On the question.
Yes.
Are we good? Okay. All right. Thanks everybody for joining. My name's Adam Tindle, and this is part of my connected devices coverage here at Raymond James. Very happy to have CJ and Bryan, CEO and CFO of NETGEAR, here today. In terms of our format, I know it's getting towards the end of the day. We'd love to keep it engaging, and, you know, would love to have questions. If you do, please feel free to raise your hand along the way. No slides, no presentation. We're just gonna do a fireside chat. I will start with some high-level questions if you're kind of re-engaging or less familiar with the NETGEAR story since there's been a lot of change over the past couple of years with CJ. Guys, thanks for being here.
CJ, maybe we'll just start. I think a lot of folks are familiar with NETGEAR from a customer standpoint, but those not as familiar with the business, just give us a little background of the company and the evolution that I was alluding to.
Yeah. We actually just hit a big milestone, 30-year anniversary in January, which is pretty impressive. For 28 of those years, we had the same CEO, which Bryan and I were reflecting on that. Like, how many Silicon Valley-based companies can say they've had the same CEO for 28 years? Incredible run. That being said, when you have the same leader for so long, that does create an opportunity to bring in new leadership and reinvent the company. We've been engaged in a very significant transformation that started a couple of years ago, and we really couldn't be prouder of the results we've accomplished. If you look at our 2025 financials, we grew revenue. That was a commitment we made to investors. That's the first time NETGEAR's grown revenue since the COVID pull forward, 2020.
We had three consecutive quarters of record gross margins. Q2 all-time record, Q3 all-time record, Q4 all-time record. We entered the year expecting or setting the expectation that we wouldn't be profitable because we're investing in our transformation. I'm happy to report we delivered operating income, and we delivered a $1.35 shift in non-GAAP EPS. We landed at $0.44 EPS. I give you that context because what's really driving that is our enterprise business. When we spend time with investors that have known NETGEAR for some period of time, there's a fairly significant re-education that happens because nobody recognizes NETGEAR as an enterprise brand or an enterprise business. That's now 1/2 of our top line and really the driver of those financial results. Last year, enterprise grew revenue just under 19%.
Again, with record gross margin over 51%, 23% contribution margin. In the enterprise segment, like, we're disrupting the traditional enterprise players there, that's why it's so great. We had our Investor Day at the end of last year, and we're starting to engage more actively with the investment community because it's time to tell the NETGEAR, the new NETGEAR story.
I think that's a good segue into some of the actual changes you've made at the company as well. A lot of times we hear, executives talk about, you know, kind of qualitative things, but there's, you know, boots-on-the-ground changes in terms of leadership that you've implemented. Maybe just recap some of those leadership changes.
Yeah. Yeah. The biggest, like, organizational change is we established a true enterprise business unit. When I joined, we were very much consumer-led. When you looked at the leadership team, I had inherited 13 direct reports. Only one of those was enterprise-focused. We've rebalanced the company. We've got a very clear enterprise business unit, full R&D, full go-to-market. We've got a consumer business unit. Both of those have new leaders. In fact, if you look at I still have about 13 direct reports. 12 of those are new to the executive team. Most of those from the outside, but a number of people that were leveled up from the organization. A really big shift that. And those folks are driving their own transformations within their own teams. The biggest change is on the enterprise side. Pramod Badjate leads that.
He was the former head of Ruckus, the former head of Arista's campus networking business. He's brought in a whole experienced enterprise network team, leadership team. They've built out their team. That's, that's a big, probably the biggest shift. I'd say the second biggest shift is when I joined, we didn't really have software development. Software development was largely outsourced to contractors. One of the big efforts that's happening across both of our businesses is to insource that capability. Like, what better time to do that than now when we've got these AI capabilities that allow us to accelerate that.
If you know, fast-forward to where we are today, we kind of set the foundation to allow us to scale both businesses, this business unit structure, new leadership, and, yeah, couldn't be prouder of the team that we have in place to do that.
