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NETGEAR (NTGR +30%) explodes higher today after entering into a settlement agreement with TP-Link Systems, a whole home mesh Wi-Fi system manufacturer. NTGR and TP-Link were in a dispute over patent infringement and breached contracts. The two parties agreed to settle, awarding NTGR a $135 mln payment. Meanwhile, NTGR announced an earlier-than-anticipated launch of its next-gen 5G mobile hotspot, rolling it out in Q3 instead of Q4. As a result of the two favorable developments, NTGR raised its Q3 revenue guidance to $170-180 mln, up from $160-175 mln.

NTGR is a global provider of consumer networking products. The company operates two segments: Connected Home and NETGEAR for Business, splitting out its sales to consumers versus small and medium-sized businesses. Its primary offerings are Wi-Fi devices, including mesh systems, routers, and 4G/5G mobile products.

Prior to last night's settlement agreement and raised guidance, shares of NTGR have been languishing. Since 2021 highs, the stock tumbled by over 70%, bottoming in late 2023 before making a mild recovery throughout 2024. The usual suspects, i.e., inflation, interest rates, and dampened consumer sentiment, have been hard at work creating intense headwinds for NTGR, which has not delivered a quarter of positive yr/yr sales growth since 2Q21. Earlier this year, the company observed more destocking than expected across its consumer and business segments, with the cost of carrying excess inventory swelling. To counter these headwinds, NTGR has been taking steps to place itself in a better position to reenergize growth.

• To contend with excess channel inventories, NTGR changed its game plan. Instead of destocking throughout the year so its channel partners could exit 2024 with normalized inventory levels, given the costs associated with taking it slow, NTGR decided to accelerate its way through Q2, which took a chunk out of its revenue, illuminated by a 17% drop yr/yr. While Q2 suffered, NTGR made excellent progress in lowering its inventory position, reducing it by more than initially targeted.
• Looking ahead, NTGR exited Q2 with nearly $300 mln of cash on hand, anticipating additional cash generation during the back half of the year, which has already been aided by the settlement payment. With subscriber counts remaining robust, expanding by 19% yr/yr to 958K in Q2, supporting an over 30% jump in recurring sub revs, NTGR has some wind at its back.
• Management also introduced changes to its business line, hiring a new leader and reorganizing its global sales team. Meanwhile, its business division won a few large projects during Q2, reflecting an uptick in enterprise-scale customers.

The two surprising developments announced yesterday after the close may have been the spark NTGR needed to shift into a permanently higher gear. Still, given the extent of its past woes, it is worth treading lightly. Another sour quarter could send NTGR right back to where it was before today's explosive move.