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spk04: Eric Bilen, please go ahead, sir.
spk00: Thank you, Rob. Good afternoon and welcome to Netgear's first quarter of 2024 financial results conference call. Joining us from the company are Mr. CJ Prober, CEO, and Mr. Brian Murray, CFO. The format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the first quarter and guidance for the second quarter 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 expense, 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-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, non-GAAP financial measures will be mentioned on this call. Reconciliation of the non-GAAP measures The gap 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 CJ.
spk01: Thanks, Eric, and good afternoon to those of you joining this call. So I've just passed my 90-day anniversary with NICIR, and I am unequivocally more excited about the opportunity ahead than when I joined. I've just completed my listening tour that involved meeting dozens of customers and partners as well as the global Netgear teams across nine countries in the Americas, Europe, and Asia. And I'll be opening today's call by covering three main topics. First, the decisive near-term actions we're taking for the long-term health of the business that are reflected in our Q1 results and Q2 guidance. near-term strategy adjustments to both our consumer and B2B businesses, and third, our plan for developing a long-term strategy and prioritizing the allocation of our capital to build a higher growth, more profitable business. One important theme that cuts across all these topics is that our decision-making is focused on creating long-term value for shareholders. The board has aligned my incentive compensation with shareholder value creation. In our most recent equity grants to the broader executive team that will be disclosed in next year's proxy, we have similarly implemented an incentive structure that rewards executives on shareholder value creation. In doing so, we're moving away from incentivizing performance based on a much narrower metric like subscriber count or subscription revenue. All of these steps we are taking to transform this business will be driven by the goal of creating higher growth more profitable business that delivers long-term value for our shareholders. With that context, let me start with a couple of decisive actions we're taking for the long-term health of the business that are reflected in our Q1 results and Q2 guidance. First, as you all know, the macroeconomic environment remains challenged and we're seeing higher than expected inflation and interest rates persist. While we've made good progress on our efforts to destock the channel, These macro conditions continue to impact our channel partner's posture on inventory. As a result, we're seeing more to stocking than expected in both our businesses, and the cost of carrying excess channel inventory is higher than expected as well. In Q1, these factors impacted our revenue and were amongst the main drivers for missing our non-GAAP operating margin target for the quarter. Netgear's original plan coming into Q1 was to destock the channel throughout the year so that our channel partners could exit 2024 with a normalized level of inventory. Given the increasing pressure on channel inventory and costs associated with having excess channel inventory, we're instead electing to accelerate our way through this challenge in Q2. We expect this effort to represent a headwind of 25 to 30 million in revenue, which is reflected in our Q2 guidance. While this creates a near-term challenge in terms of financial results, This is the right long-term action for the business, so we are resolute about immediately addressing this challenge in Q2. While there could be small pockets of excess channel inventory as we exit Q2, overall we expect to be able to match sell-in with sell-through after Q2. We are seeing some channel partners at historic lows in terms of weeks of supply, so this could create revenue upside in future years. with macroeconomic environment improvements and lower interest rates. Second, as you all know, the dynamic of the demand pull forward during the early days of COVID combined with the supply constraints that followed led Netgear and many other companies to exit 2022 with a substantial inventory position. Supply challenges and historically long lead times forced Netgear to make bets on certain product categories. Some of these bets worked incredibly well, while others have led to a higher than optimal inventory position. This isn't surprising or uncommon given the impossibility of predicting product mix so far in advance of making purchase commitments in such a dynamic environment. Last year, the team did a good job working down our inventory position and we exited 2023 with roughly six months of supply. The plan for this year was to get to four months of supply by the end of the year, However, now that we have visibility into the Q1 performance of some of the products where we have excess supply, we are going to accelerate the depletion of these problematic areas faster than originally contemplated. We are driving to lower our inventory to closer to three months of supply, which will help with profitability and cash generation. More importantly, the high level of inventory has negatively impacted our ability to launch new innovative products for our customers. For example, Netgear decided to delay the launch of many Wi-Fi 7 products to avoid possible cannibalization of our prior generation products where we had excess supply. While seemingly prudent, from an inventory depletion perspective, consumers want the latest and greatest products, so that caused us to not as aggressively capture this early technology mover demand. It's important that we optimize our inventory positions