Netgear (NTGR) Q1 2021 Earnings Call Transcript

Netgear (NTGR 1.18%)
Q1 2021 Earnings Call
Apr 21, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. [Operator instructions] Later, we will conduct a question-and-answer session. [Operator instructions] I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Erik Bylin -- Investor Relations

Thank you, Mike. Good afternoon and welcome to NETGEAR's first quarter of 2021 financial results conference call. Joining us from the company are Mr. Patrick Lo, chairman and CEO; Mr.

Bryan Murray, CFO. Format of the call will start with a review of the financials for the first quarter provided by Bryan, followed by details and commentary on the business provided by Patrick, and finish off with the second quarter of 2021 guidance provided by Bryan. We'll then have time for any questions. If you have not received a copy of today's press 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, operating margins, tax rates, expenses, 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-K.

Any forward-looking statements that we make on this 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. 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 Mr.

Bryan Murray.

Bryan Murray -- Chief Financial Officer

Thank you, Erik, and thank you, everyone, for joining today's call. We delivered a great start to the year, setting the pace to achieve the full-year targets we put out at last December at our Analyst Day. We reported net revenue just above our guidance range and both sides of the business performed well, and we saw supply constraint decrease slightly. Our operations team navigating around chip constraints and the continuing elongated transportation times to bring product in from our suppliers while significantly lowering our freight spend for the -- from the fourth quarter levels.

Net revenue for the first quarter ended March 28, 2021, was $317.9 million, up 38.3% year over year, driven primarily by strong CHP growth in the retail channel and better than expected SMB performance. Our leading WiFi 6 offerings continued their momentum in the first quarter across both businesses. Additionally, the work we continued to do to focus on the right products in support of the work-from-home networking market, coupled with strong Pro AV growth, resulted in continued upward trajectory for our SMB business, delivering 17.9% year-over-year growth. In the first quarter, we generated a record non-GAAP operating income of $42.3 million.

This translated into a non-GAAP operating margin well above the top end of our guidance range at 13.3%, an improvement of 970 basis points over the first quarter of 2020 and 230 basis points over the fourth quarter of 2020. While it's still relative to our guidance range, we experienced better than expected performance from our SMB business, which carries higher margins. Additionally, we saw an improved mix of business coming from the higher-margin e-commerce channel. As mentioned previously, our operations team was able to lower spend on airfreight meaningfully below plan levels.

All three factors contributing to non-GAAP operating margin coming in well above our initial expectation. While we spent less than airfreight than originally expected, much of the improved supply arrived later in the quarter. As a result, we could only replenish the channel inventory for the end of the quarter. And thus, we didn't have an opportunity to increase promotional efforts and recruit even more market share than the modest gains we experienced in the quarter.

We do believe we were in a solid position heading into the second quarter to selectively increase promotional efforts, including participation in promotional activities playing with some key channel partners, which should allow further gains in market share and assist with our goal of driving increased paid subscribers. The strength in our business was seen across the globe as we delivered solid double-digit year-over-year growth in all geographies, led by the demand for our premium mesh products in our CHP business, as well as strength in our SMB business. For the first quarter of 2021, net revenue for the Americas was $219.2 million, which was up 38.5% year over year and down 15.6% on a sequential basis. EMEA net revenue was $61.1 million, which was up 44.9% year over year and down 9.4% quarter over quarter.

Our APAC net revenue was $37.7 million, which was up 27.2% from the prior-year comparable quarter and down 5.7% sequentially. For the first quarter of 2021, we shipped a total of approximately 4.1 million units, including 2.7 million nodes of the wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.4 million units for the first quarter of 2021. The net revenue split between home and business products was about 76% and 24% respectively.

The net revenue split between wireless and wired products was about 59% and 31% respectively. Products introduced in the last 15 months constitute about 35% of our first-quarter shipments. While products introduced in the last 12 months contributed about 30% of our first-quarter shipments. 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. The non-GAAP gross margin in the first quarter of 2021 was 35.2%, which is up 600 basis points as compared to 29.2% in the prior-year comparable quarter, then up 460 basis points compared to 30.6% in the fourth quarter of 2020. The year-over-year improvement was driven by improved product margins led by our premium mesh solutions. Sequentially, lower spend on airfreight, higher demand for SMB products, and higher mix of revenue going through e-commerce channels, which brings the added benefit of lower costs associated with consumer returns, all contributed to improving gross margins.

