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DATE
Oct. 29, 2025 at 5 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — C.J. Prober
Chief Financial Officer — Bryan Murray
Vice President, Investor Relations — Erik Bylin
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RISKS
Chief Financial Officer Bryan Murray stated a "headwind to our gross margin of about 150 basis points mainly related to the rising cost of memory as several of the large suppliers in this space have exited the DDR4 market," which is expected to impact all business segments, with a more pronounced effect on the home networking segment.
Supply constraints continue to limit NETGEAR (NTGR 0.97%)’s ability to fulfill full demand in the enterprise segment, particularly in managed switch products. Management notes full inventory normalization is not expected until the first quarter of next year.
Operating margin for fiscal Q4 2025 is projected in the range of negative 7.3% to negative 4.3%, indicating continued operational pressure for the remainder of the year.
TAKEAWAYS
Revenue -- $184.6 million in revenue, up 8.2% sequentially and 0.9% year over year, exceeding the high end of guidance.
Enterprise Segment Revenue -- $90.8 million in enterprise segment revenue, representing a 9.9% sequential and 15.7% year-over-year increase.
Enterprise Gross Margin -- 51%, up 630 basis points year over year, matching the highest level recorded for the segment.
Home Networking Revenue -- $72.6 million in net revenue, down 6.6% year over year but up 7.6% sequentially.
Home Networking Gross Margin -- 27.7% non-GAAP gross margin for the Home Networking segment, increasing by 590 basis points year over year, attributed to an improved product mix and a 15% D2C sales contribution.
Mobile Business Revenue -- $21.1 million, down 20.7% year over year but up 3.3% sequentially.
Mobile Gross Margin -- 31% non-GAAP segment gross margin, rising 1,270 basis points year over year, marking a record for the segment.
Non-GAAP Gross Margin (Company) -- 39.6% non-GAAP gross margin, an 850 basis point increase year over year and a 180 basis point sequential improvement, setting a new company record.
Recurring Revenue (ARR) -- $37.9 million annual recurring revenue, up 17.2% year over year, with 560,000 recurring subscribers at quarter-end (non-GAAP).
Non-GAAP Operating Income -- $3.8 million, yielding a 2.1% non-GAAP operating margin, improving by 120 basis points year over year and 280 basis points sequentially.
Non-GAAP EPS -- $0.12 non-GAAP income per share, reported above management’s guidance.
Stock Repurchases -- $20 million spent to buy back 815,000 shares at an average price of $24.55 per share.
Liquidity -- $326.4 million in cash and short-term investments at quarter-end, reflecting a $37.1 million decline mainly from share repurchases and working capital changes.
Q4 Revenue Guidance -- Projected GAAP net revenue in the range of $170 million to $185 million for fiscal Q4 2025.
Q4 Operating Margin Guidance -- Non-GAAP operating margin expected between negative 2% and 1% for fiscal Q4 2025 amid memory cost increases and normalization of facility expenses.
Headcount -- 753 employees at quarter-end, up from 707 in the previous quarter, with increases focused in the enterprise segment.
Strategic Initiatives -- Transition to reporting in two segments (NETGEAR Enterprise and NETGEAR Consumer) starting fiscal Q4 2025, and launch of a new branded website and partner program.
Pro AV Ecosystem Expansion -- Reached 500 AV partners, reflecting increased market integration.
SUMMARY
Management confirmed the sixth consecutive quarter of both revenue and non-GAAP operating margin surpassing guidance, with record non-GAAP gross margins of 39.6%, driven by favorable enterprise mix. The enterprise segment delivered strong sequential (up 9.9%) and year-over-year (up 15.7%) growth (non-GAAP), as supply chain improvements allowed the company to capitalize on substantial ProAV demand. The home networking business showed sequential revenue recovery of 7.6%, supported by new WiFi seven mesh launches and expanded direct-to-consumer sales, even as year-over-year revenue declined by 6.6%. The mobile segment delivered record non-GAAP gross margins of 31% despite ongoing competitive pressures and declining revenue, benefiting from high-end product adoption. Company investment priorities have shifted toward software and recurring revenue models, with integration of security offerings and efforts focused on building out cloud and app capabilities for differentiated enterprise and consumer experiences. Fourth-quarter guidance points to margin compression due to memory cost headwinds and ongoing supply constraints, while leadership reiterated expectations for non-GAAP profitability in all four quarters of the year.
