网件 (NTGR) 2026年第三季度业绩电话会：供应限制制约企业业务增长

核心要点

• 网件（NETGEAR）公布2026年第三季度营收为1.673亿美元，同比下降9.3%，环比大致持平。受制造端瓶颈限制，营收低于公司此前给出的1.65亿至1.75亿美元指引区间中值。
• 企业级业务营收为9070万美元，占综合营收的54%以及非GAAP毛利润的约70%。企业级终端销售（POS）表现同比增长约6%。
• 企业级在手积压订单增至第二季度水平的2.5倍以上，达到近2000万美元。管理层将这一增长归因于制造吞吐量问题，而非需求疲软或零部件短缺。
• 综合非GAAP毛利率同比提升170个基点至41.3%。非GAAP营业利润为330万美元，高于公司此前给出的亏损3%至盈亏平衡的指引区间。
• 年度经常性收入（ARR）同比增长约12%至4250万美元。尽管基数相对较小，但Insight云管理平台的开票金额同比实现翻倍以上增长。
• 对于2026年第四季度，管理层指引营收为1.60亿至1.75亿美元，非GAAP营业利润率为0%至3%，同时警告称制造端受限及零部件成本上升仍将构成逆风。

关键财务数据

业务与运营表现

企业级业务仍是网件的主要盈利驱动力。尽管遭遇供应延迟，管理型交换机的渠道动销仍实现两位数增长；同时，美洲地区整体企业级POS销售表现增长约10%，欧洲地区增长4%。

企业级业务非GAAP边际贡献率为24.5%。该业务按金额计算的毛利润创下历史新高，略高于第二季度创下的前高水平。管理层表示，区域结构、空运成本以及计划中的企业级投资在一定程度上抑制了利润率的环比表现。

专业视听（Pro AV）业务在商业视听、数字标牌、现场活动及广电领域继续保持强劲势头。网件在第三季度推出了Align AV平台，首批产品即告售罄。Align应用商店有超过70家生态合作伙伴正在接入，而更广泛的Pro AV合作伙伴生态系统已扩展至625家以上。支持SMPTE标准的交换机渠道动销同比实现翻倍以上增长。

网件还对其Insight云管理平台进行了改版升级。相关的提价推动Insight开票金额同比实现翻倍以上增长。活跃企业级合作伙伴环比增加14%，Apex合作伙伴较第二季度增长31%。

受竞争性定价、零部件成本上升、供应受限以及计划中收缩传统运营商业务的影响，消费级业务营收持续承压。运营商及相关产品组合同比下滑约23%。消费级业务录得约140万美元的边际贡献亏损。

公司完成了针对消费级业务的重组，波及约8%的员工并关闭了加拿大办事处。管理层预计年化节约资金约600万美元，对损益表的效益将于2027年开始显现。

管理层业绩指引

网件预计2026年第四季度净营收为1.60亿至1.75亿美元。该预期基于制造产能将继续低于客户需求的前提，特别是Pro AV管理型交换机和部分消费级路由器。

管理层预计第四季度综合毛利率将环比下降约150个基点，主要是由于存储芯片成本上升以及与恢复生产相关的运输费用增加。

管理层预计受影响的制造合作伙伴将在2027年第一季度恢复正常生产水平。网件还自11月起对管理型交换机实施了约10%的提价，并计划在2027年初对部分消费级产品进行提价。

风险与关注事项

• 由于工厂迁移执行不力，一家制造合作伙伴再次未能达到最低生产承诺。网件表示，问题在于将现有零部件组装转化为成品的能力，而非零部件本身短缺。
• 制造复苏的时间节点和产品结构仍是近期营收的关键变量。渠道库存处于低位，管理层预计供应受限将持续至2027年第一季度。
• 因产品缺货而流失的消费级需求可能无法弥补。管理层估计第三季度消费级营收受此影响约400万美元，并表示这部分需求大多具有时效性，过期即失。
• 存储芯片及其他零部件成本正在上涨，紧缺状况已蔓延至闪存、印制电路板（PCB）和多层陶瓷电容器（MLCC）。管理层预计消费级利润率将面临更大压力，因为存储芯片在该业务的物料清单（BOM）中占比较高。
• 尽管原材料库存增加，但产成品库存出现下滑，反映出制造端的瓶颈。原材料库存增加了约2500万美元，达到3600万美元。

分析师问答要点

管理层表示，企业级在手积压订单接近2000万美元。公司力求在第四季度维持或小幅减少该积压订单，随后在2027年第一季度取得更实质性的进展。网件还在必要时采用直发方式以支持客户项目，同时努力恢复渠道库存。

为降低供应风险，网件已派驻人员在受影响制造商现场办公，并将部分产品转移给其他合作伙伴。首席执行官CJ·普罗伯（CJ Prober）表示，他已于10月与该合作伙伴的首席执行官及运营团队会面，以排查根本原因并评估整改方案。

