And then secondly, what you're thinking about doing? Obviously, we're kind of cart before the horse here, but provided that the outcome could be ultimately this favorable, what you can put in place or do to capture that?

Speaker 2

Yes, great question. So they're about from a market share perspective and the product categories that matter about equivalent to us. So they've they're a formidable competitor. They've grown their shares quite significantly over the last few years. That's why this is a very big deal for us.

Speaker 2

And then the way that this flows through the ITC and comes into action, it takes time for all that to take effect and for any inventory that they've got in the channel to sell through, etcetera, etcetera. And so we are we're building plans to be in a position to take advantage of that when it comes to fruition.

Speaker 4

Got it. Okay. And I guess in light of that, how are you thinking about destocking levels and your ability to capture more real time sales if this outcome does become favorable for you or even outside of that, just broadly speaking, destocking and ability to capture POS?

Speaker 2

Yes. Great question. The destocking was that was a big effort from the team this quarter and we executed on that while achieving our sell through roles. So really proud of the effort there. We feel like we're on an aggregate basis in a great spot.

Speaker 2

I would say, like everything, there's not perfect synchronicity across all regions and all channels. I would say some of our channels and some of our regions are probably at unsustainably low levels. And even in the cost of capital and whatnot, which I think is a longer term opportunity for us in increasing the stocking in the channel. But even absent that, there's some parts of the channel that will likely need to stock up because they're dangerously low levels. Similarly, there's other parts where we could probably be a little lower.

Speaker 2

But on an aggregate basis, we're in a great place. And then we would want to match sell in with sell through no matter what happens with TP Link or otherwise as we grow our business. I mean, that's just an important kind of philosophical change that we've implemented here. And that allows better linearity, better working capital efficiencies. And so as we increase our sell through, we would increase our sell into the channel, to match that.

Speaker 2

And my philosophy is I'd rather be supply constrained than have to go and chase demand. And we're seeing the benefits of that approach now.

Speaker 4

Makes sense. Okay. Just a couple more. I wanted to maybe double click on the announcement for additional share repurchase. Can you just walk us through that decision on that authorization and particularly why you and the Board thought that this was the correct level for share repurchase?

Speaker 3

Yes. From my vantage point, it's pretty much the path we've been on. Obviously, we spend a lot of time evaluating how we allocate capital. But if you look back historically speaking over the years, we've put out authorizations of a similar magnitude and executed on them and typically would replenish as we get to a lower point. Obviously, the previous authorization were down to about 875,000 shares.

Speaker 3

And again, we're evaluating our strategic plan go forward, what investments we may want to make elsewhere. But in the meantime, we continue to believe that stock repurchase is a healthy way to allocate our capital at this point in time and it was appropriate time to up the authorization.

Speaker 4

Got it. Okay. And then maybe last one, the subscription story with the other piece in here at NETGEAR at CJ that I wanted to ask about. And you talked about some of the new metrics and some of the things that you're looking at, but maybe taking a step back. Could you just walk us through maybe evaluating what you inherited?

Speaker 4

How you kind of went through the evaluation of the current subscription strategy? Then go into specifically what you're changing and lastly how these new metrics will work?

Speaker 2

Yes. So maybe let me start at the highest level, which is as we transform the business, stronger software execution and more recurring revenue is a consistent theme across both business units. And if you take each business unit separately on NFB, our Wi Fi LAN attaches a subscription with Insight. And that's an area, of course, we talked about adding Promode. Promode has spent his entire career building software for networking use cases at Cisco, Ruckus and Arista, obviously incredibly experienced here.

Speaker 2

There's a big opportunity to improve our execution and our recurring revenue on the NETGEAR for Business side and Promote is the perfect person to lead that effort. It's small today. We are starting to win large transactions, as I mentioned on the call. Those attach nicely from a recurring revenue perspective. But if you look at just the market generally, we under index on recurring revenue relative to the devices that we sell and we're going to change that and that's a big focus for Promote.

Speaker 2

So really excited about the opportunity there. On the consumer side, we've made great progress building a subscription attached business with ARMOUR. And as we talked about on the last call, we're making a number of adjustments to simplify the offering for consumers. One kind of foundational thing that we're going to be doing differently going forward is we really have 2 classes of subscribers today. 1 class of subscriber buys a device.

Speaker 2

There's no bundle of armor included. They discover armor through the app and they subscribe and they give us their credit card and the subscription metrics associated with that are really great. The retention is strong. We've got work to do, which aligns with the simplification effort to improve the conversion to trial and the trial to paid. But overall, that's a really healthy recurring revenue business.

Speaker 2

And when I say there's 540 4,000 of those of the 958, that's what I'm referring to. So they've discovered the subscription largely through the app, maybe through our website or through an email, and they've subscribed and they're recurring. On the other subscribers of that 958 Club of 400,000 of them. We acquired them via product bundle. And the subscription value is included typically for a year.

Speaker 2

And it's confusing to consumers. Like are they getting that? Is it free? We don't collect their credit card and it's really not recurring. And the conversion at the end of that 1 year free trial isn't strong.

Speaker 2

And so we are going to we made the decision to move away from the product bundles. So we're going to be just offering subscription as a standalone attach after a consumer buys one of our networking devices. And our focus will be on converting those purchasers into recurring subscribers and moving away from the product bundles.

Speaker 4

I can personally vouch for that. That makes sense to me. Okay, that's all I have. Thank you so much.

Speaker 2

Great. Appreciate you joining and all the questions.

Operator

Thank you. And there are no further questions at this time. I would like to turn it back to C. J. Provo for closing remarks.

Speaker 3

J. Robillard:]

Speaker 2

Yes. Thanks for joining and see you next quarter.

Operator

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.

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NETGEAR Q2 2024
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