NETGEAR, Inc.

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Ladies and gentlemen, thank you for standing by. At this time, all participants are in a 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 1 on your push-button phone. I would now like to turn the conference over to Eric Palin. Please go ahead, sir.

Thank you, Mike. Good afternoon, and welcome to Netgear's first quarter of 2021 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lowe, Chairman and CEO, Mr. Brian Murray, CFO. The format of the call will start with a review of the financials for the first quarter provided by Brian, followed by details and commentary on the business provided by Patrick, and finish off with the second quarter of 2021 guidance provided by Brian. We'll then have time for any questions. does not receive a copy of today's press 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, operating margins, tax rates, expenses, and future business outlook. Actual results or trends could differ maturely from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in Netgear's periodic findings of the SEC, including the most recent Forum 10-K. 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. In addition, several non-GAAP financial measures will be mentioned on this call. 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 Mr. Brian Murray. Thank you, Eric, and thank you, everyone, for joining today's call. We delivered a great start of the year, setting the pace to achieve the full-year targets we put out at last December at our analyst day. We reported net revenue just above our guided range as both sides of the business performed well. And we saw supply constraints ease slightly. Our operations team navigated around chip constraints and the continuing elongated transportation times to bring product in from our suppliers, while significantly lowering our freight spend from the fourth quarter levels. Net revenue for the first quarter ended March 28, 2021, was $317.9 million, up 38.3% year-over-year, driven primarily by strong CHP growth in the retail channel and better-than-expected SMB performance. Our leading Y56 offerings continued their momentum in the first quarter across both businesses. Additionally, The work we continue to do to focus on the right products in support of the work-from-home networking market, coupled with strong ProAV growth, resulted in continued upward trajectory for our SMB business, delivering 17.9% year-over-year growth. In the first quarter, we generated a record non-GAAP operating income of $42.3 million. This translated into a non-GAAP operating margin well above the top end of our guidance range at 13.3%, an improvement of 970 basis points over the first quarter of 2020, and 230 basis points over the fourth quarter of 2020. Relative to our guidance range, we experienced better than expected performance from our SMB business, which carries higher margins. Additionally, we saw an improved mix of business coming from the higher margin e-commerce channel. As mentioned previously, our operations team was able to lower spend on air freight meaningfully below planned levels. All three factors contributed to non-GAAP property margin coming in well above our initial expectation. While we spent less in air freight than originally expected, much of the improved supply arrived later in the quarter. As a result, we could only replenish the channel inventory towards the end of the quarter. And thus, we didn't have an opportunity to increase promotional efforts and recoup even more market share than the modest gains we experienced in the quarter. We do believe we were in a solid position heading into the second quarter to selectively increase promotional efforts, including participation in promotional activities planned with some key channel partners. which should allow further gains in market share and assist with our goal of driving increased paid subscribers. The strength in our business was seen across the globe as we delivered solid double-digit year-over-year growth in all geographies. Led by the demand for our premium mesh products in our CHP business, as well as strength in our S&B business. For the first quarter of 2021, net revenue for the Americas was $219.2 million, which is up 38.5% year over year and down 15.6% on a sequential basis. The median net revenue was $61.1 million, which is up 44.9% year over year and down 9.4% quarter over quarter. Our APAC net revenue was $37.7 million, which is up 27.2% from the prior year comparable quarter and down 5.7% sequentially. For the first quarter of 2021, we shipped a total of approximately 4.1 million units, including 2.7 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.4 million units for the first quarter of 2021. The net revenue split between home and business products was about 76% and 24%, respectively. The net revenue split between wireless and wired products was about 59% and 31%, respectively. Products introduced in the last 15 months constituted about 35% of our first quarter shipments, while products introduced in the last 12 months contributed about 30% of our first quarter shipments. 