在定价方面，管理层表示，企业级产品的提价迄今已抵消了增加的供应成本。受竞争环境影响，消费级产品提价难度更大，公司预计计划中的提价无法完全抵消零部件成本的上涨压力。

管理层表示，AI相关应用场景目前并非主要的需求直接驱动因素。不过，公司预计在未来两到三年内，AI将有助于提升内部效率、支持软件开发以及赋能未来的网络管理功能。

公司表示，其软件自主研发内包计划已接近完成从外部承包商向内部团队的过渡。管理层将Insight、Axiom和Align的整合工作视为取得进展的早期证明，同时强调企业级软件与服务仍处于早期阶段。

财报电话会议完整实录

---

完整财报电话会议逐字稿

管理层陈述

Operator

Hello, everyone. Thank you for joining us, and welcome to the NETGEAR Third Quarter 2026 Results Conference Call. [Operator Instructions] I will now hand the conference over to Steven Pelayo. Please go ahead.

Unknown Attendee

Thank you, operator. Good afternoon, and welcome to NETGEAR's Third Quarter of 2026 Financial Results Conference Call. Joining us from the company are CJ Prober, CEO; and Bryan Murray, CFO.

The format of the call will start with commentary on business provided by CJ, followed by a review of the financials for the third quarter and guidance for the fourth quarter provided by Bryan. We'll 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 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, 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 and on our Investor Relations website.

At this time, I would now like to turn the call over to CJ.

Charles Prober

Thanks, Steven, and thank you all for joining us today. The third quarter was an important period for NETGEAR as we continue advancing our transformation into a software-differentiated enterprise-led business. We're excited by the underlying momentum and demand we're seeing in enterprise, particularly in our managed switch portfolio and growing software and services offerings. At the same time, our positive momentum in the second half of this year has been impacted by continued execution challenges at one of our key manufacturing partners.

Importantly, this is not a reflection of customer demand, which remains robust, but rather our ability to fulfill customer orders in a timely manner. Addressing these manufacturing issues is my highest operational priority.

Despite these supply constraints, we delivered revenue within our guidance range and positive non-GAAP operating income above the high end of our guidance range, reflecting the underlying profitability of our enterprise business and continued financial discipline. Our non-GAAP EPS was $0.13.

Today, I'll discuss the momentum that's building in our enterprise business, the actions we're taking to address the manufacturing bottleneck and how we're continuing to position NETGEAR for sustainable, profitable growth through our enterprise-led transformation. I'll also touch on the ongoing transformation of our consumer business, and Bryan will then walk through our financial results and fourth quarter outlook in greater detail.

Enterprise generated approximately $90.7 million of revenue, representing 54% of consolidated revenue and approximately 70% of non-GAAP gross profit. End customer sell-through increased approximately 6% year-over-year globally, led by strong double-digit growth from our managed switch products with even more positive trends in the Americas and Europe.

At the same time, missed production commitments from our manufacturing partner, combined with our ongoing APAC transformation led us to flat year-over-year growth for reported revenue. Enterprise backlog exited Q3 more than 2.5x higher than the end of Q2, which was already at an elevated level due to product shortages in the prior quarter as well.

Enterprise non-GAAP gross margin was 53.2%, up 220 basis points year-over-year and contribution margin was 24.5%. While both measures moderated sequentially due to regional mix, increased use of airfreight to bring in supply and our planned investments in the enterprise business, they continue to demonstrate the attractive economics of our growing enterprise portfolio and the importance of the mix shift to enterprise underway across NETGEAR.

I next want to elaborate on the cause of our supply chain challenge and what we're doing to resolve the issue. As we noted last quarter, a key manufacturing partner delivered less supply than anticipated in Q2, and that led to slower growth and an increase in our backlog for the quarter. The root cause of the challenge was a poorly executed factory transition by our partner. The executive team, including the CEO of this partner, assured us that their production slowdown was temporary. This is a long-time partner of NETGEAR with a strong track record for delivering on commitments over the last 20-plus years.

Our work with their team on the ground suggested they would be successful in turning things around in Q3. They committed to our minimum Q3 production volumes, but once again fell short of these minimum requirements. Our checks with other customers of this partner have confirmed that other companies are experiencing similar challenges. This is not a NETGEAR-specific issue.

This is also not an issue of component availability. We've taken proactive steps to secure the critical materials needed to support our production plans. Rather, the challenge has been converting those materials into finished products at the expected pace following our partners' transition to a new factory. Obviously, this production challenge is unacceptable and resolving it is my highest operational priority. We continue to have NETGEAR personnel working on site with our partners to troubleshoot production bottlenecks in throughput and to prioritize the products most urgently needed by our customers.

In parallel, we're discussing appropriate commercial remedies and transitioning some products to other manufacturing partners that are executing more reliably. We're encouraged by the partners' remediation plan and are seeing early signs of improvement, but we expect it will take another quarter to return to normalized supply and our fourth quarter outlook reflects this recovery timeline. We believe we'll be back to normal production levels with this partner in the first quarter of 2027.