Great. Bryan, if you could, you know, maybe... Oh. Oh, wait. Audio problem. Was that me? I didn't turn it on. Actually, turn it on. Okay. User error. Oh, no. Sorry. Sorry about that. Hopefully Bryan's mic was picking up my... Yeah. Yeah. She gave me a thumbs up there, so we don't have to recap. Okay. Okay. Bryan, I was just gonna ask you on the financial profile, CJ kind of gave us a little bit of an overview and the focus on the company, maybe, bring that into financial terms, and if you wanna recap some of the targets that you gave at the Analyst Day as well.
Yeah. Maybe just kind of provide a foundation for it. We just delivered our third sequential quarter of record gross margins for the company. A lot has to do with CJ's comments with regards to the transformation of the company and the emphasis on the enterprise business that's really contributing there. We did put out midterm and long-term targets. I would urge people to look at our slides that are out there or listen to the webcast if you have not seen it yet. A lot of information in there. From a financial profile, you know, we are, we're 49% of our revenue today is coming from enterprise, and we expect over the long term that can get to 65% or higher. The enterprise business, we expect to grow double digits.
It's really gonna drive the overall performance, which I think in the midterm, which is kinda 2028 timeframe, would be a high single-digit to low double-digit growth profile. On the gross margin, we expect the full company to be about 40%-43%, again, because of the mix of enterprise and how that's expected to increase. That in and of itself, the enterprise portion would be in the 50%-53% range. We're also developing, you know, non-device revenue streams, subscription and services. We're further along on the consumer side today, but we expect both businesses to be contributing. In that midterm timeframe, we're talking about probably 5%-10% of our overall revenues coming from those streams. Contribution margin from the businesses. Enterprise is in the 24%-27% range.
Consumer, we have more work to do in terms of transforming that business. It's probably in the 0%-3% range, which would drive the overall performance to the 5%-8% non-GAAP operating margin. Longer term, again, the mix will continue to shift towards enterprise. We would expect the overall gross margins to be more in the 50%+ range. Overall revenues would be growing double digits. Contribution from non-device revenue would be 20%+, probably a little ahead of that on the consumer side. Contribution margin range-wise, enterprise would be 30%+, and consumer would be about 10%+. I know there's a lot of numbers there, but again, if you look at the Investor Day deck, it will outline a lot of that.
Perfect. CJ, we just had, your, I guess former brethren, in the next room.
Former sister.
Yeah, former sister-
Former.
... from Arlo next door. They were talking about, you know, some things that obviously impact them, but, you know, may impact you as well, from a competitive environment standpoint. I'll ask the question broadly in terms of how the competitive environment has changed. I know there's, you know, a lot of specific focus on the potential ban of some of your competitors as well. If you could touch on that'd be helpful.
Yeah. Let me start with enterprise, of course. On the enterprise side, the AI and data center build out, putting aside the cost of memory that's being applied to everyone, we view it as a significant accelerant to our business because the companies that we compete with that we're taking share from today are focused on the data center build-out, right? The big traditional networking companies that have historically played in the AV space, which is a multi-billion dollar market where we still only have 8% share, but clear product market fit and differentiation. We're actually quite excited about what's happening in the AI space from that perspective, from the perspective of software insourcing, et cetera.
On the consumer side, we do face competition from a number of players that really allow us to stand out as kind of an independent, U.S.-based and, you know, public company trusted brand. If you look at our two biggest competitors, you've got Amazon on the one hand, and there's a certain consumer perception that goes with, you know, buying Amazon products if you look at some of the challenges that Ring has faced recently. You have TP-Link, and I can only speak to what I read in the news about TP-Link. If you read the reports from WaPo or Bloomberg or otherwise, it does seem like there's an escalating level of scrutiny being applied to the company. You know, the smoke is increasing. Maybe some, you know, at the state level, there's formal actions that have been taken.
TP-Link's being sued by Florida. They're being sued by Texas for misleading customers. We, we do view that as a potential inflection point in that business, and we're as confident as ever that something's gonna happen there. We don't know when, we don't control the decision. It's important to note that on the consumer side, we have a, we have a vision and a roadmap that to be successful, that doesn't require any of that to happen. It's almost like, okay, it's a near-term catalyst that really broadens the scope of that business, given the extent of the market share that they would have if it were to happen.