With improving supply, we plan to selectively increase promotional spending to accelerate market share gains which should contribute to further growth in paid subscribers. In addition to higher promotional activities, we have seen an uptick in the cost of sea transportation by two to three times historical levels. And as a consequence, we believe that Q1 '21 gross margin performance is not likely to repeat in the near term quarters ahead. Total Q1 non-GAAP operating expenses came in at $69.7 million, which is up 18.2% year over year and down 3.3% sequentially.

Our team continues to navigate a challenging operating environment while adding proportionately less spend. As a result, we were able to unlock considerable leverage on a 38% year-over-year revenue growth. As always, we manage our expenses prudently while also ensuring we adequately fund the growth portions of our business so that they have the resources they need to succeed. Our headcount was 775 as of the end of the quarter, down from 818 in Q4 as we consolidated some of our offices in the APAC region to gain some cost efficiencies.

This will fund further investment in other areas of the business such as resources supporting our paid subscription business. We continue to manage our headcount but we'll add resources to invest in areas that we believe will deliver future growth. Our non-GAAP R&D expense for the first quarter was 7.1% of net revenue as compared to 8.1% of net revenue in the prior-year comparable period and 6% of net revenue in the fourth quarter of 2020. To continue our technology and subscription service leadership, we are committed to continued investment in R&D.

Our non-GAAP tax rate was 24.5% in the first quarter of 2021. Looking at the bottom line for Q1, we reported non-GAAP net income of $31.6 million and non-GAAP diluted EPS of $0.99, each substantially higher than the prior-year comparable period. Turning to the balance sheet, we ended the first quarter of 2021 with $370.7 million in cash and short-term investments, up $17.3 million from the prior quarter. We were also able to strengthen our inventory position incrementally in the quarter, adding $43.6 million to our stock levels.

We believe our supply position will continue to improve in the second quarter. During the quarter, we generated $13.7 million in cash flow from operations, which brings our total cash provided from operations over the trailing 12 months to $165.9 million. We used $1.6 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $10.6 million. As we previously highlighted, we plan to reestablish normal carrying levels of our own inventory in 2021.

As a result, we expect to be below our normal conversion ratio of 85% to 100% of non-GAAP net income by a fair amount as we saw in Q1. But we remain confident in our ability to continue to generate cash on a full-year basis. Now, turning to the first-quarter results for our product segments. The connected home segment, which includes the industry-leading Nighthawk, Orbi, Nighthawk Pro Gaming, and Meural brands, generated net revenue of $240.9 million during the quarter, which was up 46.3% on a year-over-year basis and down 18.6% sequentially.

The strong year-over-year growth was driven by heightened demand in the retail channel for our premium WiFi 6 solutions. In the first quarter, despite supply headwinds for our WiFi 6 products existing for much of the quarter, we were able to improve on our strong leadership position in the U.S. market share and consumer Wi-Fi, regaining two points to 43%. And we fully expect we'll continue to gain share in the second quarter given the improved supply position in the channel entering the quarter.

The SMB segment executed well and generating net revenue of $77 million for the first quarter of 2021, which was up 17.9% on a year-over-year basis and up 8.5% sequentially. This is the highest quarterly revenue for our SMB business in the past two years. The growth was driven primarily by exceptionally strong demand -- demand from work-from-home solutions, including low port out switches, as well as our SMB wireless solutions. We were also particularly pleased with the performance of our Pro AV business, which experienced meaningful year-over-year growth as we see signs of activities resuming at business offices and sports entertainment venues.

Our market share in switches sold through the U.S. retail channel came in at 56% in Q1. I'll now turn the call over to Patrick for his commentary. After which, I will provide guidance for the second quarter of 2021.

Patrick Lo -- Chairman and Chief Executive Officer

Thank you, Bryan. As we progress through 2021, we are seeing the progress of the world's slow recovery from the pandemic. New cases remain high and variants from other continents are becoming prevalent in many states. However, unprecedented federal spending plans and accelerated vaccine rollout, and state reopening plans point to a light at the end of the tunnel.