As it relates to our enterprise transformation, we remain encouraged by the strength of our portfolio, the robust demand we're seeing from customers, our growing backlog and our long-term strategic opportunity. Our strategy remains to build a differentiated enterprise networking business that combines high-performance hardware with differentiated software, including AI-enabled experiences that simplify workflows, deployments, network management and security for our customers. Our in-house software engineering investments are accelerating innovation, increasing control of our road map and expanding the opportunity for higher-margin non-device revenue.

In Pro AV, we've expanded our industry-leading solutions with the award-winning Align platform that was announced at InfoComm and launched in Q3. Align is our first AV hardware platform that consolidates AV services to make our IP-based solutions even more valuable to our end customers. The reception for this new product has been fantastic, and we quickly sold out of our initial quantities. Align is a live platform where we can expand the software and services offered over time. We've launched an initial wave of first-party and third-party software solutions on Align, and we have over 70 AV ecosystem partners in the pipeline who would like to add their software to the Align App Store, demonstrating the value of our platform in the AV ecosystem.

More broadly, our Pro AV partner ecosystem continues to expand with the addition of more than 25 new partners, bringing us to a total of over 625 as of the end of the quarter. Many of these new partnerships are designed to accelerate our entry into the broadcast vertical. And in this regard, sell-through of our Sentia-enabled switches more than doubled year-over-year.

More broadly, we continue to support mission-critical end customer deployments and are now powering AV for one of the top AI frontier labs, NATO, several critical U.S. federal agencies, the Olympics and major churches and museums around the world. We also just deployed our solution to power the full entertainment system on our second Norwegian cruise line vessel. In enterprise networking and security, our transformation bet is beginning to take hold.

From a product perspective, we've revamped Insight, our cloud management platform, and it's been well received by partners and customers. This transformation enabled us to initiate an Insight price increase that helped drive a doubling of Insight billings year-over-year this quarter. We're also leveraging AI to further simplify the design, deployment, management and security of networks and are beta testing these experiences with end customers now.

We also just launched our PR30 router that provides security integrated with networking, which is becoming increasingly important given the heightened security vulnerabilities in the current environment. From a go-to-market perspective, our new partner program is seeing strong engagement. We increased active partners in Q3 by 14% sequentially, while the number of Apex partners grew to 31% over Q2.

Our presence in enterprise networks continues to expand with deployments in Q3 such as a large industrial factory in Poland, a large national convention center in Africa, a large U.S. government department, a hospital win in Europe and a major global semiconductor equipment manufacturer. Diverse deployments were done in India, such as the Maharashtra Public Service Commission and the Brooklyn Resort.

Most notably, the transformational progress on our product and go-to-market model have put our enterprise networking and security business on a growth trajectory in the Americas for the first time in several years, a great milestone and an attractive growing opportunity even though we're in the very early innings of building this business and capturing the market opportunity.

Similarly, our APAC transformation is taking hold. And while sell-through for the region is down year-over-year, we're seeing double-digit sequential growth as anticipated. So the recovery in that region is on track.

For our enterprise business, we continue to pass on the increasing cost of components giving our pricing leverage in this segment. During the quarter, we announced an approximately 10% further price increase on our managed switch portfolio and more modest price increases on other products, and these will take effect in November.

Our long-term thesis for enterprise remains strong and on track. Momentum is building, customer demand is strong, and we are tracking well to the medium- and long-term targets we outlined at our Investor Day last year.

For Consumer, our near-term focus is on protecting gross profit and managing expenses with discipline while maintaining the strength of our brands and innovating for the future. Revenue for the quarter was down year-over-year as we intentionally harvest our legacy service provider business, navigate missed production commitments from our manufacturing partner and optimize this business for gross profit. The same manufacturing partner impacting supply for enterprise is responsible for production of a portion of our consumer wireless router portfolio.

Despite the revenue declines, both non-GAAP gross and operating margins in consumer were relatively flat sequentially, and the contribution profit was limited to a $1.4 million loss. This is a testament to the team's focus on optimizing the bottom line for this business. While this strategy results in reported revenue deceleration, it also allows us to focus resources on the more attractive portion of our consumer portfolio, including our core retail networking products and higher-margin recurring services.

Our recurring services delivered double-digit growth in the quarter despite the intentional constraints on unit volume. In Q3, we implemented a restructuring to reduce spend on this business, which impacted approximately 8% of employees and resulted in the closure of our office in Canada, where the team is focused on our consumer service provider products.

The annualized savings of approximately $6 million from this restructuring will not impact our P&L until 2027, given the timing of the exits and office closure. We're also in the process of implementing a set of price increases that will take effect in January to further mitigate the incremental cost of supply. We believe our consumer business retains value, supported by our established brands, broad product portfolio, long-standing customer relationships and positive U.S. regulatory tailwinds.

