NETGEAR, Inc.

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we'll 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'd now like to turn the conference over to Eric Bilen. Please go ahead, sir.

Thank you, David. Good afternoon, and welcome to Netgear's second quarter of 2023 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lowe, Chairman and CEO of Mr. Brian Murray, CFO. The format of the call will start with a review of the financials for the second quarter provided by Brian, followed by a detailed commentary on the business provided by Patrick, and finish with a third 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 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 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 are pleased by the execution of our team this quarter, as we delivered net revenue above the high end of our guidance range. For the quarter ended July 2nd, 2023, revenue was $173.4 million, down 22.3% year over year, and down 4.1% on a sequential basis. Enabled by increased demand, our largest service provider partner outperformed our original expectations. In the retail portion of our CHP business, our premium products, which consist of our Orbi 8 and 9 tri and quad band Wi-Fi mesh products, and 5G mobile hotspots, once again outperformed the broader market, with worldwide sales to end users growing year over year and sequentially. Also, We're beginning to see positive signs the retail networking market and its channel inventory are stabilizing. Momentum behind our ProAV line of managed switches delivered another strong quarter in end-user sales, up 44% year-over-year, more than offsetting some of the weakness in the traditional SMB market, which has been negatively impacted by the uncertain macroeconomic environment, particularly in Asia and Europe. While we outperformed our Q2 expectations on the top line, we continue to experience meaningful headwinds in the form of $29 million of channel inventory reductions across both our CHP and SMB businesses during the quarter. Additionally, the higher mix of service provider revenue and seasonality in our CHP retail channel business affected our gross margins. Accordingly, we delivered non-GAAP operating loss of $10.7 million. and non-GAAP operating margin of negative 6.2%, with the margin coming in at the high end of our guidance range. This was down 430 basis points compared to the year-ago period and a decline of 230 basis points compared to the prior quarter. For the second quarter of 2023, net revenue for the Americas was $116.6 million, a decline of 19% year-over-year, and down 4.4% on a sequential basis. The MIA net revenue was $36.2 million, a decrease of 19.6% year-over-year and down 7.7% quarter-over-quarter. Our APAC net revenue was $20.6 million, which is down 39.7% from the prior year comparable period and up 4.2% sequentially. Our APAC revenue saw outsized declines due to a significant market slowdown in Greater China and Korea. For the second quarter of 2023, we shipped a total of approximately 1.6 million units, including 830,000 nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 426,000 units for the second 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 55% and 45%, respectively. Products introduced in the last 15 months constituted about 20% of our second quarter shipments, while products introduced in the last 12 months contributed about 12% of our second 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 second quarter of 2023 was 31.6%, which is up 390 basis points as compared to 27.7% in the prior year comparable period, and down 200 basis points compared to 33.6% in the first quarter of 2023. As compared to the prior year period, improved supply for our premium higher-margin CHP products and considerably lower total freight costs drove the improvement. As compared to the prior quarter, Q2 experienced a higher mix of service provider revenue and seasonal impact to our CHP retail channel business. Total Q2 non-GAAP operating expenses came in at $65.5 million. which is down 0.9% year-over-year and down 3.6% sequentially. Our headcount was 653 as of the end of the quarter, down from 702 in Q1. We will continue to strategically invest in our business and hire in key areas we believe 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, providing further cost efficiencies. Our non-GAAP R&D expense for the second quarter was 11.4% of net revenue, as compared to 9.5% of net revenue in the prior year comparable period and 11.6% of net revenue in the first quarter of 2023. 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 $4 million in the second quarter of 2023. Looking at the bottom line for Q2, we reported non-GAAP net loss of $4.7 million and non-GAAP diluted net loss per share of 16 cents. Turning to the balance sheet, We ended the second quarter of 2023 with $202.8 million in cash and short-term investment, down $36.4 million from the prior quarter. During the quarter, $34.6 million of cash was used by operations, which brings our total cash used by operations over the trailing 12 months to $45.6 million. We used approximately $700,000 in purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $5.3 million. We expect to return to positive free cash flow in the second half of the year as we make further progress in reducing our inventory and our bottom line improves. Now, turning to the second quarter results of our product segments. The connected home segment, which includes our industry-leading Orbi, Nighthawk, Nighthawk Pro Gaming, armor, and mural brands generated net revenue of $98.4 million during the quarter, down 23.6% on a year-over-year basis, and down 4.2% 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 retail networking market overall in Q2, our premium Orbi 8 and 9 Wi-Fi mesh and 5G mobile hotspots once again materially outperformed the market, with worldwide sales to end users growing over that same period. Importantly, these higher-margin, high-end products with higher ASPs allowed us to deliver revenue above the high end of our guidance. This is clear validation of our long-term growth and profitability potential of our core strategy. On the SMB side, net revenue came in at $75 million in the second quarter, led by continued strong demand for our ProAV managed switch products. While we continue to be challenged by channel inventory compression to historically low levels, as partners navigate through the uncertain macroeconomic environment, SMB end-user sales were up high single digits year on year. demonstrating strong market momentum of our ProAV line of products. Despite these near-term headwinds, it's clear that the strategic investments we've made in the rapidly expanding ProAV market continue to pay off, with end-user sales in this category growing 44% as compared to the prior year. While we materially lowered channel inventory in the first half of the year across both businesses, elevated interest rates and macroeconomic uncertainty remain top of mind for our partners. We continue to expect top line headwinds throughout the second half of the year as our channel partners constrain both CHP and SMB products to historically low inventory carrying levels. However, we expect the revenue impact in the second half of the year to be smaller than the first half. Encouragingly, we are starting to see indicators that the broader consumer retail networking market is beginning to stabilize. and the market should remain steady as we move through the remainder of the year. Despite our top line remaining challenged due to the inventory reduction in the near term, customer appetite for our premium CHP products and our SMB ProAV products remain strong, a positive indicator of the product chains underlying our business. I'll touch on this more when covering our guidance for the third quarter of 2023. I'll now turn the call over to Patrick for his commentary.