Businesses small and large are planning for growth off of a difficult 2020 with science and business offices and sports and entertainment venues scaling toward reopening albeit at dialed back capacity. It is clear that the pandemic has accelerated multiple years of technological progress into one year and people adjusted surprisingly quickly to more time and activities from home. However, to enable this transition, highly reliable, high-speed internet connectivity that covers the entire home and even patio or yard has become a necessity. This spurred the rapid growth of the premium segment in home Wi-Fi, spearheaded by WiFi 6 mesh with tri-band architecture, which NETGEAR pioneered and continues to be the leader in the market.

These solutions fuel the work and do everything from home for families that need to cover large houses and supply reliable internet to every corner of the home. Given the demands all these activities put on home Wi-Fi, we see no slowdown in the demand for our products that help keep people and the devices connected. This premium tri-band WiFi 6 segment represented 30% of the Wi-Fi mass market in the U.S. in Q1, rising from 25% in Q4 and 7% in the prior-year comparable period.

This category continues to grow quickly and regardless the highest prices use the healthiest margins and has the highest prospect for attaching our value-added services, which we clearly see the benefits of in our Q1 performance. NETGEAR continues to deliver the innovative, leading-edge products to meet the needs of these most demanding consumers in the market. Last quarter, we announced that Nighthawk tri-band mesh Wi-Fi system model MK83, and we started shipping it in Q1. This is our first tri-band Nighthawk mesh system, and it retails at $499 for the router and two satellite kit.

The Nighthawk brand has a strong following among those who would like to have more real-time control of their Wi-Fi setup such as QRS settings and SSID controls with different bands. The MK83 satisfies a long-anticipated desire from the loyal Nighthawk base. We're also quite pleased with the demand and reception of the Nighthawk RAXE500 tri-band WiFi 6E router, which debu -- debuted in Q1 at a price of $599, with speeds of two gigabit now available from cable operators in the U.S. WiFi 6E products have the Wi-Fi speeds to match, thus enabling multiple high-quality video downloads and uploads and 8K gaming.

Equally important as the performance of the product is the strong attach rate of our subscription services that we are seeing from the ultra premium customers purchasing this product. Last but not least, for product introduction on the safety side, we launched our second DOCSIS 3.1 Wi-Fi cable gateway, the entry-level CAX30. The power of combining DOCSIS 3.1 speed with the benefits of WiFi 6 technology gives cable subscribing households an all-in-one option built to provide multi-gigabit internet speeds across a multitude of devices in the home while avoiding the monthly rental fees of cable modems and Wi-Fi routers from the cable operators. This category is about 20% of the total U.S.

retail Wi-Fi market and one in which we possess substantial market share. There is only one meaningful competitor to us in this category and it has yet to introduce a WiFi 6 cable product today. As we enter the second quarter with an improving supply picture in the channel, we see the opportunity to build on our Q1 performance in regaining U.S. market share.

This bodes well for us to continue to make progress in paid subscriber acquisition, building from the 481,000 paid subscribers that we ended with in Q1. We are on track to meet our goal of 650,000 subscribers by year-end and we are excited about the long-term profitability impact that we have on our business. Additionally, we will improve on our service offerings in the second quarter with the rollout of our smart parental controls service that garnered accolades at CES this year. Following that, we plan to bring the features of our gaming router lineup to the market through a service offering in the second half of this year for those online game-loving customers of our premium WiFi 6 tri-band Orbi systems.

I'm also very happy to share that we continue to make great progress with our SMB business. Our efforts to equip sophisticated home offices with best-in-class configurable WiFi 6 solutions in a highly functional low port count PoE switches continue to meet with strong demand as businesses transition to flexible working environments. Additionally, with businesses that are navigating COVID-related challenges and reopening and economies beginning to improve, our more sophisticated switching business is accelerating. This includes our Pro AV switching line, which is also seeing the added benefit of sports and entertainment venues opening at en -- entry levels of capacity.