Chief Financial Officer Bryan Murray said, "We continue to expect modest impacts from the supply constraints in Q4 and expect to be back into a healthy supply position in Q1 so we can fully capitalize on the substantial and growing demand."
Chief Executive Officer C.J. Prober noted, "remain almost completely exempt from tariffs," highlighting a unique market position amid industry trade actions.
Management emphasized that "seasonality in the consumer side of the business" according to Bryan Murray typically leads to mid-teen percentage revenue declines from Q4 to Q1, which may influence first-quarter performance.
Prober revealed that the company's recurring services strategy is designed to "driving recurring revenue and non-device revenue," with a specific focus on software, security, and cloud management as future growth enablers.
INDUSTRY GLOSSARY
ProAV: Professional Audio-Visual; refers to devices and networking solutions for commercial, entertainment, and event venues requiring advanced audio-visual integration and management.
D2C: Direct-to-Consumer; a channel in which products are sold directly to end customers, bypassing traditional retailers or distributors.
ARR: Annual Recurring Revenue; the yearly contracted revenue from subscriptions or ongoing service agreements.
SASE: Secure Access Service Edge; a cybersecurity framework that converges networking and security functions traditionally delivered in siloed point solutions into a unified, cloud-delivered service.
SD WAN: Software-Defined Wide Area Network; a virtual WAN architecture that allows enterprises to leverage any combination of transport services to securely connect users to applications.
MSP: Managed Service Provider; a company that manages a customer's IT infrastructure or end-user systems, typically remotely and on a subscription basis.
DDR4: Double Data Rate 4; a type of DRAM memory technology commonly used in networking hardware and computing devices.
Full Conference Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the star one on your push-button phone. I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.
Erik Bylin: Thank you, Operator. Good afternoon, and welcome to NETGEAR's 2025 Financial Results Conference Call. Joining us for 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 third quarter and guidance for the fourth quarter provided by Bryan. We will then have time for any questions. If you have 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 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-Q. 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, 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.
C.J. Prober: Thanks, Erik. We are pleased to share that our team delivered another really strong quarter. Over the past year and a half, NETGEAR has embarked on the first phase of a dramatic and comprehensive transformation, and the results of everyone's efforts and diligence are coming to fruition. While the seeds of our investment are only beginning to bear fruit in terms of top-line expansion, our team's operational acumen is unlocking new ways for us to efficiently capitalize on the opportunities in front of us. We are sincerely excited about the foundation we've built and are confident that our transformation positions us exceedingly well to deliver long growth, profitability, and shareholder value creation.
This quarter's results marked the sixth quarter in a row where NETGEAR has exceeded our revenue and non-GAAP operating margin guidance. The supply chain team kept the pedal to the floor to drive the material improvement in our supply position for our managed switches, allowing us to grow revenue for our Enterprise segment almost 16% year over year. As a great sign of our strength in this category, ProAV units and ASPs were each up materially year over year, contributing to a strong improvement in gross margin, operating margin, and net profitability. We came into this year hoping to improve our gross margin from 2024, while sharing that we felt that achieving profitability for the year was unlikely.
We're now thrilled to share that not only are we expecting to be non-GAAP profitable for the year, but we also expect to deliver non-GAAP positive EPS in each quarter this year. While our focus remains on making the investments needed to drive our transformation and enable long-term profitable growth, this near-term profitability milestone is a sign our efforts are paying off. In Q3, our profitability resulted from a big improvement in each segment. We once again delivered positive contribution margin and significantly improved gross margin for each business.
An increased mix from enterprise, which delivered an all-time high segment gross margin of over 50%, led to another record high non-GAAP gross margin for the company of 39.6%, surpassing the record from last quarter by 180 basis points. This enabled us to deliver positive non-GAAP operating income well above guidance and non-GAAP EPS of $0.12. We were also extremely successful on the capital allocation front, repurchasing $20 million of our common stock at an average price of $24.55 per share in the quarter. We plan to continue to opportunistically return capital to shareholders via share repurchases, at a minimum to offset dilution.
Before moving on to updates for our business segments, I'm excited to share a couple of important updates on our transformation that will allow us to continue to evolve how we position our products and services in the market. First, we launched our new website yesterday, and we encourage you all to check that out. This has been in the works for over a year and reflects our new branding that will serve to more clearly distinguish our consumer and commercial businesses. A key part of this change involves renaming our commercial business from NETGEAR for Business to 500 companies and mission-critical events like the G7 Summit, not to mention many different global Tier one music and sporting events.
