NETGEAR, Inc. 2026 Q2 Earnings Call

Please go ahead, sir. Thank you, operator.

Good afternoon, and welcome to NETGEAR's second quarter of 2026 financial results conference call. Joining us from the company are Mr. C.J. Prober, CEO, and Mr. Bryan Murray, CFO. The format of the call will start with commentary on the business provided by C.J., followed by a review of the financials for the second quarter and guidance for the third quarter provided by Bryan. We'll then have time for any questions. If you've not received a copy of today's release, please visit NETGEAR's investor relations website at www.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, gross and operating margins, expenses, tax expense, and future business outlook. 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 this call are based on assumptions as of today, 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. At this time, I would now like to turn the call over to C.J.

Thanks, Erik, and thank you all for joining our call. We're pleased to share that we delivered another solid quarter that demonstrates the continued momentum behind our transformation to being a software-differentiated, enterprise-led business that's delivering profitable growth and expanding long-term shareholder value. Today, I'll cover two topics, a recap of our Q2 performance and an update on our transformation. Let's jump in. Q2 showed disciplined execution, strong profitability, and clear progress on the strategic priorities we outlined at the start of the year as we delivered top and bottom-line performance above the high end of our guidance range. Enterprise delivered another strong quarter, with revenue increasing 7.7% year-over-year, which was led by strong growth across the Americas and EMEA.

Enterprise now represents more than half of NETGEAR's total revenue and approximately 69% of our gross profit, demonstrating the increasingly important role this business plays in our growth and financial performance. Just as important, Enterprise continues to deliver significant profitability expansion. Non-GAAP gross margin reached an all-time high of 54.1%, while non-GAAP contribution margin increased 660 basis points year-over-year to 25.9%, its highest level in more than seven years. Although our ongoing go-to-market transformation in APAC moderated our growth during the quarter, we're addressing those headwinds and believe the changes underway can position APAC to become our fastest-growing region.

With Enterprise now representing the majority of NETGEAR's revenue and an even greater share of our gross profit, and with that contribution expected to continue growing, we've elected to change NETGEAR's Standard Industrial Classification code, or SIC code, to align with our competition in this enterprise segment. This change takes effect today, and going forward, we should screen better to potential investors by identifying NETGEAR as the company we are today, an enterprise solutions company. In Consumer, we continue to harvest our service provider business and optimize the core consumer business for growth profit, given the challenging supply environment. Despite these top-of-funnel constraints in Consumer, we grew our overall annual recurring revenue to $42 million, representing a 15% year-over-year increase.

The stronger mix of business and margin expansion from Enterprise, combined with the disciplined execution in our Consumer business, allowed us to move from a non-GAAP operating loss last year to operating profit in Q2 of this year, while significantly expanding our EPS as well. Bryan will cover the Q2 results in more detail, so I'll conclude my commentary on Q2 by thanking the NETGEAR Enterprise and Consumer teams for their relentless focus on delivering against our commitments. In addition to the quarterly results, we're thrilled with the tangible progress of our longer-term transformation. When I joined NETGEAR two and a half years ago, it was very apparent that we had an opportunity to unlock significant shareholder value by bringing a stronger focus to our Enterprise business.

That led to a substantial reorganization and a significant influx of Enterprise talent, starting with a new business unit leader, followed by new leaders for most functional disciplines. In transforming our team, a core part of our talent strategy has been to insource software development while leveraging AI. This effort was accelerated for our enterprise business by three strategic acquisitions, VAAG, Exium, and the source code that had previously been outsourced for our line of managed switches. I'm thrilled to report that this business unit now has over 200 badge software engineers, and we've almost completely reduced our reliance on outside contractors. This brings with it increased alignment, speed, and quality to our software delivery.

AI has been a significant enabler for us, and our team is ahead of the curve on adoption because we're building this full stack software development capability from scratch, and we're not constrained by legacy development processes. AI landed as an accelerant at the perfect time to help fuel our transformation, and today, the team, organization, intellectual property, capabilities, roadmap, and delivery are strong and have little resemblance to where we were a few short years ago. I'm more confident than ever that this will enable us to better serve an even broader set of customers in the future. The impact of this transformation is evident in the products and services we're now delivering to our customers.

In Q2, we announced the launch of Align, a cloud-managed platform designed to consolidate AV infrastructure services, host applications such as our network management platform, Engage, and serve as the open layer for third-party AV apps. Align was announced at InfoComm, the world's largest AV industry trade show, where it won Best of Show among its seven industry awards, while also receiving an incredibly positive reception from partners and end customers. We're already working with several third parties to integrate their applications into our Align platform. Given that the cloud management capabilities will require an Insight license, Align will catalyze our recurring revenue business within the enterprise segment. Speaking of Insight, we also announced several significant improvements to this platform in the quarter.

Our newly designed experience dramatically simplifies the user interface, workflows, and onboarding, revamps our licensing model to drive higher recurring revenue, implements an initial integration of our Exium security services, and establishes the framework for AI-powered network operations and AI-defined networking. This is a significant milestone in expanding the value we deliver to customers and a key driver of future recurring revenue growth opportunities. Align and Insight are excellent examples of the transformation underway at NETGEAR. They demonstrate how we are expanding beyond networking hardware to deliver a broader software and services platform that increases customer value, differentiates our solutions, and supports our objective of building a faster-growing, higher-margin enterprise business. The transformation of our partner and customer ecosystems is gaining momentum as well. In Q2, we surpassed 600 Pro AV manufacturing partners, including several new critical leading brands from the broadcast vertical. Our partner program is in full swing, and we now have added over 125 certified APEX partners, our highest tier of partnership that requires a significant investment in NETGEAR.

Our support and services team landed big new customers like National Geographic, Shopify, and Salesforce. We also made great progress in the education vertical with wins in 86 school districts for the 2026 E-Rate season, more than half of which are new to NETGEAR this year. As noted in my Q2 recap, all of these accomplishments are favorably impacting the financial results of our enterprise business. We're making high ROI investments in the business while at the same time significantly increasing gross and contribution margin.

As we mentioned previously, we implemented a small price increase in Q2, and we're now evaluating more pricing actions in the second half of the year given the pricing leverage we have and to ensure the margins for this business remain robust and reflect the value we're delivering to customers. In addition, we now have the foundation in place to grow our higher-margin non-device revenue, and we look forward to scaling contributions from Insight, security, support, and professional services over the quarters to come. We're just at the beginning of unlocking growth opportunities of this business, and as we shared it in our Investor Day, the multibillion-dollar addressable markets are huge, and many of the incumbents are focused on the AI data center build-out, opening the door to additional share means for NETGEAR.