We continue to monitor developments in the U.S. regulatory environment that could positively influence the competitive landscape for consumer networking products. As we've discussed previously, the FCC's evolving requirements for networking equipment could create opportunities for trusted U.S.-based companies like NETGEAR, particularly as the industry transitions to future generations of networking technology, and we're well positioned if this were to happen.

Stepping back, Q3 reinforced our confidence in the underlying enterprise opportunity while also highlighting the supply chain challenges that are preventing us from fully capitalizing on that growing demand. We continue to make progress in building a more differentiated business through our expanding software capabilities, growing service offerings and leadership in Pro AV. However, we recognize that these strategic advances also need to translate into more consistent revenue growth and financial performance, and we're taking the actions that will make this happen.

Positive Q3 non-GAAP operating profit that was also above the high end of guidance demonstrates the ongoing progress of our transformation. We remain committed to the strategic direction and medium- and long-term financial objectives outlined at our Investor Day. Our focus is on maintaining financial discipline and making decisions that position NETGEAR for sustainable, profitable growth and long-term shareholder value creation.

With that, I'll turn the call over to Bryan for a review of our financial results and fourth quarter outlook.

Bryan Murray

Thank you, CJ, and good afternoon, everyone. Our third quarter results reflect multiple dynamics. Underlying demand for our enterprise solution remains quite strong, particularly in our line of Pro AV managed switch products. Ongoing manufacturing constraints limited our ability to fully translate that demand into reported revenue with more impact to the enterprise business, but a contributing factor for consumer as well.

We delivered favorable gross margin performance and continued expense discipline that enabled us to deliver non-GAAP operating profitability above our expectations, reflecting the efforts of our transformation strategy. For the third quarter of 2026, revenue was $167.3 million, down 9.3% year-over-year and roughly flat sequentially. Revenue was within our guidance range of $165 million to $175 million, although below the midpoint as a result of the supply challenges we faced with our manufacturing partner. Enterprise revenue was $90.7 million, up 2% sequentially and essentially flat year-over-year.

Importantly, the revenue results do not fully reflect underlying customer demand given the supply constraints we faced on our Pro AV managed switch products, which was the primary driver for our backlog growing to be more than 2.5x the balance at the end of the prior quarter, which was already at an elevated level. Enterprise point-of-sale activity increased approximately 6% year-over-year, including growth of approximately 10% in the Americas and 4% in Europe.

Demand for our managed switch products remained particularly encouraging, continue to grow double digits despite impact from supply delays. As CJ outlined, the challenges has been manufacturing throughput and availability of product required to fulfill customer orders for our Pro AV managed switch products within our enterprise business and certain routers within our consumer business rather than a broad shortage of components.

These constraints also contributed to a sequential decrease in our ending inventory of $5.5 million despite an increase of procured components increasing approximately $24 million and limited our ability to replenish channel inventory. While we continue to work with our manufacturing partner to improved production output, the timing and mix of shipments remain important variables in our near-term revenue outlook, which I will cover further later.

Turning to Consumer. Third quarter revenue was $76.6 million, down 18.2% year-over-year and 3.7% sequentially. This business continues to operate in a challenging environment characterized by aggressive competitive pricing despite rising component costs. While we continue to see benefits of share gains in the U.S. cable category with our previous competitor decreasing their channel presence, the service provider and related product portfolio decreased approximately 23% year-over-year as we harvest the profits from these lower priority businesses.

Within this business, our focus remains on protecting gross profit and managing the business with financial discipline. We expect these pressures to remain significant as we move into 2027, particularly as higher memory and other component costs flow through.

Turning to recurring services. Annual recurring revenue reached $42.5 million in the third quarter, an increase of approximately 12% year-over-year and 2% sequentially. The growth in this area was limited during the quarter as we facilitated a technical platform migration that will improve our ability to market and sell our services over the long term. This limited our ability to sell these services on our direct-to-consumer website for much of the period, where we typically see our highest conversion rate. However, the long-term benefits of the new platform are well worth the trade-off.

Also worth noting, we are making great strides with our non-device revenue initiatives in the enterprise segment with the successful launch of our new Insight solution continuing to receive positive feedback. We are quite pleased by the ramp in the billings for this service, which nearly doubled the levels in the prior quarter, albeit off a relatively small base. Our modest but growing recurring services business is an increasingly important driver of NETGEAR's transformation, providing attractive higher-margin revenue streams while deepening customer relationships and strengthening our competitive differentiation.

As we expand our software and service offerings, we see meaningful opportunities to increase recurring revenue, improve revenue visibility and drive greater operating leverage and profitability as the business scales.

From this point forward, my discussion of profitability will focus on non-GAAP results unless otherwise indicated. Reconciliations between GAAP and non-GAAP results are included in today's earnings release. Consolidated non-GAAP gross margin was 41.3%, approximately flat sequentially and up 170 basis points from 39.6% in the prior year quarter.