Second, starting in Q4, we'll be reporting on two segments: NETGEAR Enterprise and NETGEAR Consumer. As we've shared over the past several quarters, our mobile products serve both of these end customers, and the go-forward product strategy is to drive stronger integration of our mobile products into our app and subscription service for consumers on the one hand and into our cloud management and security platform for our enterprise customers on the other. Mobile, of course, remains an important strategic capability that we will leverage to expand both our consumer and enterprise businesses. Bryan will share more details on this in his section. With that context, I'll move on to the business segment updates.
Our Enterprise segment again led the way in driving our great results, and we continue to see double-digit demand growth for our best-in-class ProAV managed switches. The NETGEAR team successfully navigated supply chain headwinds, accelerated supply, and started to lower our backlog, leading to outperformance in the quarter. While we still believe we'll return to an optimal inventory position in the first quarter, the 16% sequential growth of our managed switch revenue in Q3 reflects better supply and strong end-user demand for these products. We're already a clear leader in the Pro AV space and continue to expand our advantages and round out our value proposition by relentlessly growing our ecosystem, notably reaching 500 AV partners this quarter.
Further, the AV professional services that launched in the second quarter have garnered positive early traction with blue-chip customers and will be an integral part of expanding our enterprise value proposition and non-device revenue going forward. Essential to achieving this goal is our constant drive to innovate in ways that will improve our differentiation across products, pricing, and partners. Much of our headcount growth remains in enterprise, and we're building out our software development capabilities. Our new team in Chennai, which is roughly cost-neutral due to a simultaneous reduction in outsourced software development capacity, allows us to improve our efficiency, quality, and competitive differentiation.
With this new and growing team, we're making great strides in improving our device firmware, cloud management, and security software offerings. We're also in the process of greatly improving the user experience, and in the coming months, we will be integrating networking and security in a manner that will lead to a unique offering in the industry. We plan to offer networking and security with enterprise-grade reliability delivered by a simple user experience at an affordable price. That will make this platform purpose-built for managed service providers and small to medium enterprises.
And as a first step to addressing cybersecurity in our target market, earlier this month, we announced a tailored security solution for SMEs based on technology obtained via the acquisition of Acxiom earlier this year. This exciting new unified solution is the industry's only all-in-one SASE and hybrid firewall platform designed specifically for SMEs and the MSPs that support them. We can now secure remote workers as well as the on-premise networks and combine advanced threat protection, AI-powered zero Trust network access, web gateway security, SD WAN, and firewall capabilities in a single user-friendly platform. The investments we've made in the enterprise business are clearly beginning to deliver both financial and operational benefits.
While we continue to have success in hiring key leaders for the enterprise sales team, we're starting to expand the list of marquee customers we serve. In the most recent quarter, we closed material deals with a Fortune 10 global retailer, Boeing, the South African Parliament, University of Wales, and Fox Sports, to name a few. Moving on to home networking. While the retail market remains highly competitive, we're continuing to make inroads with our good, better, best strategy. Sequential top-line growth came in at roughly 8%, and we once again delivered positive contribution margin in the quarter.
Key enablers to this success are the broadening product portfolio, strengthening our higher margin D2C channel, leaner operational execution, and growing annual recurring revenue, which reached $37.9 million in the quarter and grew 17.2% year over year. Our Orbi 370 mesh product that launched in the quarter is gaining momentum in the market and outperformed our expectations. This is our most affordable WiFi seven mesh system to date and offers high-end performance and security at an accessible price point, benefits that are clearly resonating with customers.
We remain confident in the long-term growth potential of the home networking business and notably saw share growth in WiFi seven routers and mesh systems in Q3, pointing to NETGEAR's expanding sphere of influence in this part of the market. The Mobile segment delivered on our modest top-line expectations, and with strong demand for our high-end offering, we achieved record non-GAAP gross margins of 31% for this business. Although the service provider channel remains highly competitive, we continue to add new channel partners. For example, be launching the M7 Pro with O2 in The UK this quarter. We also have exciting new products coming to market for this segment over the coming months that will expand our addressable market.