We intend to capitalize on this opportunity. And to do so, we are investing in these areas to continue to strengthen our differentiation. Our recent releases in the AV line expand our highly successful 4250 Pro AV switch product offerings and are tailored to make complex AV deployments easy to install and manage. These switches to live a higher overall wattage, provide AV-specific presets and user interfaces while seamlessly transporting the highest quality digital audio and video signals.

We're excited with what lies ahead given the tailwinds across both businesses and improving supply outlook, driving the opportunity for further market share gains and a solid foundation for increasing our subscriber base. And with that, I'll turn it over to Bryan Murray to comment on our opportunities and obstacles in the coming quarter.

Bryan Murray -- Chief Financial Officer

Thank you, Patrick. Our net revenue for the second quarter is expected to be in the range of $305 million to $320 million. GAAP operating margin is expected to be in the range of 6.5% to 7.5%, and non-GAAP operating margin is expected to be in the range of 9% to 10%. As our channel inventory progresses to healthy levels, we do expect Q2 will present an opportunity to selectively turn promotions back on, including participation in key sales events with some of our channel partners, allowing us to continue to grow market share and to drive paid subscriber acquisition.

Additionally, while airfreight costs will stay at the Q1 level, we see sea transport costs rising to two to three times their normal rates. Our GAAP tax rate is expected to be approximately 27% and the non-GAAP tax rate is expected to be 24.5% for the second quarter of 2021. Though we are confident in our ability to provide guidance at this time, we do so with the caveat that considerable uncertainty remains in the market due to the COVID-19 pandemic. And should unforeseen events occur, in particular related to transportation delays into any of our regional distribution centers, our actual results could differ from the foregoing guidance.

We would now like to answer any questions from the audience.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Jeffrey Rand from Deutsche Bank. Please go ahead.

Jeffrey Rand -- Deutsche Bank -- Analyst

Hi. Thanks for taking the question. You talked about participating in more promotional activities in the second quarter. With global chip supplies still being relatively [Inaudible] and demand remaining strong, can you just discuss your thought process for running more promotional activities?

Patrick Lo -- Chairman and Chief Executive Officer

Yeah, as we have said that we would like to continue the momentum to regain share and -- and also we -- we -- we actually have to be, you know, in locksteps with our channel partners. So our channel partners have plans for some promotional activities in the seasonally weaker Q2 and we would like to continue to keep the momentum going. And we believe that this is the -- the most opportune time for us to be gaining share. And the importance of gaining shares, of course, is to try -- try to continue to have a really good installed base to work with us to increase our paid subscribers, which is a very long-term benefit for us.

We have found out over the last two years that the -- the most opportune time to recruit service subscribers is at the point when they install a new product, and -- and that's the reason why driving our organization.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. Thank you. And just as my follow-up, how are you thinking about the trajectory of your assembly business as the global economy continues to open? Will that partially be offset by less people sitting at home offices as we approach a return to the more traditional office?

Patrick Lo -- Chairman and Chief Executive Officer

We don't believe so. We're actually seeing a three-legged stool on the SMB business we're very encouraged by. I think there are a lot of entrepreneurs who has left the workforce and started to become entrepreneurs to open businesses at home. And then also there are other small business owners and professionals who actually would split time between home office and their main office such as [Inaudible], architects, and interior designers, and so forth.

So the activities of entrepreneurial home base of business buying our what we call sophisticated home office solution is unabated. Secondly, as we have seen also, these small businesses who are starting to reopen and get back into the office, which they have not been for over a year, found out, well, now they have just upgraded their home offices to WFi 6 but their old -- their office is stuck with WiFi 5. And we're seeing quite a bit of upgrade opportunities happening in their actual office. So that's also driving what we call the reopening trade.

And our wireless named business still continues to grow tremendously. And then third piece is the Pro AV business. We're seeing a lot of sports events of reopening entertainment, reopening, and a lot about video productions going on, all driving the demand of our Pro AV businesses as AVs and, you know, edging toward more into -- into ultra high definition productions and things like that. And -- and so those three excuse give us confidence that our SMB momentum will continue on in the upcoming few years.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. Thank you.

Patrick Lo -- Chairman and Chief Executive Officer

Sure.