The year-over-year improvement reflects the increasing contribution of our higher-margin enterprise business, including the structural benefits of the operating system license acquired late last year. We had anticipated using a higher level of airfreight spend to bring in supply that was supposed to ramp in the second half of the quarter. But due to the production delays that turned out not to be the case. The team responded and was able to drive revenues within our guidance range, utilizing the inventory we had, which has the added benefit of slightly lower component costs.

Looking at the individual segments, Enterprise non-GAAP gross margin was 53.2% compared to 51% in the prior year quarter and 54.1% in the second quarter. This represents a year-over-year improvement of approximately 220 basis points and reflects the continued strength of our managed switch portfolio and the benefits of our software-related initiatives.

Gross profit reached a record high in dollar terms for this business, narrowly exceeding the previous high set in the prior quarter. Enterprise contribution margin was approximately 24.5%, demonstrating the attractive profitability of the business even as manufacturing constraints limited revenue growth. Consumer non-GAAP gross margin was 27.2%, down 120 basis points year-over-year and relatively flat sequentially, reflecting continued competitive pricing pressures and rising component costs.

While our mitigation efforts have helped offset some of these pressures, we expect elevated memory costs to continue weighing on consumer profitability in the coming quarters. We are planning for a price increase on selected product categories in the early part of 2027. Consumer recorded a contribution loss of approximately $1.4 million in Q3, reinforcing the importance of our ongoing focus on gross profit optimization and expense discipline.

Third quarter non-GAAP operating expenses were approximately $65.7 million, down 5% year-over-year and relatively flat sequentially, reflecting continued expense discipline while supporting our strategic priorities in enterprise software development, product innovation and go-to-market capabilities. This came in lighter than initially expected, primarily due to the timing of onboarding hires to support the ongoing enterprise business transformation. Non-GAAP operating income was $3.3 million, representing 2% of non-GAAP operating margin.

Despite the increasing challenges of component cost increases, primarily impacting the consumer business, this represents the fifth consecutive quarter of non-GAAP profitability. This was above our guidance range of negative 3% to breakeven, supported by stronger-than-anticipated gross margin performance and controlled operating spending. Our non-GAAP tax expense was approximately $800,000 in the third quarter of 2026.

Looking at the bottom line for Q3, we reported non-GAAP net income of approximately $3.7 million, resulting in non-GAAP diluted earnings per share of $0.13. During the quarter, $3.8 million of cash was used by operations, which brings our total cash provided by operations over the trailing 12 months to $7.2 million. We used $1.4 million in purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $12.6 million.

Turning to the balance sheet. We ended the third quarter with $242.1 million in cash and short-term investments compared to $267.9 million at the end of the second quarter. The sequential reduction primarily reflected stock repurchases of $15 million at a weighted average price of $21.86 per share as well as changes in working capital. Working capital continues to reflect the manufacturing disruption.

Finished goods inventory declined as production constraints limited replenishment, while raw materials and inventory increased as we proactively secured critical components, particularly memory to support our manufacturing plans. This distinction is important. We have invested in component availability, but our ability to convert those materials into finished product remains constrained by manufacturing execution with one of our manufacturing partners.

Overall, while our third quarter revenue performance was constrained by the manufacturing challenge we've discussed, we are encouraged by the continued strength in underlying enterprise demand and our ability to deliver non-GAAP operating profitability above our guidance range. This reflects the improving economics of our enterprise business, the benefits of our ongoing transformation and continued expense discipline.

Our priorities remain clear: restoring product availability, driving profitable growth in enterprise and managing consumer with a continued focus on gross profit and contribution margin. We remain confident in our long-term strategy while recognizing that the near-term operating environment presents challenges that will require continued focus and discipline.

With that, I'll turn to our outlook for the fourth quarter of 2026. Within enterprise, we continue to see encouraging underlying demand, particularly for our Pro AV managed switches. However, our near-term revenue outlook remains constrained by manufacturing output and the timing of product availability, which we expect to persist into the first quarter of 2027.

Our guidance reflects the uncertainty surrounding improvements in production execution will still fall short of customer demand in the fourth quarter. Within consumer, we expect to continue to optimize this business for gross profit with increasing impact from component costs with some additional impact from supply constraints. For service provider and related products, we expect revenue of approximately $17 million. And while it reflects our focus on optimizing for contribution profits, this would represent an approximate 28% year-over-year decline for this category. Taking these factors into account, we expect fourth quarter net revenue of $160 million to $175 million.

Turning to profitability. We anticipate approximately 150 basis points of consolidated gross margin pressure in the fourth quarter compared to the prior quarter, primarily driven by rising memory costs and increasing transportation costs associated with our production recovery efforts.

While our pricing actions and cost mitigation efforts have offset the impact of rising component cost headwinds within the enterprise business, we expect elevated component costs to continue weighing on margins within the consumer business in the fourth quarter.

Taking these factors into account, we expect fourth quarter GAAP operating margin to be in the range of negative 8.7% to negative 5.7% and non-GAAP operating margin to be in the range of 0% to 3%. Our GAAP tax expense is expected to be in the range of a benefit of $0.5 million to an expense of $0.5 million. And our non-GAAP tax expense is expected to be in the range of $0 to $1 million for the fourth quarter of 2026.