If you look at the long-term plans that we have and how we plan to leverage our position as kind of the Switzerland of the home and work across partners in a way that neither eero at this part of Amazon or TP-Link could do. We're very bullish about, you know, the long-term potential of that. We announced at Investor Day the Google partnership. We can't say a whole lot about that now. There's gonna be more on that coming next year. It is the first proof point of how we can be an independent platform in the home that just helps everything work better. For all of us homeowners, we know that like connectivity hasn't been solved, and we're on a mission to truly solve it.
Whether there's a ban or not, you know, we're extremely confident about what we're doing to build out that business.
One of the investors was asking about, you know, market share to, from, to Arlo. I guess maybe the same question. Do you have a sense of market share for TP-Link and, you know, what would potentially become available were they to be banned?
Yeah, like rough numbers, and Bryan can keep me honest here. Like the retail market in the U.S. is roughly $1 billion for networking. TP-Link's the market leader, let's say like hypothetically, if they had 40% share, that'd be, you know, a $400 million business. And then, you know, there's other parts of the market that aren't counted in retail. You've got the professional installer channel, which is separate. You've got partnerships with ISPs, which doesn't count to retail. It's a pretty big number. Like that business today for us is $350 million. You know, if you do the math, it's significant.
I'm gonna ask one more and then I'll pause for questions. You had mentioned component costs. This one might be for Bryan. Maybe just, you know, since that's been such a topical thing lately, how does that impact NETGEAR, and what are you doing to navigate the supply chain?
Yeah. I can start and if you wanna chime in.
Yeah. I am officially the Chief Memory Officer of NETGEAR right now.
Yeah.
Yeah. I've been promoted, so but I'll let Bryan take it, then I can fill in any gaps.
As CJ alluded to, like everybody in the market is facing this memory situation primarily today hitting DDR4, but I think even more broadly, I think even DDR3 probably is starting to see some of that. We have been largely able to mitigate this. It's been going on for the, you know, better part of 2025, and it started this year. We've been able to mitigate that through working with our supply chain partners. We did provide guidance in Q1 that we thought it would be about a 100 basis point headwind to our gross margin performance in Q1. We have about four and a half months of inventory, we have line of sight and visibility that covers most of the first half of this year.
I think the other challenge out there is that the ability to access supply is what is out there in question. We said about a month ago, providing guidance that the second half is a little less certain in that regard. Given we have two businesses on the enterprise side, it's almost something we can mitigate. We've announced that we're raising prices there. The rest of the competitive landscape is also raising prices. It is a lower percentage of the overall BOM. Consumer side is a little more challenging. It's a higher percentage of the BOM. Competitive landscape is very different there, as CJ was mentioning a minute ago. We're working through a number of actions that will find other ways to mitigate.
We'll be working through that so through the first half of the year and anticipating what will happen. The market today, pricing is month by month. One thing I should mention is that we actually have insourced procurement of memory, which is not something we've done historically. Given it's a commodity component, that's something that we have historically outsourced to our ODM partners to do that. Given the importance, given this environment, we've taken this direct, which is why CJ's called himself the Chief Memory Officer. So...
I'm glad you didn't hire for that position. Put him in a margin call.
Well, we are hoping it's transitory.
It's transitory. It's transitory.
Yeah. Yeah. I'll give up the title in six.
Part of the margin bridge.
Six to nine months.
Yeah.
Yeah. Exactly.
I don't think there's anything else you wanna add.
No, no. That was good. I mean, the thing that, I guess you go back to our Investor Day, we shared mid-range targets, long-range targets, and, you know, the real focus in the near term was on enterprise. Because if you just do the math on NETGEAR's enterprise value using our enterprise business, applying enterprise multiples, like there's just we're so undervalued. It's not our job to assess value to NETGEAR, it's our job to deliver the results. But just looking at it outside in objectively, it's there's clearly, we're clearly undervalued and people haven't kind of moved away from, oh, NETGEAR's a consumer company. That having been said...
Well, tell us, gotta buy back more stock.
