Netgear is ahead of the game with its WiFi 6 router portfolio and it is paying off as the company is seeing a surge in home network upgrades.
The catch for Netgear is that its supply chain, sales channels and markets have all been upended by the COVID-19 pandemic. CEO Patrick Lo outlined the moving parts of Netgear's first quarter.
We saw two distinct phenomena during the Covid-19 pandemic. Whenever a shelter in place lockdown was declared, business activities fell and demand for our SMB products dropped significantly. At the same time, consumers are quickly finding out that high performance WiFi at home is a necessity and are rushing to upgrade their home WiFi, driving upticks in our consumer WiFi and mobile hotspot sales. We also saw significant channel shift from physical retail channel purchases to online purchases which put strain on the logistics of some of our online sales partners.
On an earnings conference call, it became clear that Netgear had a lot to navigate as it pulled its guidance due to COVID-19. The company reported a first quarter net loss of $4.17 million on revenue of $229.96 million, down from $249 million a year ago. On a non-GAAP basis, Netgear's earnings of 21 cents a share were a nickel better than estimates.
One thing is certain: WiFi 6 is likely to be adopted faster courtesy of the bandwidth needs of consumers working from home. Once the home demand surge for WiFi 6 passes, small business demand is likely to bounce back. Lo indicated that Netgear is seeing home network upgrades across all price points ranging from Orbi to simple extenders to extend the WiFi signal.
Here are some of the takeaways from Netgear's quarter.
Home schooling and remote work exposed many networks as insufficient. Lo said:
Our Connected Home business saw double-digit growth in end market demand worldwide towards the end of Q1 as people mobilized for work-from-home mandate. The work-from-home and school-from-home requirements put unprecedented demand on home networks.
Families recognized that strong WiFi performance in home is now a necessity and responded by upgrading their WiFi connections at various price points according to their financial ability.
It is unclear how long the demand surge for WiFi 6 will last. Lo added:
While we can't be confident how long the home WiFi demand surge will last, we are still seeing double-digit growth at this point in Q2. WiFi 6 is about 25% of our North America router and mesh system end market demand in Q1. With more new products and supply, we believe this proportion will increase in Q2 and beyond. We now have 3 different WiFi 6 mesh products in the market. With 2-Pack pricings at $229, $449 and $699 to suit homes of different sizes.
But remote workers are likely to use hotspots as a backup to at-home connectivity. Netgear is launching mobile hotspots with 5G and WiFi 6. This adjacent market is likely to boost Netgear's service provider revenue in the quarters ahead.
SMB demand has plunged, and stabilization will depend on re-opening economies.
The supply chain for routers is stressed. Lo said that airfreight rates are now 2.5x higher than before assuming the company can find a plane. Netgear is also facing higher costs and lower margin as demand shifts to connected home from business.
Lo noted that Netgear's factories in Vietnam, Indonesia and Thailand are fully operational and components are available from China. However, operations in Mexico are troubled due to the rising curve of COVID-19 cases and that's hurting supplies of RF components.
E-commerce is shifting the Netgear distribution mix and may pressure profits. Lo said:
We do believe that this pandemic and the shelves in place, work-from-home scenario have altered the channel landscape permanently. We are seeing more and more of our channel partners moving to online, which requires less inventory and also some physical stores successfully transitioning to online as well as online order curbside pickup, and -- which enable them to manage their inventory significantly more -- in a more efficient manner. So we do believe that overall, the channel inventory for retail is going to trend downwards.
The new normal of work will be different. Lo said it's unclear how SMB demand will bounce back, but a big part of demand will be there. Lo said:
Typically, we sell in the small businesses, but our major businesses, customers are on the IT side, okay, primarily manufacturing and schools and local governments, those are our typical customers as well as engineering departments of startups or major companies. So our experience is that when the activities resume, they should come back, all right? Now it may not be 100% to previous level, it will still be pretty close, schools have to be run, engineering departments have to continue to develop products and governments do have to be run, manufacturing is going to resume.