To sum up, our financial priorities are clear: capitalize on the momentum and scale our higher-margin enterprise business, resolve the manufacturing constraints so we convert demand into the full revenue potential and managing consumer profitability while maintaining the financial flexibility to invest in our strategic priorities to drive sustainable long-term value creation.

With that, we can open up for questions.

Operator

[Operator Instructions] Your first question comes from the line of Logan Katzman with Raymond James.

分析师问答

Logan Katzman

This is Logan on for Adam. I guess, first, maybe around some of the supply challenges you guys are having in enterprise. I think you said last quarter, you expected targeted volumes to return to production in 3Q, maybe 4Q. And now it's pushed to 1Q '27.

I guess -- I know you touched on it a little bit in the prepared remarks, but could you maybe touch on a little bit in more detail on what changed with the manufacturing partner intra-quarter? And then what gives you the confidence this isn't going to slip again? And then I have a related follow-up.

Charles Prober

Yes. Great question, Logan, and totally fair. A lot of OEMs are reporting results this quarter and talking about the supply environment. A lot of that's tied to components. And that's where we've done a really good job securing what's needed to produce our products. We're in the unfortunate position of being the subject of missed commitments from one of our manufacturing partners. This is ultimately something that we're accountable for. But commitments were made, commitments were missed.

And this is all tied to a factory transition that happened in Q3 that had the promise of increasing production volumes, but the execution of that was missed. And the remediation plan is in place. I was on the ground there in October, meeting with the CEO of that partner along with the executive team and the folks that are responsible for the day-to-day execution. We reviewed the remediation plans. We identified, they shared with us the root causes.

So we've got confidence that momentum is building on the production side of things. But because demand is strong, it's going to take us a little bit to catch up and to burn down that backlog. So that's a little bit of added context from what we had -- what we shared on the call. And by the way, this doesn't just impact our enterprise managed switch products. It impacts our consumer router portfolio as well. So it's impacting both sides of the business.

Logan Katzman

Understood. Yes, that's super helpful. And actually kind of leads into my next question. Like you mentioned, backlog has been strong. I think enterprise increased more than 2.5% or 2.5x Q-over-Q. And so I know these challenges are also eating into some of the inventory supply you guys have. So I guess when this does get resolved, how long is it going to take for that inventory supply to, I guess, work through you guys and then work through your guys' partners? And I was just kind of curious around the conversion and timing around that.

Charles Prober

Yes. Let me start, and Bryan can chime in if he's got anything else to add. So the backlog at this stage is almost $20 million on the enterprise side. And so we're going to need production to meet ongoing demand and then catch up to that demand in order for us to be able to burn down that backlog.

Our enterprise business isn't one. I think we've talked about this before. It's not one where we'd expect to carry a backlog. So it's just a reflection of the lack of supply availability. On the consumer side, where we don't have inventory to sell in, a lot of that demand is perishable. So in Q3, it was roughly a $4 million revenue impact, but that's largely perishable demand because consumers are going to switch to a product that meets their needs that is available. So the way to think about the backlog is in Q4, we hope to maintain or slightly burn down that backlog and then start to make much more progress against that in the first quarter of next year.

Bryan Murray

Yes. The only other thing I would add there to your question about when -- how quickly it can get in the hands of actual end-user demand. We have been in the mode and obviously, we'll have to continue to be in the mode of drop shipping some of those supplies direct to customers so that they can get to projects on time. So it will be relatively close, but we do want to get the channel inventory levels to a healthier level.

The best, I guess, proxy for that, I would say, in the information we're reporting is the U.S. distribution inventory levels, which is much closer to a pure-play enterprise view. It does not include some of the direct manufacturing partners we have, of course, but that, as you can see in the quarter, was down just over three, which is extremely low. And even lower than we were a year ago when we had some supply challenges as well.

So we want to replenish that, but that will give you some perspective about how we are trying to do everything we can to make sure we get the right products to the customers at the right time.

Charles Prober

Yes. Maybe one final point on this Logan. The positive news behind all of this is demand is really strong, right? So the transformation is working. Strong demand continues in Pro AV. We're seeing demand pick up in the other part of the enterprise business. And so the transformation is taking hold, and it's all very positive. So it's frustrating not to have the supply we need to meet that, but we're doing everything we can to turn the corner on that issue.

Logan Katzman

Got it. Yes, that's super helpful. That's super helpful. But I guess moving on, you guys have done great on memory and components this year. I was just curious, what is your visibility to next year look like? And then has anything changed in that environment trying to secure supply? Has it eased up? Or are you seeing it -- is it tightening or anything like that?

Charles Prober

Yes. I would say the supply environment, again, you'll see this reported by many, many different OEMs continues to be tight, and it's expanding beyond memory, right? So it's going to flash and PCB and MLCC. And so our team is working incredibly hard in a lot of cases directly with the suppliers of those components in other cases in partnership with our OEMs to secure supply.