quickly and deliver the exciting new product lineup we have coming over the course of the year. In order to achieve this normalized level of inventory more quickly, we're taking a harder look at products and chipsets that are moving more slowly than we'd like. The Q1 results and the Q2 guidance reflect the cost associated with moving through these problematic areas more quickly than originally planned, with the goal of exiting the year with a normalized level of working capital. In order to avoid these inventory challenges in the future, we're implementing a tighter and more constrained approach to demand and supply planning. A couple of less significant decisions impacting our Q1 results and Q2 guidance are the decision to exit the Mural business and a restructuring charge relating to executive transitions. While Mural is a well executed product, it has a small target market and does not fit well with the rest of our portfolio. The current plan is to sell through our remaining inventory and to continue to maintain the service for existing subscribers. However, we did write off approximately $500,000 of non-finished goods inventory in Q1. On the restructuring, as part of the reorganization, we're estimating costs of approximately $2.5 million in Q1 for executive transitions, and this is reflected in our guidance. Despite the aggressive near-term actions to set us up for long-term success, we generated over $17 million of cash from operations in Q1 And we expect to generate cash this year and in Q2 as well. I'm proud of the team for making the hard decisions that set us up for long term success, while accelerating our introduction of new products that will be critical to our growth going forward. So with that context on Q1 and Q2, I'd now like to discuss some near term adjustments to our strategy for both our consumer homes products business or CHP, and our B2B business, which we've previously referred to as SMB and will now be referred to as Netgear for Business or NFB. On the consumer side, Netgear has established itself as the industry-leading brand in consumer network working over many years. The recent focus on the high end of the market has showcased this better than ever with our industry-leading products like the Wi-Fi 7 or B970 and the Nighthawk M6 Pro hotspots. That said, we've now realized we moved too aggressively to focus on the high end of the market for the following three reasons. First, the market size of our high-end mesh products is not reaching the scale we had hoped. While the high-end mesh segment is still growing and we remain the clear market share leader, we aren't pulling up as many customers as we'd like to our premium products. Second, there are significant benefits to playing in larger segments at the medium and low end of the market with a good, better, best product strategy. This is particularly true with Amazon, where their algorithms favor high volume SKUs, and it's hard to move customers into our flagship products if we don't appear in their searches for good or better products. Third, the foreign competition that has been growing share with subpar products at lower price points is now moving up into the high end of the market, so we're starting to face competition there as well. So given these market dynamics, we're making the following adjustments to our CHP strategy. First, we're developing products that serve a broader segment of the market and following a simple good, better, best product strategy. This will enable us to compete more effectively on Amazon, especially internationally where online channels are our primary route to market. Second, we're evolving our marketing messaging to highlight our points of differentiation versus trying to compete with low-cost foreign competition on speeds and feeds alone. This includes the fact that as a US-based, U.S. listed public company, we are the trusted brand in the space focused on delivering a secure, safe, and high performance connectivity experience. Third, we'll be leveraging our position and independence to forge value added partnerships that drive innovation and improve the experience for our customers. As an example of this, we recently entered into a partnership with a leading provider of home security to enable whole home Wi-Fi alongside their security implementations to ensure the most reliable and secure experiences for our joint customers. The other benefit of addressing some of the higher volume segments is it increases the funnel into our subscription services. I mentioned earlier how we're moving away from incentive compensation tied to subscriber count, and this is not a reflection of a change in the importance we place on recurring revenue. Subscriptions remain an important focus and we're implementing some strategy changes here to simplify the offering, improve the value, and grow the recurring revenue. In this regard, we've decided to move away from product bundles that include the device like a router and extended subscription period like a year. While this strategy drove up subscriber count and non-recurring subscription revenue, it leads to lower margins, increased churn, and fewer recurring revenue subscribers, so it does not help with long-term value creation. This change to bundling will only affect newly released products, so you won't likely see this reflected in our metrics until 2025. While I'm confident these near-term changes to our CHP strategy will improve our trajectory and market share in the near term, the overall CHP market is not recovering as we expected and was down double digits year over year in Q1. While we were able to achieve our sell-through targets, doing so required us to be more promotional than expected. As a result of these near-term actions and because of the ongoing CHP market challenges, we're withdrawing the full year guidance that was discussed at the