Over the long term, we expect our strategic capability in delivering mobile products to benefit our consumer and enterprise segments by offering differentiated experiences that are integrated closely with our broader solution for these end markets. So in summary, this quarter was marked by solid execution, and these results underscore the impact of our strategic transformation in building a healthier, more resilient business for the long term. We remain well-positioned to be the trusted domestic supplier across our range of products, a true differentiator in this market, and remain almost completely exempt from tariffs. We're focusing on the right areas, growing our higher margin segments, driving operational efficiency, and delivering value to our customers.
And it's showing in our financial performance thus far, while setting the stage for renewed growth in 2026. With that, I'll turn it over to Bryan.
Bryan Murray: Thank you, C.J., and thank you everyone for joining today's call. We entered the second half of the year building on the solid momentum we established in the first half. And I'm pleased to share that this marks a sixth consecutive quarter where we exceeded the high end of our guidance ranges for revenue and non-GAAP operating margin. Propelled by the strong demand for our Managed Wish product within our Enterprise business segment, and enabled by the ongoing operational excellence of our team, we drove sequential top-line growth of more than 8% while attaining a non-GAAP gross margin of 39.6%. Yet another new all-time high for NETGEAR.
These impressive results are undeniable signs of progress as we continue to execute our long-term growth and profitability strategy. For the quarter ended September 28, 2025, revenue was above the high end of our guidance range, coming in at $184.6 million, up 8.2% on a sequential basis and up 0.9% year over year. The third quarter's outperformance was once again a result of a strong showing by our higher margin enterprise segment, benefiting from ASP and unit growth in ProAV managed switch products. The team worked tirelessly to improve supply in the quarter, which enabled a 16% sequential revenue growth for these products and meaningful double-digit growth year over year in end-user demand.
We also saw all three of our businesses deliver positive contribution income for the second consecutive quarter. In Q3, we repurchased $20 million of our shares and ended the quarter with $326.4 million in cash and short-term investments. We delivered $90.8 million of revenue in the enterprise segment for the third quarter, up 9.9% sequentially and up 15.7% year over year, above our expectations. Although we continue to be challenged by supply constraints around certain managed switch products in the enterprise business, the team executed well and was once again able to outperform our forecast for the quarter by working closely with key vendors to navigate these headwinds.
Notably, in spite of these supply constraints, the revenue mix of our products from the higher margin enterprise segment continued to climb and grew both sequentially and year over year, adding to the corporate margin improvement. We continue to expect modest impacts from the supply constraints in Q4 and expect to be back into a healthy supply position in Q1 so we can fully capitalize on the substantial and growing demand. In Q3, the home networking business delivered net revenue of $72.6 million, down 6.6% on a year-over-year basis and up 7.6% sequentially.
The U.S. retail market remained extremely competitive, but with the introduction of our entry-point WiFi seven mesh offering in the Orbi 370, we were able to gain share in the WiFi seven mesh category. And we saw similar share gains in WiFi seven routers. We have moved past higher cost inventory and continue to benefit from an improved product mix of WiFi seven offerings, coupled with streamlined channel execution. Revenue for the mobile business in Q3 was $21.1 million, down 20.7% year over year but up 3.3% sequentially. Mobile benefited from an increased adoption of our high-end Nighthawk M7 Pro mobile hotspots in retail.
With additional products expected to launch in the coming months, we believe the full benefit of our good, better, best strategy will build over time. Our focus in mobile technology really straddles both consumer and enterprise customers. As such, we will be reporting two business segments going forward with products and solutions built on mobile technology being in both businesses. Even though more than 50% of our mobile hotspots products sold through our service provider channel are to commercial end customers, the initial reporting of this revenue will remain in our consumer business segment.
We will continue to supplement reporting of revenue from mobile products sold to service providers and plan to add our cable modem and gateway businesses to this reporting as well, since these products also enable services offered by these operators. This revenue call-out will allow investors to isolate these declining businesses in their assessment of NETGEAR and our transformation. Now, moving on to an update on a recurring subscriber base. We continue to believe that focusing on increasing our recurring subscriber base is the optimal strategy to add high-margin revenue throughout our business while differentiating our offerings.
We've made progress with our initiatives to transform these offerings, successfully moving more customers to our higher ASP ARMOR plus offering, which was the driving force in growing our ARR by 17.2% year over year, reaching $37.9 million in the quarter. We remain confident we can grow our highly profitable ARR over time, and I'm pleased to share that we exited Q3 with 560,000 recurring subscribers. 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 came in at 39.6% in 2025, once again a new record, and the fifth consecutive quarter of sequential gross margin expansion.