You'll see in the Q that we filed an increase in raw material inventory. So raw materials went up about $25 million to end the quarter at $36 million in Q3. And so what we're doing there is we're using our balance sheet to protect ourselves from a component and supply issue and benefit from the cost of components that we've purchased throughout the year into 2027. Bryan, do you have anything to?

Bryan Murray

No, I think you covered it.

Logan Katzman

Awesome. I appreciate that. And then last one for me. I was just curious if you guys could give us a broad update on the competitive environment. And maybe if you could touch on both sides of the business. I think on the enterprise side, we've seen some new vendors, brand names kind of make some announcements in the Pro AV market. And then on the consumer side, any commentary you guys have there?

Charles Prober

Yes. So on the enterprise side, let's start with the AV category. So one of the things that we're hearing back from our partners is supply is tight across the board. So the big incumbents in that space that we've been taking share from are seeing much longer lead times, significant supply challenges. There have been some product announcements that report to address kind of the AV use cases. We haven't seen any of those of any type of traction or momentum. It's obviously that we watch carefully.

On the enterprise networking and security side, a lot of disruption in that market with some of the M&A activity, one competitor gone out of business. And so we're -- we feel like we continue to be really well positioned with the value prop that we're bringing to partners, which is reliable enterprise grade but super simple and fully integrated networking and security. So as I said on the call, we're seeing ourselves turn a corner in that business, and we haven't seen that in several years. So really excited about that.

On the consumer side, it remains a competitive environment. We're obviously monitoring the regulatory environment. The SEC regulations that were passed in March stand and you're not able to launch new products unless you have conditional approval. And so we've seen Eero and ASUS receive approval along with NETGEAR, which is the first kind of in our competitive set. But no real change on the consumer side. It's still a competitive market, and we're performing well in the context of optimizing that business for gross profit.

Bryan Murray

Maybe just to add there, Logan. The only thing I would add here is that one of the drivers or things that we've been looking at, and we talked about increasing prices on the consumer product sets. You're seeing that broadly across consumer products. It has not been the case in our category, but we have recently seen some of the competition in certain pockets of consumer networking increasing price. And as we said, we are going to be looking to do so as component cost continues to ramp.

Operator

Your next question comes from Tore Svanberg with Stifel.

Solomon Wang

This is Solomon on for Tore. So you guys already give some great colors on the memory situation. But I think you mentioned a little bit about specifically maybe upping some pricing selectively. So I'm kind of wondering how can we think about the gross margin path maybe from here given this memory situation? And how far can you kind of take pricing and mix to kind of offset the situation maybe looking into '27?

Charles Prober

Why don't I start and then Bryan can add in. I'll focus on the enterprise business to start. It's a good question. We've been we've been consistent in saying that our strategy in the enterprise segment is to pass on the incremental cost of supply to end customers, and that strategy has worked to date.

So we implemented a price increase earlier this year. We just said on the call that we implemented another price increase that will take effect in November. It's a very strategic price increase. It's not broad-based. And so when you look out to Q4 into 2027, we -- at our Investor Day last year, talked about midterm gross margin targets for enterprise. We've already exceeded those.

But we do plan to look to maintain like a strong position on margin and pass on those incremental costs to end customers. And Bryan, do you want to talk consumer?

Bryan Murray

Yes. As we said all along, the memory impact is far greater on the consumer side of things. It is a higher percentage of the overall BOM. And the market conditions thus far have not provided much of an opportunity to raise prices as you've seen in other consumer categories like PCs. As I was just saying, we are starting to see some of that movement in the market. We are going to be responding in the early part of the year to address and offset some of that. We won't be able to offset it all. We are doing things in terms of looking at promotional activities and optimizing for gross profit at this point. But we are looking forward to announcing the price increases in January.

Solomon Wang

Got it. Great. And maybe kind of looking into the enterprise and Pro AV, some great traction you guys kind of shared this quarter, I mean, ranging from NATO to Olympics. I'm kind of curious, so if you -- if you kind of break down the Pro AV segment, like where is growth -- where do you see the strongest growth coming from? Are there specific areas or verticals? Or do you really see a very wide breadth of growth coming from Pro AV?

Charles Prober

The way we look at the market is there's kind of commercial AV, which is corporate offices, things like conference rooms, et cetera. Then you've got digital signage. We've talked before about we power some of the most advanced digital signage deployments globally. You've got live events and then you've got broadcast, which ranges from corporate broadcast. A lot of big companies have broadcast studios all the way to the big broadcasters.

And so that's how we look at the market growth is happening for IP-based networking across all of those. It's a very healthy growth rate, and we're exceeding that and taking share. So we're focused on all of those market opportunities. I'd say where we've been the strongest initially is on the commercial side, but we're expanding into live events, signage, broadcast, I shared the milestone with all the SMPTE enabled switches that are needed for broadcast use cases. We more than doubled that this quarter year-over-year. So we're making good progress there. But the whole AV market, each of those verticals is where we're focused.

