NETGEAR, Inc.

Please stand by, we're about to begin. Good afternoon, ladies and gentlemen, and welcome to the Netgear first quarter 2023 results conference call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad, and if you would like to withdraw your question, please press the pound key. And now at this time, I'll turn things over to Mr. Eric Filan. Mr. Filan, you may begin.

Thank you, Beau. Good afternoon and welcome to Netgear's first quarter of 2023 Financial Results Conference Call. 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 first quarter provided by Brian, followed by details and commentary on the business provided by Patrick, and finish with second quarter of 2023 guidance provided by Brian. We'll then have time for any questions. If you've 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, operating margins, tax rates, expenses, and future business outlooks. 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-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. A 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. While we came into the quarter forecasting approximately $28 million in channel inventory reductions of both CHP and SMB products, our actual experience was a reduction of $37 million. or $9 million higher than anticipated. This increase was due to an unprecedented inventory reduction by our largest service provider partner, as well as a meaningful reduction in SMD inventory by our largest e-commerce partner. This resulted in an unexpected challenge to our top line. Accordingly, our net revenue for the quarter ended April 2nd, 2023, was $180.9 million. which came in below the low end of our guidance range, down 14.1% year-over-year, and down 27.4% on a sequential basis. However, our end-user sales of SMB products remain strong, growing double digits year-on-year, driven by our ProAV line of managed switches, and our premium CHP products, consisting of our Orbi 8 and 9 tri- and quad-band Wi-Fi mesh products and 5G mobile hotspots, again outperformed the broader market, growing sequentially despite normal seasonal patterns. While the gross margin improved dramatically during the quarter, it was not enough to offset the reduced leverage from our top line. As a result, we delivered non-GAAP operating loss of $7.1 million, and non-GAAP operating margin came in at negative 3.9%, below the low end of our guidance range. which was up 50 basis points compared to the year-ago period, and a decline of 230 basis points compared to the prior quarter. For the first quarter of 2023, net revenue for the Americas was $121.9 million, a decline of 15.7% year-over-year, and down 23.4% on a sequential basis. The mean net revenue was $39.2 million, an increase of 6.3% year-over-year and down 25.7% quarter-over-quarter. Our APAC net revenue was $19.8 million, which is down 31.8% from the prior comparable period and down 46.8% sequentially. Our APAC revenue saw outsized declines due to the sudden COVID surge in China at the end of last year and into Q1 of this year, which caused a significant market slowdown in China, Hong Kong, and Korea. For the first quarter of 2023, we shipped a total of approximately 1.8 million units, including 860,000 nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 485,000 units for the first quarter of 2023. The net revenue split between home and business products was about 57% and 43% respectively. The net revenue split between wireless and wired products was about 44% and 56% respectively. Products introduced in the last 15 months constituted about 18% of our first quarter shipments. While products introduced in the last 12 months contributed about 12% 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 the earnings release distributed earlier today. Non-GAAP gross margin in the first quarter of 2023 was 33.6%, which is up 540 basis points as compared to 28.2% in the prior year comparable period, and up 870 basis points compared to 24.9% in the fourth quarter of 2022. This represents our second highest gross margin since the beginning of 2019. As compared to both the prior year period and Q4 2022, we experienced an improved mix of our premium CHP products as well as a higher mix of SMB revenue, both of which carry higher margins. Additionally, we experienced lower sea freight costs as determined when the inventory was purchased and decreased our use of higher cost air freight due to an improved supply picture. Total Q1 non-GAAP operating expenses came in at $67.9 million. which is down 1.1% year-over-year and up 2.8% sequentially. Our headcount was 702 at the end of the quarter, up slightly to 691 in Q4. We will continue to strategically invest in our business and hire in key areas where we believe we will deliver future growth and profitability, such as ProAV managed switches, premium Orbi Wi-Fi mesh systems, 5G mobile hotspots, and subscription services. However, we continue to evaluate other areas of the business on a regular basis and plan to drive further cost efficiencies. Our non-GAAP R&D expense for the first quarter was 11.6% of net revenue as compared to 10.8% of net revenue in the prior year comparable period and 7.7% of net revenue in the fourth quarter of 2022. To continue our technology and subscription service leadership, we are committed to continued investment in R&D. Our non-GAAP tax expense was a benefit of $19,000 in the first quarter of 2023. Looking at the bottom line for Q1, we reported non-GAAP net loss of $5.6 million and non-GAAP to lose net loss per share of 19 cents. Turning to the balance sheet, We ended the first quarter of 2023 with $239.2 million in cash and short-term investments, up $11.8 million from the prior quarter. During the quarter, $9.1 million of cash was provided by operations, which brings our total cash used by operations over the trailing 12 months to $5.9 million. We used $870,000 in purchases of property and equipment during the quarter, which brings our total cash use for capital expenditures over the trailing 12 months to $5.7 million. Now, turning to the first quarter results for our product segments. The Connected Home segment, which includes our industry-leading Orbi, Nighthawk, Nighthawk Pro Gaming, Armor, and Miro brands, generated net revenue of $102.7 million during the quarter, down 21.2% on the year-over-year basis, and down 31.1% sequentially. We experienced a year-over-year decline in both the retail and service provider channels, as the year-ago period was still experiencing relatively elevated demand and higher inventory carrying levels at our channel partners. Despite a year-over-year double-digit decline in the consumer networking market overall in Q1, our premium Orbi 8 and 9 Wi-Fi mesh and 5G mobile hotspots materially outperformed the market in that same period. Importantly, these higher-margin, high-end products help offset the lost top-line leverage and result in an improved contribution profit in the CHP business as compared to the year-go period and Q4 2022, despite lower revenue. This is clear validation of the long-term growth and profitability potential of our core strategy. On the SMB side, our products continue to garner strong reception in the market, and end-user sales grew double digits year-on-year. However, while we had anticipated some channel inventory reductions of our SMB products, we also experienced a drastic and unanticipated reduction in inventory carrying levels at our largest e-commerce channel partner, which constrained our top line. Accordingly, SMB net revenue came in at $78.2 million in the first quarter, a decline of 2.6% on a year-over-year basis, and 21.9% sequentially. Demand remains exceptionally strong for our ProAV managed switch products, with end user sales in this category growing over 50% as compared to the prior year quarter, as our investments in this area continue to pay off. As we continue to look to the remainder of the year, broad-based inflationary pressures and the uncertain macroeconomic environment still remain top of mind for our partners across all channels. Consequently, While we materially lowered channel inventory in the first quarter, we continue to expect top-line headwinds as our channel partners continue to constrain inventory levels of both CHP and SMB products to unprecedented carrying levels with an impact of a similar magnitude to Q1 on our top-line projections. Despite our top-line remaining challenge due to the inventory reductions in the near term, we expect in-market sales of our premium CHP products and our SMB products to continue to deliver growth, a positive indicator for the underlying business. I'll touch on this more when covering our guidance for the second quarter of 2023. I'll now turn the call over to Patrick for his commentary.