This marked an 850 basis point increase compared to 31.1% in the prior year comparable period and a 180 basis point increase compared to 37.8% in 2025. Our gross margin in the current period benefited from an improved mix of our higher margin enterprise business. Success in moving past older higher cost inventory, along with other benefits of operating with channel inventory at leaner levels, relative to the year-ago period. Drilling down to the profitability of our three business segments, all three segments were profitable on a contribution margin basis. For the second quarter in a row, each grew their contribution margin by at least 440 basis points year over year.
This is the truest indicator of the operational changes we've made over the last six quarters and the stellar execution of the team. Enterprise gross margin was 51%, up 630 basis points year over year, matching its highest level ever. Led again by strong demand for our ProAV managed switches. Driven by strong demand for our Nighthawk M7 Pro mobile hotspots, the Mobile segment experienced the largest improvement in segment gross margin expansion year over year, growing 1270 basis points to 31%. The Home Networking segment was aided by our improved mix of WiFi seven products.
The move into lower cost inventory strengthened our higher margin direct-to-consumer channel, grew to approximately 15% of sales, improving our gross margin for this business by 590 basis points year over year to 27.7%. Total Q3 non-GAAP operating expenses came in at $69.2 million, up 25.1% year over year and up 5.4% sequentially as we had some one-time expenses related to moving our headquarters and we continued our strategic hiring plans. We saw an increase in facility-related costs due to moving our new San Jose headquarters in Q3, but we expect this cost to normalize. Our headcount was 753 at the end of the quarter, up from 707 in Q2.
As a reminder, we conducted a reorganization in January to enact approximately $20 million in annual savings and are reinvesting those savings in the areas of the business that we expect will deliver the best growth and profitability. This is reflected in the sequential operating expense and headcount increase, most notably within our enterprise business. Our non-GAAP R&D expense for the third quarter was 11.7% of net revenue, as compared to 11% of net revenue in the prior year comparable period and 11.6% of net revenue in 2025. To continue our technology and product leadership, we are committed to continued investment in R&D.
I'm pleased that we delivered non-GAAP profitability above the high end of our guidance range, enabled by improved top-line led by enterprise growth, and compounded by gross margin improvement. Our Q3 non-GAAP operating income was $3.8 million, resulting in a non-GAAP operating margin of 2.1%. An improvement of 120 basis points compared to the year-ago period and an improvement of 280 basis points compared to the prior quarter. As a reminder, the prior year period included a $10.9 million benefit from a legal fee adjustment relating to the favorable settlement of a legal matter. Our non-GAAP tax expense was approximately $3.4 million in 2025.
Looking at the bottom line for Q3, we reported non-GAAP net income of approximately $3.5 million, resulting in a non-GAAP income of $0.12 per share. Turning to the balance sheet, we ended 2025 with $326.4 million in cash and short-term investments, down $37.1 million from the prior quarter due largely to $20 million in stock repurchases and changes in working capital. During the quarter, $7.4 million of cash was used by operations, bringing our total cash provided by operations over the trailing twelve months to $3.6 million.
We used $9.7 million in the purchase of property and equipment during the quarter, elevated from normal levels relating to improvements to our new corporate headquarters, which brings our total cash used for capital expenditures over the trailing twelve months to $17.1 million. In Q3, we spent $20 million to repurchase approximately 815,000 shares of NETGEAR common stock at an average price of $24.55 per share. We have approximately 2 million shares reserved in our current authorization, and our fully diluted share count is approximately 29.8 million shares as of the end of the third quarter. We're committed to returning value to our shareholders and plan to continue to opportunistically repurchase shares in future periods.
I'll now cover our outlook for 2025. Within the enterprise, end-user demand for our Pro AV line of managed switches is expected to remain strong. And although we expect to continue to make improvements in our supply position, we continue to face supply headwinds, which may limit our ability to capture the full top-line potential of this growing business. On the home networking side, we are seeing signs of the benefit of our broader product portfolio to address the market. On the mobile side, we expect revenue to be in line with Q3, as we await our new product introductions to round out the portfolio, which we don't expect to yield benefits until next year.
Accordingly, we expect fourth-quarter net revenue to be in the range of $170 million to $185 million. In the fourth quarter, we expect our operating expenses to be slightly reduced with our facilities cost normalizing now that we have transitioned into our new corporate headquarters. With some offset as we further ramp our planned investments. We're focused on insourcing software development capabilities and enhancing our go-to-market capabilities supporting our enterprise business. Additionally, we expect a headwind to our gross margin of about 150 basis points mainly related to the rising cost of memory as several of the large suppliers in this space have exited the DDR4 market.
