Netgear’s AI-Driven Dilemma: Record Margins Clash with Supply Chain Strain

Netgear US64111Q1040

Netgear has posted its first annual revenue increase since 2020, yet investor optimism was swiftly curtailed by a cautious forecast. The very trend fueling global tech—the artificial intelligence boom—is indirectly pressuring the networking equipment maker by driving up costs for essential components.

Key Financial Results at a Glance:
* Full-Year 2025 Revenue: $699.6 million (a 3.8% increase)
* Q4 Revenue: $182.5 million (flat year-over-year)
* Q4 Gross Margin: A record 41.2%
* Q1 2026 Guidance: Revenue projected between $145 million and $160 million

The company's fourth quarter demonstrated a powerful surge in profitability, even as top-line revenue remained unchanged. Netgear achieved an adjusted gross margin of 41.2%, a record high that represents an expansion of more than 750 basis points from the prior-year period. This improved efficiency translated to an adjusted earnings per share of $0.26, allowing the firm to move past the losses reported a year ago.

A significant portion of this strength originated from the enterprise division. Revenue from business clients grew 10.6% to $89.4 million, now accounting for nearly half of total sales. This robust enterprise growth is counterbalancing persistent softness in the consumer segment, where demand fell by 8.4%. Providing further stability, the paid services unit reported 558,000 subscribers and delivered an 18% increase in recurring revenue.

Cautious Outlook as AI Demand Squeezes Chip Supply

Management's guidance for the current first quarter of 2026, however, adopted a restrained tone. The forecast for an operating margin between -6% and -3% disappointed the market, triggering an after-hours share price decline of 3.82%. The primary culprit is rising memory chip costs.

A global surge in demand for AI hardware is creating scarcity for standard memory components. Netgear anticipates this dynamic will pressure its gross margin by approximately 100 basis points in Q1. In response, the company has initiated a restructuring plan that includes reducing its workforce by about five percent to maintain financial discipline.

A critical factor for the year ahead will be the extent to which the chip shortage impacts the consumer business. Concurrently, Netgear continues its share repurchase initiative, having bought back $15 million worth of its own equity during the fourth quarter.