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. The non-GAAP gross margin in the first quarter of 2021 was 35.2%, which is up 600 basis points as compared to 29.2% in the prior year comparable quarter, and up 460 basis points compared to 30.6% in the fourth quarter of 2020. The year-over-year improvement was driven by improved product margins led by our premium mesh solutions. Sequentially, lower spend on air freight, higher demand for SMB products, and higher mix of revenue going through e-commerce channels, which brings the added benefit of lower costs associated with consumer returns, all contributed to improved gross margins. With improving supply, we plan to selectively increase promotional spending to accelerate market share gains, which should contribute to further growth in paid subscribers. In addition to higher promotional activities, we have seen an uptick in the cost of sea transportation by two to three times historical levels. And as a consequence, we believe the Q1 2021 gross margin performance is not likely to repeat in the near-term quarters ahead. Total Q1 non-GAAP operating expenses came in at $69.7 million, which is up 18.2% year-over-year and down 3.3% sequentially. Our team continues to navigate a challenging operating environment while adding proportionately less spend. As a result, we were able to unlock considerable leverage on a 38% year-over-year revenue growth. As always, we manage our expenses prudently while also ensuring we adequately fund the growth portions of our business so that they have the resources they need to succeed. Our headcount was 775 as of the end of the quarter, down from 818 in Q4, as we consolidated some of our offices in the APAC region to gain some cost efficiencies. This will fund further investment in other areas of the business, such as resources supporting our paid subscription business. We continue to manage our headcount, but we'll add resources to invest in areas that we believe will deliver future growth. Our non-GAAP R&D expense for the first quarter was 7.1% of net revenue, as compared to 8.1% of net revenue in the prior year comparable period, and 6% of net revenue in the fourth quarter of 2020. To continue our technology and subscription service leadership, we are committed to continued investment in R&D. Our non-GAAP tax rate was 24.5% in the first quarter of 2021. Looking at the bottom line for Q1, we reported non-GAAP net income of $31.6 million and non-GAAP deleted EPS of 99 cents, each substantially higher than the prior comparable period. Turning to the balance sheet, we ended the first quarter of 2021 with $370.7 million in cash and short-term investment, up $17.3 million from the prior quarter. We were also able to strengthen our inventory position intramutually in the quarter, adding $43.6 million to our stock levels. We believe our supply position will continue to improve in the second quarter. During the quarter, we generated $13.7 million in cash flow from operations, which brings our total cash provided from operations over the trailing 12 months to $165.9 million. We used $1.6 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $10.6 million. As we previously highlighted, we plan to reestablish normal carrying levels of our own inventory in 2021. As a result, we expect to be below our normal conversion ratio of 85% to 100% of non-GAAP ad income by a fair amount, as we saw in Q1. But we remain confident in our ability to continue to generate cash on a full-year basis. Now, turning to the first quarter results for our product segments. The connected home segment, which includes the industry-leading Nighthawk, Orvi, Nighthawk Pro Gaming, and Nero brands, generated net revenue of $240.9 million during the quarter, which is up 46.3% on a year-over-year basis and down 19.6% sequentially. The strong year-over-year growth was driven by heightened demand in the retail channel for our premium Wi-Fi 6 solutions. In the first quarter, despite supply headwinds for our Wi-Fi 6 products existing for much of the quarter, we were able to improve on our strong leadership position in U.S. market share and consumer Wi-Fi, regaining two points to 43%. And we fully expect we will continue to gain share in the second quarter, given the improved supply position in the channel entering the quarter. The SMB segment executed well and generated net revenue of $77 million for the first quarter of 2021, which is up 17.9% on a year-over-year basis and up 8.5% sequentially. This is the highest quarterly revenue for our SMB business in the past two years. The growth was driven primarily by exceptionally strong demand for work-from-home solutions, including low port count switches as well as our SMB wireless solutions. We were also particularly pleased with the performance of our pro AB business, which experienced meaningful year over year growth as we see signs of activities resuming at business offices and sports entertainment venues. Our market share in switches sold through the US retail channel came in at 56% in Q1. I'll now turn the call over to Patrick for his commentary, after which I'll provide guidance for the second quarter of 2021.