Accordingly, we expect our fourth-quarter GAAP operating margin to be in the range of negative 7.3% to negative 4.3%. And non-GAAP operating margin to be in the range of negative 2% to 1%. Our GAAP tax expense is expected to be in the range of a benefit of $500,000 to an expense of $500,000. And our non-GAAP tax expense is expected to be in the range of $500,000 to $1.5 million for 2025. And with that, we can now open it up for questions.
Operator: At this time, I would like to remind everyone in order to ask questions, press star then the number one on your telephone keypad. Your first question comes from the line of Tore Svanberg from Stifel. Please go ahead.
Tore Svanberg: Yes. Thank you, C.J., Bryan, and congrats on the continuous progress here. My question is on the gross margin headwind for the fourth quarter. Is that across the board for each of the three segments, or is it mainly more tied to the enterprise segment?
Bryan Murray: Yeah. Good question. So the main headwind is coming from the DDR4 memory situation where the largest suppliers in that space have taken their products end of life. And at this point, there are smaller players who are trying to pick up capacity. Memory is in products in each of our businesses. I'd say it's more acutely felt on the home networking side at this point, but it does impact all three businesses.
Tore Svanberg: Very good. And when I look at your revenue guidance, it's like a $15 million spread. Could you just talk about some of the puts and takes? What would have to happen for you to get to the higher end of the range versus the lower end of the range? And I assume supply is part of it because you obviously have very good backlog visibility. But anything else that you could share with us as far as variability within that guidance range?
Bryan Murray: Yeah. I'll start there, and C.J. can certainly chime in as well. Supply is the big factor there, as we've said. Throughout the year, we're seeing tremendous progress on the managed switch side. With the ProAV switches, we are still supply constrained. We are making progress there. But really don't believe we'll be in a position to have safety stock in place until Q1 of next year. That would be one lever. As you saw in Q3, the upside to the quarter that obviously impacted gross margins as well as the top line was that we were able to pull things in ahead of expectations. So that would be one potential lever there.
The other thing would certainly be the success of the holiday promotional period, what happens in the home networking market. I would say, would be another factor to unlocking more towards the upside potential in that revenue guide.
Tore Svanberg: Great. Thank you. I'll go back in line.
Operator: Your next question comes from the line of Adam Tindle from Raymond James. Please go ahead.
Adam Tindle: Okay. Thanks. C.J., I want to start by just acknowledging great progress on the gross margin front and very clear that your leadership and strategy towards pushing more of the enterprise business quality of the business hires is manifesting itself in results. More recently, we've seen more headlines around TP Link of late, and we obviously get a lot of investor questions on that. So just wanted to start on that subject. It seems like there's a lot of government activity around TP Link. Just give us your sense of the latest of your understanding there and the potential timeline and opportunity on that.
C.J. Prober: Yes. Sounds good. And hi, Tore. Hi, Adam. So Bloomberg reported a few weeks ago that there's been a flurry of, and I think that's a kind of well-put statement around what's happening. In the article, they mentioned that there's a final initial determination on TP Link. It's been completed and a bunch of administrative activity around that. Haven't heard much about it since then. But more broadly, the Senate just passed the NDAA, which states that it's going to evaluate TP Link as a DoD covered company. Yesterday, the FCC voted in favor of restricting networking equipment that has connected components from the Chinese covered list. There's a state of Texas investigation into TP Link.
Something apparently just dropped from Wisconsin of all places. There's a 60-minute piece. So with all of this activity, I think our confidence is increasing that something's going to eventually drop here. Timing's obviously uncertain. In fact, I think the president's meeting with Xi right now or shortly. And there's obviously a lot going on there. But one thing, kind of related to that, not specific to a government action, is that we have been seeing customers starting to recognize NETGEAR differently in the market as a US-based public company trusted partner, and we've been winning some pretty big deals that may have previously not gone our way because of that.
And so I think all the messaging out there is actually helping us win with customers. And so we're excited about that in the near term, but then also, you know, I think there's just a lot going on from an administration perspective. So we're following it closely like everybody else.