Operator

Your next question comes from the line of Jay Goldberg with Seaport Research Partners.

Jay Goldberg

So CJ, you gave at the start of your prepared remarks a pretty somber assessment of your supply situation. But it sounds like the demand side is still very, very strong. Absent those supply constraints, which sounds pretty idiosyncratic to your supplier, your revenue for Q4 would -- the outlook would be -- can you say it would be much higher?

Charles Prober

If we have the supply to burn out the backlog to meet the demand that we're seeing on the enterprise side and in our consumer router portfolio it would be higher. And I didn't mean to come off this summer. We're actually really excited about all the progress.

Maybe it was -- maybe I sounded a bit annoyed because I am that's something that's at least partially outside of our control, but that we're aggressively working with the partner to address is impacting our business this way. When you hear of the component challenges that are impacting others, of course, we're seeing the cost increases, but we're -- we've got ample component availability, and we haven't seen shortages there.

So yes, so overall, it's a situation that we need to address. It's partially outside of our control, but we're -- we have people on the ground, as I said, and we're all over it. So I'm actually really excited about the progress we're making and just wish we didn't have this bump in the road with this partner.

Jay Goldberg

Yes, understood. It's a pretty challenging supply chain year across the board. So what -- I wanted to touch on the subject of AI because I think we're required to talk on this in this year. Are you seeing increase in demand on the enterprise side as enterprise, small and medium-sized enterprises are becoming more aware of the risks from AI. Is that helping to drive your business, both the hardware and the non-hardware side?

Charles Prober

I would say that is not a big driver of the business today. What I would say, though, is that the AI data center build-out is obviously the root cause of the supply issue. And I do see AI and the impact that it has on NETGEAR is a net benefit. So yes, we're having to navigate these supply issues.

However, when you think about like the journey that we're on, the work we've done to in-source software, the way that AI has helped accelerate that, the fact that we're transforming the whole organization aggressively, that's allowing us to use AI in our operations to drive efficiency. And then we're enabling AI experiences in our products. So some of that is becoming table stakes.

So if you think about like AI for operating your network, identifying issues, resolving issues autonomously, things like that, of course. But we have -- we believe we've got some really innovative AI-enabled experiences and solutions that are going to allow us to stand out. We're kind of in this position where because we're building this capability from scratch, it allows us to move more quickly, and we never would have had the success we've had in sourcing software without the benefit of AI.

So I wouldn't say -- to answer your question, I wouldn't say there's like a direct line to the demand that we're seeing today from AI-related use cases. So I do think AI is going to net out to be a real big benefit to NETGEAR if you look ahead two, three years.

Jay Goldberg

Great. And then lastly, you touched on this a little bit and in the prepared remarks, but I was wondering if you could give us an update on the in-sourcing of software that you brought on. How is that progressing? How are you feeling about that? Is it doing what you wanted to do?

Charles Prober

Yes. I mean I wouldn't say we're 100% done, but we're very, very close to having completed the burn down of the outside contractors, onboarding the code to our internal teams, and this is across the board. So we've built teams that are focused on our --next-generation operating systems across consumer and enterprise. We've got teams that are owning the application development.

There's a lot of really exciting integration work happening between like Insight and Axiom, and you see what we're enabling with the Align controller. So we've -- yes, we're really, really happy with the progress that we've made, and that's kind of the first pillar of our transformation. So great progress there.

Jay Goldberg

Cool. And then my last question is, I think you said non-device, non hardware sales were up double digit this quarter. Is that a reflection of this in-source software work that you've done? Or is there still more yet to come on the digital -- on the software and services side?

Charles Prober

There's a lot more to come there. Let me just clarify. So we had -- if you look at our recurring revenue that we report, we saw double-digit growth there. That's still -- the majority of that is still being driven by our consumer business. The doubling that I referenced is we completely revamped our Insight cloud management platform. And in Q3, our billings for that were more than double year-on-year. So it's just a proof point that the investments are paying off.

On the enterprise side, though, in addition to Insight, we've got our security platform, we've got support and professional services. So we have a number of different levers that we're pulling there. And I would say we're still in the early days of fulfilling our customers' needs, meeting our potential, but the progress is great. And so it's only going to get better.

That's the amazing thing about software. It only gets better over time. And we're seeing some real proof points. And like I said on the call, we're committed -- remain committed to the mid- and long-term targets we shared at our Investor Day.

Operator

There are no further questions at this time. I will now turn the call back to CJ for the closing remarks. Please go ahead.

Charles Prober

Yes. Just thank you all for joining the call, and a big thank you to the global NETGEAR team for all the amazing work in Q3 and what's to come in Q4. So NETGEAR team signing off. Thank you.

Operator

This concludes today's call. Thank you all for attending. You may now disconnect. Goodbye.