We're doing that. $84 million since I joined. On what we said to investors at Investor Day on the consumer side is, "Hey, we're just gonna manage that business to contribution margin neutral as we transform it, reinvent it, innovate it." It's not gonna be a drag on profitability, but there's real value and option value there. That's the goal that we're the line that we're looking to hold as we mitigate the memory challenge on consumer. It's like, how do we not let this be a drag on operating income? How do we let, you know, enterprise continue to shine and grow and expand profitability while we innovate on consumer and enable this kind of home of the future?
Yeah.
Yes. Thank you.
We do have, I don't know, a lot of questions, but let's start. On the enterprise side, can you go on level 24 and talk about how much is hardware versus not hardware? What are the benefits to scaling, you know, the non-hardware? Presumably that's what's driving the margins.
Yeah. Yeah. Great, great question. The way to think about our enterprise business is in two different buckets. On the one hand, we have, we're enabling IP-based AV deployments. If you think about conference rooms, digital signage, live events, that business is where we're disrupting. We said at our last earnings that in 2025, the sell-through for that business grew more than 25%. And revenue for that business actually grew more, but we didn't wanna overstate it 'cause we had some, you know, channel destocking that happened the year before. Sell-through, true demand grew over 25%. That business today does not have a recurring revenue component. That business is being driven by the device sale.
We do have a very compelling software offering, and we do have a path to introducing recurring revenue, but that's not an immediate term focus for us. The immediate term focus in AV is for us to take that 8% market share of a $3 billion market that's growing 14% and make that much bigger from a share perspective. Capture the growth, grow share, and over time we can introduce recurring revenue. The second half of the enterprise business is a very different story. The second half of the enterprise business we have, we compete against, you know, like the campus Wi-Fi networking folks like Ruckus and Cisco Meraki. Customers there are accustomed to cloud management licensing fees. We've also introduced security, both firewall and then a SASE platform.
The Insight licensing, the security, those products are just in the process of getting relaunched. Security late last year, Insight early this year. If you look at the Investor Day targets for the midterm and long term, we're expecting to grow our non-device revenue for our enterprise business quite significantly, and a large part of that is driven by Insight and security. There's things that fall in between kind of recurring and a device, and those apply to both. If you look at like professional services on the AV side, we've had our integration partners, and this is a bit counterintuitive, come to us and say, "Hey, NETGEAR, we really need your support in these more complex deployments. You should have a professional services organization."
We launched that at the end of last year. That's a non-device, higher margin kind of piece of that business. Support across the board, which on the networking and security side will be integrated at least in part into our cloud management. There are aspects that cut across both, but the main levers on recurring will be our cloud management and security products which we expect to start... You know, we've got plans for how we get from here to the mid-range targets we shared.
Well, how long is the contract?
We're actually changing it. Today, for Insight today it attaches to a device, so it's like a typical one-year, three-year, five-year licensing model. We haven't announced how we're gonna revamp it, but we're revamping that in a way that's much more customer friendly, in a way that customers are asking for. 'Cause if you look at the big networking providers and the complexity of their licensing models, it's like you need a physics degree to kinda figure out how to do the math on what it is. We want it to be really simple where our partners are paying for true value. That will be part of our relaunch in the first half of this year. Security, the SASE platform is seat-based, so it's based on the number of employees you have on SASE.
The firewall is tied to, you know, the number of devices that you have deployed.
Hey, we've got seven minutes, 45 seconds.
Pardon me?
Is there an existential risk from AI?
Yeah.
That one, that one AI risk and the other risk can someone dislocate you?
Yeah. We actually think of it at completely opposite from that. We view AI for us as a big accelerant, and the four main reasons are: one, again, on the AV side, if you look at the competition that we have in that market, they're all focused on the data center. Two, NETGEAR, this is part of the transformation I mentioned. We've never had software engineering. We're now accelerating the insourcing of our software capabilities. That's typically a really hard thing to do, but when you have AI to help you understand the code, refactor the code, that's a huge accelerator. We're getting massive benefits from that. We have across all of these businesses, like troves of data.