Adam Tindle: Got it. Makes sense. And maybe just a follow-up for Bryan. I know you have an Investor Day coming, and I imagine we're going to get a lot more information. I appreciate the detailed guidance for Q4. So I think we've got a good handle on that. But a number of moving parts are happening, and I'm trying to unpack when some of these things unwind or how long headwinds persist.
Maybe a simple way to ask would just be, as we have to shape our models for 2026 and in particular for Q1, is there anything that you might just have us be mindful of whether it's on the margin front or growth front or channel inventory front, just so we can make sure that we're in good shape heading into that Analyst Day and not caught with something that we've mis-modeled or a surprise?
Bryan Murray: Certainly. I'll start by saying that we're certainly thrilled, and you kind of started your questions with us. We're thrilled with the progress we've made on the transformation thus far in the unlocking of incremental gross margin performance on the business that certainly is putting us ahead of our plans. You may recall at the start of the year, we came in. We didn't think we would be profitable in 2025, and certainly year to date, we're there. And you can see by the guide where we expect the full year to shape up there. There are certainly a lot of additional opportunities ahead of us.
And as we've said, we are very much focused on driving towards long-term sustainable profitable growth. These things will require investments. We've made some investments this year. We obviously took some aggressive actions to strip out $20 million of annual cost to help fund some of those, but we still have additional investments to go here. To really get this business to where we think it can get to. I look at, like, if I look at the public estimates that are out there for the year, I think they're fairly reasonable when it comes to both the top line and the operating income side of things.
And again, that's largely because we do have investments that we need to continue to put into the business. Shorter term or more near term, I should say, Q1, I would reiterate there is seasonality in the consumer side of the business. And while enterprise has gotten to about 50% of the mix, the other 50% is subject to some of those seasonal fluctuations. So Q1 seasonality typically off of the Q4 period, the markets would be down in the mid-teen percentage wise. Certainly, you know, that will impact top-line leverage in the first part of the year.
But as I said before, I think the public estimates that are out there for the full year 2026 are reasonable at this point.
Adam Tindle: Okay. And does the mid-teens adjust for the consumer side of the business, not for...
Bryan Murray: Correct. Yes. It's for the consumer side. Enterprise is not a seasonal business for us today.
Adam Tindle: Yep. Just want to make sure. Okay. That's it for me. Thank you.
Operator: Your next question comes from the line of Jay Goldberg from Seaport. Your line is open.
Jay Goldberg: Good afternoon, guys. Thanks for taking my question. First off, I wanted to ask about you mentioned considerable progress in growing your distributor channel for NETGEAR Enterprise. Did I get that right? I was just hoping you could talk more about what's going on in the channel. What is drawing the channel's interest in NETGEAR? And just sort of know what you're hearing from them.
C.J. Prober: Yeah. Great question, Jay. And good to see you on the call. One thing just to clarify, when we talk about our ProAV partners and the growth of that, that relates more to the product integrations that we're doing with the broader AV ecosystem to kind of extend our product leadership, make it continue to make it simple to deploy complex, IP-based AV networks. That being said, because I just make that point because I'm not sure if that's what you were referring to. But we are very focused on the channel on the enterprise side of things. And there's a number of transformational initiatives that are coming to market.
Our overall philosophy is we just want NETGEAR to be the easiest company to do business with. And so we've got a partner program that's launching on, I guess, it's a week today on November 4, I believe it is, via webcast. And there's a number of other things happening under the hood in terms of, you know, we've launched our new website as part of the partner program launch. We're going to have a new partner portal. So we're very closely monitoring the health of our channel and expanding the business that we do with our channel partners and helping enable them to work more seamlessly with NETGEAR.
So it's a huge part of our focus on the enterprise side, and we're really excited with the progress that we've made today. And just to cap this all off, I spent a week on the East Coast a couple of weeks ago with customers, existing customers, and potential customers. And the feedback that we're getting is, like, we're spot on in terms of our product strategy and how we're evolving our go-to-market capabilities. So it's really validating to get that directly from those folks.
Jay Goldberg: Let me just follow-up real quick. As you went through your prepared remarks, you mentioned a number of new product launches. It seemed to be across all the business units. Could you just give us could you just sort of walk through the cadence of when we should be expecting new products over the next year? As much as you can say now. Doesn't have to be dates or anything specific. Just how we think about new product launches.