analyst day in December last year as we no longer believe such guidance to be achievable for the full year. This is not a reflection of how we feel about our long-term prospects, but rather the reality of where we find ourselves right now relative to our December guidance. We do plan to continue to provide quarterly guidance, and Brian will cover this later in the call. In our Netgear for Business segment, our managed switch business has been capitalizing on the transition to IP-based video and audio and has been on a great trajectory over the last few years. While we saw a slowdown at the end of last year due to macroeconomic conditions, end demand remains strong, and this product category is on a renewed growth trajectory. This is a segment of the market where we have strong product leadership and a clear price to value proposition. Our 265 manufacturing integrations, reliability, and stability really set us apart from the competition, and this is an area where we will continue to innovate. Recent partnership announcements include Nice For You, a leading residential manufacturer, and Audio Technica, a Japanese professional audio equipment company. Additionally, we've also secured partnership wins with companies such as Crestron, Shure, Savant, Visionary Solutions, and Sennheiser. As we make inroads with these partnerships, we are for the first time deploying our products in businesses of all sizes, including Fortune 5,500 and 100 companies. These successes are starting to build credibility for our brand with the CIO community, which we expect will open doors in the future. We will also capitalize on our leadership position to pursue new adjacent verticals. We recently announced our new interoperability partnerships with Intel and Panasonic Connect, leveraging our recently launched SMPTE capable managed switches. This marks a major step forward in our initiative to expand our reach into the broadcast industry, a new market for Netgear that greatly broadens our total addressable market. Furthermore, we've also secured Ross Video as another broadcast partner and expect more partnerships to be announced soon. With projects closing just weeks after release, this warm response to our new switches is encouraging. Outside of our managed switch business we're seeing slower progress than we would like in growing our Wi Fi land business. While we have recently launched a total network solution, there are elements of this that need improvement before we can significantly grow our share in this market segment. The team is focused on adjusting our strategy here to ensure we're set up for success and are able to build off our momentum in managed switches. We know what is needed and we're acting quickly to better address this attractive opportunity. Despite all the progress in NFV, our overall go-to-market capabilities still skew to consumer. So our near-term focus is to ensure we're building a world-class B2B sales and marketing capability to capitalize on the momentum afforded by our managed switch business. And this is an area where we are targeting incremental investment in the second half of the year. This is a market opportunity with a sizable addressable market, and we have great momentum with our existing products, so we're excited about the potential for capturing incremental growth. In addition to the immediate actions impacting Q1 and Q2 and the near-term strategy adjustments for CHP and NFB, we are launching a process to develop a longer-term strategy for both business units in the second half of this year, which will impact how we prioritize the allocation of our capital. My first executive hire is a VP of strategy who I've worked with in the past and who's joining us from Amazon. He's working with me, Brian, and the rest of the leadership team to validate several of our growth opportunities we're considering and we look forward to discussing these further in upcoming calls. I'll end my prepared remarks with a few points on culture, team, and organization. Over the course of my listening tour, I was very impressed by the global talent at the company, and the unwavering desire to prosperably grow our business. Despite this talented team and positive attitude, I did uncover a complex organizational model and some cultural challenges that are hindering our ability to reach our potential. At our internal All Hands later today, we will be announcing three initiatives to address this. First, a reorganization that will drive stronger focus, alignment, and accountability, and empower the business units to achieve their long-term growth and profitability targets. An effort to evolve our culture, beginning with the reformulation of our values that will be integrated into all aspects of our work and talent management with the goal of improving shareholder value creation. Finally, an AI transformation effort to ensure we're taking full advantage of this technology in how we work and in the products and services we develop for our customers. In closing, we're taking decisive action in both CHP and NFV to prepare us for long-term success. We're implementing both product and channel strategies that position us for a return to growth. We're implementing a long-term execution plan for all parts of the business that we believe will deliver significant value creation. We have a strong balance sheet, and as we showed in Q1, we believe share repurchases is a good use of capital in the near term and expect to have broader plans to deploy capital as we chart our course for the long term. These moves Coupled with the organizational changes being made to streamline our operations and delivery are aligned with the needs of our shareholders and we believe will create significant long-term value. I'm truly excited about the journey ahead. And with that, I'll hand it over to Brian and look forward to your questions.
