NETGEAR, Inc.

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 star 1 on your push-button phone. I would now like to turn the conference over to Eric Bilen. Please go ahead, sir.

Thank you, Josh. Good afternoon, and welcome to Netgear's third quarter of 2022 Financial Results Conference Caller. Joining us from the company are Mr. Patrick Lowe, Chairman and CEO, and Mr. Brian Murray, CFO. The format of the call will start with a review of the financials for the third quarter provided by Brian, followed by details and commentary on the business provided by Patrick, and finish with fourth quarter of 2022 guidance provided by Brian. We'll then have time for any questions. If you have not received 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 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. 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. Net revenue for the quarter ended October 2nd, 2022, was $249.6 million, which was above the midpoint of our guidance range, up 11.8% sequentially, and down 14% year over year. Across our entire business, demand for our innovative, highly differentiated premium products remained strong. These higher margin products, including our pro AB managed switches, 5G mobile hotspots, and 10 gig tri and quad band Wi-Fi mesh products, are the key to delivering growth and expanding our profitability in the long term. In the third quarter, despite supply challenges, the team worked around the clock to deliver as much of these key products as possible to our channel partners and end customers. This resulted in record quarterly revenue for our SMB segment and strong sequential growth of our 5G mobile hotspots for our service provider partners. Despite these tremendous efforts, we were still short of supplying total Luna for our high-end products, which resulted in a less favorable mix of revenue and lower overall non-GAAP operating margin than expected. As we look to the fourth quarter, broad-based inflationary pressures and in certain macroeconomic environments are top of mind for many retail channel partners. As a result, while we made progress in destocking in the third quarter, our retail partners continue to right-size inventory, and we expect that to continue in the fourth quarter and into 2023. We returned to non-GAAP operating profitability in the third quarter, delivering non-GAAP operating income of $1.8 million and non-gap operating margins of 0.7%. Stronger SMB performance helped us improve non-gap operating margins by 260 basis points as compared to the prior quarter. With that said, we still ended the quarter with a significant backlog on the SMB side, particularly in Pro AV managed switches, and on the CHP side with our M6 and M6 Pro 5G mobile hotspots. For the third quarter of 2022, net revenue for the Americas was $169.4 million, a decline of 13.2% year over year, and an increase of 17.6% on a sequential basis. Immune net revenue was $44.8 million, which is down 21.3% year over year, and flat quarter over quarter. Our APAC net revenue was $35.4 million, which is down 7.1% from the prior year comparable period and up 3.4% sequentially. Year-over-year revenue declines were principally driven by market softness in the retail portion of the CHP business, partially offset by our SMB business, where we saw strong year-over-year growth across all three regions despite supply constraints. In general, the strengthening of the U.S. dollar over the past year has had a meaningful negative impact on our international revenue and our profitability. On a constant currency basis, our EMEA and APAC revenue would have only declined 9% and 1% year-on-year, respectively. For the third quarter of 2022, we shipped a total of approximately 2.4 million units, including 1.5 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 786,000 units for the third quarter of 2022. The net revenue split between home and business products was about 60% and 40%, respectively. The net revenue split between wireless and wired products was about 61% and 39%, respectively. Products introduced in the last 15 months constituted about 28% of our third quarter shipments. while products introduced in the last 12 months contributed about 25% of our third 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. Non-GAAP gross margin in the third quarter of 2022 was 27.6%, which is down 250 basis points as compared to 30.1% in the prior year comparable period, and down 10 basis points compared to 27.7% in the second quarter of 2022. As compared to the prior year, the higher cost of components and transportation and the strengthened U.S. dollar were the primary drivers for the reduction. Total Q3 non-GAAP operating expenses came in at $67.2 million, which is down 1.1% year over year and up 1.6% sequentially. Our headcount was 731 as of the end of the quarter, down from 740 in Q2. We evaluate our business priorities on a regular basis and make structural adjustments accordingly in areas that are not aligned with our strategic focus. We will continue to invest in our business and hire in key areas we believe will deliver future growth and profitability, such as ProAV, super premium Orbi Wi-Fi systems, 5G mobile hotspots, and subscription services. Our non-GAAP R&D expense for the third quarter was 8.5% of net revenue as compared to 7.6% of net revenue in the prior year comparable period and 9.5% of net revenue in the second quarter of 2022. To continue our technology and subscription service leadership, we are committed to continued investment in R&D. Our non-GAAP tax was a benefit of $3.6 million in the third quarter of 2022. The benefit came as a result of revisions to current year-to-date estimates, as well as a one-time revision to previous year tax estimates. Looking at the bottom line for Q3, we reported non-GAAP net income of $6 million and non-GAAP dilute net income per share of 21 cents. Turning to the balance sheet, We ended the third quarter of 2022 with $233.2 million in cash and short-term investments, down $16.9 million from the prior quarter. During the quarter, $15.2 million of cash was used by operations, which brings our total cash used by operations over the trailing 12 months to $4.9 million. We used $2.1 million in purchases of property and equipment during the quarter, which brings our total cash use for capital expenditures over the following 12 months to $7.1 million. Although we did not repurchase any shares of Netgear Common Stock in the third quarter, we are committed to returning value to our shareholders and plan to continue to repurchase shares in future periods. Since the start of our repurchase activity in Q4 2013, we have spent $651.9 million to repurchase 18.9 million shares. Our fully diluted share count is approximately 29 million shares as of the end of the third quarter. Now turning to the third quarter results for our product segments. This connected home segment, which includes our industry-leading Orbi, Nighthawk, Nighthawk Pro Gaming, and Mural brands, generated net revenue of $150.6 million during the quarter, which is down 27.8% on a year-over-year basis and up 16.9% sequentially. We experienced a year-over-year decline in the retail side as the year-ago period was still experiencing relatively elevated demand. Despite a double-digit decline in the CHP retail market overall year-over-year, our super premium Wi-Fi mesh category grew in that same period. We also saw continued strong demand for our leading 5G mobile hotspots in both the retail and service provider channels in the third quarter. But we were limited by supply of these higher margin products. We remain confident that the super premium Wi-Fi market, a market pioneered and led by Netgear, and 5G mobile hotspots will continue to deliver growth into 2023. I'm excited to share that SMB once again generated record net revenue of $99 million for the third quarter of 2022, which is up 21.3% on a year-over-year basis and up 4.9% sequentially. We made incremental progress navigating the supply chain challenges facing our SMB business in the quarter, and our managed switch products led the way with 80% growth as compared to the prior year. This again demonstrates the strategic importance of our investments in the rapidly growing ProAV market. Importantly, we continue to see strong growth across all geographies despite significant FX headwinds. On a constant currency basis, our SMB business would have grown an even more impressive 29% year over year. I'll now turn the call over to Patrick for his commentary, after which I will provide guidance for the fourth quarter of 2022.