C.J. Prober: Yeah. It's a good question. Philosophically, I don't like to talk about new products coming to market until we've actually launched them. We will be teasing out some stuff at Investor Day. And I think we're going to see you there, at least on the webcast. So I definitely tune in to that. But, you know, across the board, we are innovating for our end customers and have both kind of new devices coming to market. But most importantly, our focus is on the software side, driving differentiation via software.
And part of this change that we highlighted in the call of making mobile more of a horizontal capability is we have a strong belief that combining our mobile products with what we've previously been calling our home networking products allows us to drive a lot of differentiation in terms of having a single app, a single subscription with all of those products connected in one experience. And similarly, on the enterprise side, bringing our mobile products into our Insight cloud management platform, into our security experiences is quite differentiated. So what you're going to see from us going forward is, you know, we've really got a consumer platform and an enterprise platform.
And anything we launch is going to be connected into one of those for consumers on the one hand or our commercial customers on the other.
Jay Goldberg: Got it. Thank you. I'll go back in the queue, and I look forward to seeing you in person at the Analyst Day.
C.J. Prober: Oh, excellent. I wasn't sure if you'd be there. I saw your name on the list. I wasn't sure if you're coming in person. That's great.
Jay Goldberg: Yeah. I'll be there.
C.J. Prober: Thank you.
Operator: Your next question comes from the line of Tore Svanberg from Stifel. Please go ahead.
Tore Svanberg: Yes. Thank you. Just had a couple of clarifications or follow-ups. So first of all, and not to really pick on this, right, because you had such a strong gross margin improvement in your home networking business. But when I do look at the gross margin this quarter, it was down in Q2 slightly sequentially. So I was just wondering, is that some of the DDR4 pricing already starting to weigh on that gross margin? Or was it something else that contributed to the gross margin being down sequentially?
Bryan Murray: Yes. Good question. Last quarter, we talked a little bit about there being a kind of out-of-period, one-time benefit that would have been in the Q3 period there. That was pertaining to improved experience with regards to sales returns. And we've said at that time, it was about a 250 basis point windfall to the home networking gross margin on the quarter. So we said normalized, it would be about 27% going into Q4. We obviously beat that. And I would say that, as I noted on the comments earlier, we did see some improvements and acceleration on our direct-to-consumer business, which grew to about 15% of our total sales for home networking that has higher gross margin.
So that would be the improvement. We have not yet felt any of the impact of the memory pricing increase, that won't hit us until Q4.
Tore Svanberg: Very good. And my last question for you, C.J. You highlighted on the ProAV side, you know, the company is very unique with its decision to offer both networking and security. I was just hoping you could elaborate a little bit more on that, especially when it comes to how you potentially monetize that? I mean, obviously, by including security, you can charge more. But just wondering if there's, you know, software services part of that as well. Thank you.
C.J. Prober: Yeah. Great question. So the way that we and you'll see this come out in Investor Day more, you know, even more clearly is when we talk about our enterprise business, we can think about it in the context of ProAV and enterprise networking, which includes security. And when you hear from Promote, he'll share kind of our long-term plans around those two different segments. On the enterprise networking side of things, we're building a platform that combines networking and security, that's targeted at small to medium enterprises, many of whom are served by MSPs.
And the differentiation that we're looking to drive there is enterprise-level reliability, with a very simple user interface that combines both of those things that tend to be presented in a complex, very feature-rich manner that those size customers don't value at an affordable price. So we're looking to be quite disruptive and, you know, on the topic of gross margin, you know, the competitors that we're looking to disrupt in that enterprise networking space have a very different margin profile than we do. So that's our opportunity. And a lot of the business growth that we expect to drive there will be on the services side of things.
So we're very focused on software differentiation, driving recurring revenue and non-device revenue, and cloud management's a big piece of that. Security is going to be a big piece of that. And then support and services is another big piece of that. So hopefully, that answers your question, but that software networking and security side of things, recurring revenue side of things is a big priority for us on the enterprise side.
Tore Svanberg: Sounds good. Look forward to hearing more about it on November 17. Thanks again.
C.J. Prober: Thank you.
Operator: Again, if you would like to ask a question, press star then the number one on your telephone keypad. There are no further questions at this time. Mr. C.J., I turn the call back over to you.
C.J. Prober: Just a final shout-out to the NETGEAR team. Really proud of the work that we've done to date on the transformation. And a little plug for our Investor Day, we've got exciting things to share. We're going to have some demos. I know many people on this call are committed to joining. But the space is limited. So if you're interested in coming to New York on November 17, let us know, and we look forward to seeing you there.