Operator

Your next question comes from the line of Hamed Khorsand from BWS Financial. Your line is open.

Hamed Khorsand -- BWS Financial -- Analyst

Hi. I just want to first ask is how do you feel about the current market environment as far as, you know, comparing it to previous cycles as far as seasonality is concerned? And how are you going about with inventory that you built up? Is that being consumed in the channel or are you holding it off for a particular promotion in Q2?

Patrick Lo -- Chairman and Chief Executive Officer

No. I mean, so -- so the -- the channel inventory is quote-unquote just in time. So we shift to the channel in anticipation of the -- the run -- weekly run rate of the channel. And we typically want to keep it at the forward-looking run rate of anywhere between eight to 10 weeks which we are thinking is it's in the optimal.

Expect, you know, of course, there are some pockets of products that are still below that level. And then when promotions happen, we will shift to that maybe two, three weeks before the promotion starts. So we will not preload the channel for a promotional activity to be done in a much -- much later on. The market, you know, we -- it's pretty encouraging because for the first three weeks of this quarter and the last two weeks of last quarter, we actually comping last year's onset of the COVID-19 lockdowns.

And as we have expected, the market is staying at an elevated level. And of course, it will go back to the usual seasonality that, you know, Q2 is slightly lower than Q1, and then Q3 a big step up, and then Q4 will be flat to -- to Q3. So we believe that seasonality will con -- will -- will happen but an elevated level. So -- so which is very encouraging.

The -- the reason why we feel confident about this is because we saw that phenomenon in Asia which, you know, really hasn't been hit hard by COVID in certain markets where they have always been, you know, resuming back to office work and -- and -- and, you know, without having any -- any gathering lockdowns. So -- so we're pretty encouraged by what we have seen so far.

Hamed Khorsand -- BWS Financial -- Analyst

And -- and, Bryan, what -- what's transpired in the business that your Q2 guidance is -- is a little different than the -- the qualitative guidance that you provided in -- in the past comments?

Bryan Murray -- Chief Financial Officer

Yeah, I think it's actually what -- what Patrick just touched on. We've gotten the channel into a healthier place a bit ahead of schedule. It bodes well in terms of our ability to start to -- to regain the market share in the second quarter, start to build the subscriber base. But as we said early on in the call, we expect the full-year targets that we set out back in December, we -- we think we're on track for those.

And what that means is the back half of the year is probably steering more toward the 10% growth over the first half as we had said back in December. We thought they'd be on the lower side because we thought there'd be more channels still happening early on, but -- so we think we'll be about 10% over the first half of the year. Some of that's driven by, you know, the service provider business, which again is lumpy this quarter for Q2. We think it will be about $30 million.

So still below the $35 million on average that we still believe we'll hit for the full year. But also the strength of the SMB business is also contributing to the overall profile for the rest of the year. But again, we think the second half will be up on the first up about 10%.

Hamed Khorsand -- BWS Financial -- Analyst

OK. Great. Thank you.

Bryan Murray -- Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Liz Pate from Cowen and Company. Your line is open. Liz Pate, your line is open. Your next question comes from the line of Adam Tindle from Raymond James.

Your line is open.

Unknown speaker -- Raymond James -- Analyst

Hi, thanks. This is Alex on for Adam. I'm just curious about how you're thinking about kind of the margin impacts from promotional spend, how you're thinking about the return on investment for that? And then kind of just on the side on margins, you -- you mentioned that shipping con -- shipping costs dropped about two or three times. So just kind of curious about how that kind of flows through the gross margins? Is shipping a large component of gross margin?

Bryan Murray -- Chief Financial Officer

Yeah, I -- I would say the -- the Q2 sphere relative to the Q1 performance, I'd say about a third is the movement from -- from the 13.3% operating margin to the 9% to 10% range is going to be driven by the sea costs, the transportation costs for sea freight. So it is significant certainly. And then the other two-thirds I would say is -- is tied to the promotional activities. Term -- in terms of the return on investment, I think Patrick touched on that earlier.

It -- it's all about assisting us in -- in gaining additional paid subscribers, which is the long-term goal that we have of pushing that up and getting to our long-term target of 50% operating margin that -- that is key to us getting there.