On the enterprise side, like we are, we're the disruptor, so we view ourselves as AI being an enabler to catch and pass like competition. Whereas that previously would have been hard to do, right? Because it's like you kind of get pixels and features tied exactly to kind of your software resourcing. Because we've got a former software leader running our enterprise business, we're insourcing these teams, we've acquired, you know, startup folks that have been quite aggressive using AI, we're really well positioned to capitalize on this to catch up and exceed competition. We're actually thrilled about it. The only little asterisk is memory, but everybody's facing that.
Yeah. One of the things that also comes up with this story is the balance sheet. I wanna ask Bryan a question on that. Obviously, very healthy balance sheet. You know, maybe just recap the capital structure, your view of sort of normalized free cash flow and then capital allocation.
Today, we're sitting on about $323 million in cash, and we believe we need about $125 million-$150 million to operate the business. CJ touched on, we have been acquisitive. Some of this was an acqui-hire to accelerate the insourcing of software development. Some of it was the SASE security platform, the adjacency there to add to the portfolio. Then we have been active repurchasers of our stock. We've repurchased $84 million worth of stock over the last two years. We have a remaining authorization of about 1.5 million shares, which is about 5% of the outstanding.
We're gonna continue to be opportunistic buyers of our stock, but we're looking at all three facets, the organic investments that we need in the business, M&A opportunities, as well as stock repurchasing.
CJ, you mentioned earlier, kind of the sum of the parts and how, you know, valuation seems to be dislocated if you know, look at it on that basis. Have you kinda looked at that internally, what's your kinda current view on, you know, these two businesses together or separate? What would be the potential dyssynergy? Maybe just talk us through, like, the logistics of having these two businesses together and the opportunity from a sum of the parts standpoint.
Yeah. We've been clear from the outset that these are really different businesses that, you know, could at some point be separated. We have nothing to announce or talk about relating to that today. If you think about it from, like, a product go-to-market, innovation perspective, they're completely different. On the one hand, we're competing with Arista, developing products that are, you know, costing end customer thousands of dollars. On the other hand, you know, we're competing with eero at Best Buy. Like, it's just, they're completely different businesses. At some point, it may make sense to separate them. In the meantime, like, our focus. Like, part of the big shift in kinda how we report the business, how we structure the business is we do wanna create, like, operating independence.
Like, the two of us are standing up here, but the reality is we have Pramod, who's a very experienced enterprise leader, running. He's a CEO of our enterprise business. You have Jonathan, very experienced, connected device consumer leader. He's the number two at Fitbit, sold to Google, was at Google for several years. He's running the consumer business. We do have shared, you know, G&A. We've got a shared operations team. At some point in the future, I think there'd be a big potential to unlock value by separating the businesses.
Makes sense. We've got about two minutes left. Any final questions? No? All right. CJ, I guess, you know, maybe just a final question would be, how would you like it to leave investors as they think about NETGEAR today and in the future? What's kind of the key message you want them to take away?
Yeah. Well, I'd really encourage investors who either don't know NETGEAR or have the kind of legacy perspective on NETGEAR to go take a look at our Investor Day from November. Those mid-range targets still stand, the long-range targets still stand. We outlined kind of the markets we play in, the strategies for driving ongoing differentiation. Like, of course, we're overemphasizing enterprise because everybody thinks about NETGEAR as consumer, but the reality is we're bullish on both businesses and the long-term value creation opportunity. That would be the first thing. I guess the second is, one of the things that I think made NETGEAR successful, but I think has also been a hindrance to kind of long-term value creation, is a very short-term orientation, right?
It's like new chip comes out from a, you know, one of our chip partners, we can create a new product on that, get it to market quickly. Software is outsourced. Very kind of lean model without kind of thinking about the future, the long term, and how to create long-term value, and that's something that we've really instilled in our teams. We have five-year strategies, five-year plans that we're religiously implementing against. Yes, while we've had a real impact on the near-term financial profile of the company, like, our focus is on long-term value creation, and we're confident we're gonna get there.
Perfect. The breakout is in Cordova 5 if you'd like to join. CJ, Bryan, thank you so much.
Thank you.
Thank you.