Netgear, Inc. (NTGR) Reports Litigation Settlement

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September 11, 2024 4:42 PM UTC

Netgear, Inc. (NASDAQ: NTGR)

Item 8.01 Other Events.

Litigation Settlement

On August 28, 2024, NETGEAR, Inc. (the “Company”) entered into a Settlement Agreement (the “Settlement Agreement”) with TP-Link Systems Inc. (“TP-Link”), regarding all of their respective pending U.S. International Trade Commission and patent infringement disputes, and TP-Link’s patent challenges and breach of contract claims. Consistent with the terms of the Settlement Agreement, all pending litigation between the parties will be dismissed or not further pursued, as applicable, and NETGEAR has received a $135 million payment as consideration for the same.

Third Fiscal Quarter Ending September 29, 2024 Guidance Update

The Company today provided an update to its business outlook for the third fiscal quarter ending September 29, 2024. The updated guidance reflects the above-referenced litigation settlement, as well as the earlier than anticipated launch of its next generation 5G mobile hotspot in the third quarter which was previously expected to occur in the fourth quarter of 2024.

Driven by the earlier than anticipated launch of its latest 5G mobile hotspot, NETGEAR currently expects net revenue for the third quarter of 2024 to be between $170 million and $180 million, compared to prior guidance of $160 million to $175 million for the third quarter of 2024.

The Q3 GAAP impact of the settlement is expected to be as follows:

•
NETGEAR expects to report a net benefit before taxes of $103.6 million after backing out associated fees. Of this amount:
o
$10.9 million is expected to be recorded as a reduction in GAAP G&A expenses to offset actual fees incurred to date
o
$92.7 million is expected to be recorded as a contra-expense in litigation reserves, net within operating expenses which will more than offset the Company’s total operating expenses for the quarter and lead to a significant GAAP operating profit
•
Additionally, NETGEAR will reverse the $8.2 million contingent fee recorded in its second quarter of 2024 as all associated fees are captured in the net benefit noted above
•
As such, NETGEAR currently expects GAAP operating margin for the third quarter of 2024 to be between 48.0% and 51.0%, compared to prior guidance of (15.3)% to (12.3)%, with the change primarily driven by the settlement and the profits from the expected increase in revenue
•
The Company now expects its GAAP tax expense to be in the range of $19.0 million to $20.0 million, compared to prior guidance of $1.0 million to $2.0 million

The full benefit of the settlement will not be included in the third quarter Non-GAAP earnings. The portion of the settlement to be included in the Q3 Non-GAAP earnings is expected to be as follows:

•
$10.9 million is expected to be recorded as a reduction in G&A expenses, reflecting a reversal of the actual fees incurred prior to the settlement which were previously included in Non-GAAP earnings
•
As such, NETGEAR currently expects Non-GAAP operating margin for Q3 to be between (4.0)% and (1.0)%, compared to prior guidance of (11.0)% to (8.0)%, with the change primarily driven by the settlement and the profits from the expected increase in revenue
•
The Company now expects its Non-GAAP tax expense to be in the range of zero to $1.0 million, compared to prior guidance of a tax benefit of $1.5 million to $2.5 million

The Company believes that the cash benefit of the settlement after associated fees and expected tax, net of other applicable tax benefits anticipated in the year, will be approximately $90.3 million. Additionally, the Company

has repurchased approximately 99,000 shares of its common stock for $1.5 million, or $14.92 per share quarter to date, and does not expect any further repurchases to occur in the third quarter, due to trading window restrictions.

A reconciliation between the updated Business Outlook on a GAAP and Non-GAAP basis is provided in the following table:

Three months ending

September 29, 2024

(In millions, except for percentage data)

Operating Margin
Rate

Tax Expense (Benefit)

GAAP

48.0% - 51.0%

$19.0 - $20.0

Estimated adjustments for1:

Stock-based compensation expense

3.0%

-

Restructuring and other charges

0.8%

-

Litigation reserves, net

(55.8)%

Non-GAAP tax adjustments

-

$(19.0)

Non-GAAP

(4.0)% - (1.0)%

$0.0 - $1.0

A reconciliation between the previously provided Business Outlook on a GAAP and Non-GAAP basis is provided in the following table:

Three months ending

September 29, 2024

(In millions, except for percentage data)

Operating Margin
Rate

Tax Expense (Benefit)

GAAP

(15.3)% - (12.3)%

$1.0 - $2.0

Estimated adjustments for1:

Stock-based compensation expense

3.4%

-

Restructuring and other charges

0.9%

-

Non-GAAP tax adjustments

-

$(3.5)

Non-GAAP

(11.0)% - (8.0)%

$(2.5) - $(1.5)

1 Business outlook does not include estimates for any currently unknown income and expense items which, by their nature, could arise late in a quarter, including: litigation reserves, net; acquisition-related charges; impairment charges; restructuring and other charges and discrete tax benefits or detriments that cannot be forecasted (e.g., windfalls or shortfalls from equity awards or items related to the resolution of uncertain tax positions). New material income and expense items such as these could have a significant effect on our guidance and future GAAP results.


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