Unknown speaker -- Raymond James -- Analyst

OK. Perfect, thanks. And then, again, just on promotional activity. Which products, in particular, do you think you're going to kind of lean more heavily into? Is it more on the gaming side, more on the SMB side, the home office side? Just kind of cadence of that.

Patrick Lo -- Chairman and Chief Executive Officer

Different channels would -- would have, you know, different focus. Generals -- generally speaking, it would be on the mid-range WiFi 6 products that would be the focus, and -- and would leave at that is the place -- it serves multiple purpose. One is relatively high ESP. Secondly, relatively high chance of those new users or the installation users to attach to our paid subscription services.

And they generally have a little bit higher margin. So I think those are the areas that -- that we'll focus on.

Unknown speaker -- Raymond James -- Analyst

Perfect. Thank you so much.

Operator

Your next question comes from Woo Jin Ho from Bloomberg. Your line is open.

Woo Jin Ho -- Bloomberg LP -- Analyst

OK. Thank you for taking my question. A couple of questions to ask. I'm actually looking at the -- the gross margin in a different way.

I mean, that there's a lot of things that could potentially pressure gross margin. You've got the higher freight costs. You've got a lower mix of SMB. And -- and traditionally, when -- when you have these gross margin impacts plus promotional activity, you know, your -- your operating margin really sinks because of gross margin, low gross margin.

But -- but implied to that, it almost seems as if you're kind of holding the gross margin roughly around the 28% to 30% level. I'm -- I'm just curious if there are any other factors that's helping to prop up the gross margin going into your outlook?

Bryan Murray -- Chief Financial Officer

In -- in terms of -- I -- I think we just went through kind of a bridge of the gross margin from the -- the peak levels that we saw in Q1 at 35%. The -- the sea freight costs and the promotional activities will steer it downwards. And I would say the entirety of the bridge from Q3, sorry, Q1 to Q2 is -- is going to be in the gross margin. I -- I don't think on the view with the revenue guide that there's not going to be any change in operating leverage on the business, but -- but that -- that would be the driving forces there.

But again, long term. You know, we're going to try and push that up by adding subscribers and keep doing the premium segments of the market.

Woo Jin Ho -- Bloomberg LP -- Analyst

Are -- are you seeing any positive impacts from subscription revenue on gross margin?

Bryan Murray -- Chief Financial Officer

Yeah. Yeah, I think if you look at our Analysts Day deck that we put out in December, I think if you look at the ASP that we communicated, which is about $48, we said it would probably contribute close to 80 basis points on -- on this year's margin. So it is starting to contribute. But again, we're trying to grow that as quickly as possible and so with increasing us our target from the 1 million to 2 million.

Woo Jin Ho -- Bloomberg LP -- Analyst

And then secondly, I'd have to give you, you kind of called out your cable gateway business. And -- and given some of the recent industry dynamics, I mean, how -- how much of an opportunity do you see in the cable gateway business going forward given some of the, I -- I guess, the divestitures that's going in -- in the industry?

Patrick Lo -- Chairman and Chief Executive Officer

Well, I mean, the cable gateway and cable modems segment of the retail Wi-Fi has always been pretty steady at some around 20% of the total market. And as you probably know, and there's just only one other major competitor, and because it's not easy. You have to get certified by all the cable operators in the U.S. We have a commanding market share.

And I mean, theoretically -- theoretically, we could get 100% market share in this segment. That means then we'll have a base of 20% market share of U.S. Wi-Fi. You know, so it's pretty lucrative.

Yeah.

Woo Jin Ho -- Bloomberg LP -- Analyst

And -- and -- and then -- and then lastly to me, you -- you -- you mentioned -- so as you say about getting a growing sales in your online store. I'm -- I'm curious how large is that business and why is -- is the -- the return dynamic different than your online store versus the traditional retailers to help on the gross margins -- margin side?

Patrick Lo -- Chairman and Chief Executive Officer

Actually, when -- when Bryan talked about return, it's not limited only to our own online stores, but also to our partner online stores such as Amazon, such as Newegg. So -- so basically, online -- as you probably know, the online stores are very, very nimble in reacting to price fluctuations much more than brick and mortar. And actually, 99% of the returns are no trouble found. And the most frequent reason for people to return is they -- they bought this at store A and then found in, you know, store B is having a promotion, it's cheaper.

