NETGEAR, Inc.

Hello and welcome to Netgear's third quarter 2023 results conference call. 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 Bilen. Please go ahead, sir.

Thank you. Good afternoon and welcome to Netgear's third 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 third quarter provided by Brian, followed by details and commentary on the business provided by Patrick, and finish with the fourth quarter of 2023 guidance provided by Brian. We'll then have time for any questions. If you have 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 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. We are pleased by the continued strong execution of our team this quarter in delivering both revenue and operating margin comfortably above the high end of our guidance range. For the quarter ended October 1, 2023, Revenue was $197.8 million, up 14.1% on a sequential basis, but down 20.7% year over year. Increased demand in both the CHP retail market and service provider channels, along with retail channel partners maintaining rather than depleting their inventories, enabled us to outperform our top line relative to our original expectations. As the Wi-Fi 7 upgrade cycle begins to ramp and we approach the holiday season, we continue to see positive signs that the retail networking market is stabilizing. Notably, in Q3, the U.S. retail market grew double digits sequentially, in line with historical seasonality. In the retail portion of our CHP business, our premium solutions, which consist of our Orbi 8 and 9 tri and quad band Wi-Fi mesh products, and 5G Nighthawk mobile hotspots are continuing to perform well. Sales to end users of these premium products grew double digits year over year, dramatically outperforming the total market, which compressed double digits over the same timeframe. On the other hand, our SMB business fell short of our top line expectations in the third quarter. The uncertain macroeconomic environment continued to pressure our channel partners and we saw them continue to reduce their inventory carrying levels, which constrained the top line of our SMB business and will continue to limit its top line potential in the quarters to come. This second consecutive quarter of top line outperformance is an encouraging sign that the CHP retail market is stabilizing and the Wi-Fi 7 transition is gaining traction. The strong mix of our premium Higher margin products, combined with the progress we continue to make in growing our service revenue business in CHP, helped improve our gross margins. Additionally, we gained top-line leverage from the seasonal lift of the back-to-school season and, coupled with the disciplined expense management, we returned to profitability, delivering non-GAAP operating income of $5.3 million and non-GAAP operating margin of 2.7%. With the margin coming in well above the high end of our guidance range. Our non-GAAP operating margin was up 200 basis points compared to the year-ago period and up 890 basis points compared to the prior quarter. For the third quarter of 2023, net revenue for the Americas was $141 million, a decline of 16.7% year-over-year and up 20.9% on a sequential basis. EMEA net revenue was $35.7 million, a decrease of 20.4% year-over-year and down 1.3% quarter-over-quarter. Our APAC net revenue was $21.1 million, which is down 40.3% from the prior preparable period and up 2.4% sequentially. For the third quarter of 2023, we shipped a total of approximately 1.8 million units, including 991,000 loads of wireless products. Shipments of all wired and wireless routers and gateways combined were about 520,000 units for the third quarter of 2023. The net revenue split between home and business products was about 64% and 36% 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 16% of our third quarter shipments. while products introduced in the last 12 months contributed about 11% 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 2023 was 35%, which is up 740 basis points as compared to 27.6% in the prior year comparable period, and up 340 basis points compared to 31.6% in the second quarter of 2023. As compared to the prior year period, increased shipments of our premium higher margin CHP products and considerably lower total freight costs drove the improvement. As compared to the prior quarter, Q3 experienced a higher mix of premium higher margin products, and overall, we were more efficient with our marketing spend. Total Q3 non-GAAP operating expenses came in at $64 million, which is down 4.7% year-over-year and down 2.2% sequentially. Our headcount was 644 as of the end of this quarter, down from 653 in Q2. We will continue to strategically invest in our business and hire in key areas we believe will deliver future growth and profitability, such as ProEV 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, driving further cost efficiencies. Our non-GAAP R&D expense for the third quarter was 10.1% of net revenue, as compared to 8.5% of net revenue in the prior comparable period, and 11.4% of net revenue in the second 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 $0.7 million in the third quarter of 2023. Looking at the bottom line for Q3, we reported non-GAAP net income of $6.9 million and non-GAAP diluted earnings per share of 23 cents. Turning to the balance sheet, We entered the third quarter of 2023 with $228 million in cash and short-term investments, up $25.2 million from the prior quarter. As we projected in July, we were able to return to positive free cash flow in the third quarter, as we made meaningful progress in reducing our inventory and improving our bottom line. During the quarter, $26.1 million of cash was provided by operations. which reduced our total cash use by operations over the trailing 12 months to $4.4 million. We used $2 million in purchases of property equipment during the quarter, which brings our total cash use for capital expenditures over the trailing 12 months to $5.2 million. We expect to continue generating positive free cash flow as we believe we will further reduce our inventory levels over the next couple of quarters and drive to our pre-pandemic carrying levels of three to four months. Now turning to the third quarter results for our product segments. The connected home segment, which includes our industry-leading Orbi, Nighthawk, Nighthawk Pro Gaming, Armor, and Mural Brands generated strong revenue of $127.3 million during the quarter, down 15.4% on a year-over-year basis and up 29.4% sequentially. The year-over-year decline in both the retail and service provider channels is a result of a larger total addressable market and higher inventory carrying levels at our channel partners in the prior year period. Despite the year-over-year overall retail market contraction, demand for our premium Orbi 8 and 9 Wi-Fi mesh and 5G mobile hotspots continue to grow, up double digits. Bolstered by the addition of our recently released Wi-Fi 7 products, namely the Orbi 97X mesh system and the Nighthawk RS700 router, These higher margin, high-end products with high ASPs were an important contributor to delivering revenue and operating margins well above the high end of our guidance, serving as another proof point of the long-term growth and profitability potential of our core strategy. On the SMB side, net revenue came in at $70.5 million in the third quarter, below our expectations. The softness in SMB was due to the uncertain macroeconomic environment weighing on the SMB market. especially in geographies with stagnant or even negative GDP growth, such as Germany, greater China, and Japan, which are our biggest markets outside of North America. Our SMB channel partners continue to compress inventory levels in the quarter and are expected to continue doing so in the quarters ahead. Despite this, we continue to see growth in our ProAV suite of products and remain confident they will be a long-term growth driver of our SMB business. I'll now turn the call over to Patrick for his commentary.