So they would return the one to store A and buy the one from store B to enjoy that -- that price arbitrage. Such a situation would be much less online because the online stores are very nimble. They would match any lowest price already in the market today. So generically speaking, the online stores are low in return rate.

It -- it doesn't matter whether it is the Amazon or it's the Newegg or is it B&H, or it's on netgear.com stores. It's the same story.

Woo Jin Ho -- Bloomberg LP -- Analyst

OK. Thank you.

Patrick Lo -- Chairman and Chief Executive Officer

Sure.

Operator

[Operator instructions] Your next question comes from the line of [Inaudible] from Cowen. Your line is open.

Unknown speaker -- Raymond James -- Analyst

Hi. Thank you for taking my question. You know, I wanted to ask you like as you normalize your inventory levels of the channel, I assume like your revenue is mostly sell-in. Any color you can provide on the delta between sell-in versus sell-through revenue for this year that you expect?

Bryan Murray -- Chief Financial Officer

For -- for the rest of this year, as we said, we think we're pretty much there in terms of filling in the channel. So from -- from here forward, there -- there shouldn't be much -- much delta so.

Unknown speaker -- Raymond James -- Analyst

So then, basically, your sell-in would -- your sell-through would be similar to your sell-in revenue throughout?

Bryan Murray -- Chief Financial Officer

That's correct.

Unknown speaker -- Raymond James -- Analyst

OK. And I know you've maintained your guidance for this year, but any initial color you can provide on what your growth would look like into calendar '22?

Bryan Murray -- Chief Financial Officer

We'll -- we'll get there eventually. But at this point, we're -- we're focused on executing, you know, and -- and navigating this operational environment for 2021, but we'll get there.

Unknown speaker -- Raymond James -- Analyst

OK. And, you know, as you look to reinvest your incremental growth into promotional, you know, expenses, how should we look at incremental -- like anything you can provide on how do we model incremental operating margins in your business and what the trajectory on the operating margins would look like as you go through the year? Thank you.

Bryan Murray -- Chief Financial Officer

Yeah. I -- I think as -- as we see the mix of SMB increase, it -- it certainly bodes well for -- for our margins. But in a normal year when we typically see seasonality and lift the back half of the year, that's usually when we get the most operating leverage just given that the top line steer there. But a little bit earlier.

We're -- we're maintaining that the targets we set out for the full year both on top line and operating margin standpoint is -- is what we're striving to for 2021.

Unknown speaker -- Raymond James -- Analyst

Got it. Thank you.

Bryan Murray -- Chief Financial Officer

And to your -- to your early question. I mean, the -- the one that I would remind you in terms of 2022 is that, you know, we think the market has risen. It's been elevated. And we think it will maintain at these elevated levels.

And then from here forward, we kind of get back into the business of increasing the market probably in the low single-digits, all driven by ASP expansion. That's what we do. We keep innovating and we keep bringing up products in the premium portion of the market that raises ASPs.

Unknown speaker -- Raymond James -- Analyst

Got it. Appreciate that.

Bryan Murray -- Chief Financial Officer

Sure.

Operator

That was our last question. At this time, I would like to turn the call back over to Patrick Lo.

Patrick Lo -- Chairman and Chief Executive Officer

Thank you. Thanks, everybody, for joining us today. As you can see from our results, the team that NETGEAR's operating at a very high level in a difficult environment to produce excellent results. I remain confident on the tailwinds that have buoyed our business will continue.

And we will continue to execute well to produce results for all of our stakeholders. And I look forward to sharing more of that in the coming quarters with all of you. Thank you.

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Erik Bylin -- Investor Relations

Bryan Murray -- Chief Financial Officer

Patrick Lo -- Chairman and Chief Executive Officer

Jeffrey Rand -- Deutsche Bank -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Unknown speaker -- Raymond James -- Analyst

Woo Jin Ho -- Bloomberg LP -- Analyst

More NTGR analysis

All earnings call transcripts