spk05: Thank you, CJ. And thank you again, everyone, for joining today's call. We are pleased with the execution by our team this quarter in delivering revenue within our guidance range. amidst a challenging marketplace. For the quarter ended March 31st, 2024, revenue was $164.6 million, down 12.8% on a sequential basis, and down 9% year over year. However, we saw greater than expected destocking across both sides of the business in the first quarter, as the macroeconomic environment pressures continue to persist and weigh on our channel partners. This came along with a shift in product mix, which, combined with a slightly more promotional CHP retail market, led to profitability coming in below our expectations. As CG alluded to, we believe we have an opportunity to work tightly with our channel partners and execute what we believe to be the remaining D-Stock in the second quarter. This accelerated D-Stock is a significant driver behind the step down in revenue and profitability that you see in the second quarter guidance. and a critically important step to creating value in the second half of the year and beyond. Simply stated, we are looking to get the D-Stock headwind behind us as quickly as possible to enable our future growth in both CHP and NSB businesses. On the CHP side, the US retail market overall underperformed our expectations due to continued pressures with the challenging macroeconomic environment on consumer spending. This resulted in higher promotional costs than we expected in the first quarter, in part due to the lack of new products to boost the market while we consume our existing supply. Meanwhile, we did see some upside with our service provider customers, with associated revenue coming in at approximately $28 million, partially beginning the top-line challenge on the retail side, but unfavorably impacting our gross margin performance. Despite these headwinds, our premium portfolio of products continued to outperform the market, even as other competitors entered the segment of the market, pulling our lead of moving upstream. While our premium mix remained at 25% of our sales to end users in the first quarter, our growth was limited in this segment due to a slower rollout of our Wi-Fi 7, or B97X, in international markets due to varying regional requirements for quad band technology. We are happy to have established leadership in this segment. However, as CJ noted, we believe we can successfully compete below the very top end of the market, and we'll be approaching the good and better segments with updated products and marketing efforts in the future. We remain pleased with the underlying in-market demand in our next year for business segment, formerly known as SMB, which came in as expected thanks to continued momentum in our growing ProAV business. However, there are some challenges in the more traditional business as the macro conditions in certain markets are still impacting the near term with customers hesitant to make investments. Additionally, the stocking of Nectar for Business products remained a challenge as the uncertain geopolitical and macroeconomic environment continued to pressure our channel partners to reduce their inventory carrying levels more significantly than we had expected within the quarter. For the first quarter of 2024, Net revenue for the Americas was $109.9 million, a decline of 9.8% year-over-year and down 11.9% on a sequential basis. EMEA net revenue was $31.2 million, a decrease of 20.4% year-over-year and down 17.7% quarter-over-quarter. Our APAC net revenue was $23.5 million, which is up 18.5% from prior year comparable period and down 9.6% sequentially. 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 combination of this quarter's change in product mix, primarily due to higher levels of destocking by our channel partners, combined with a slightly more promotional CHP retail market, cost associated with exiting the mural business, in addition to the expected higher cost of inventory, put pressure on our profitability. and we delivered first quarter non-GAAP operating loss of $16 million and non-GAAP operating margin of negative 9.7% below the low end of our guidance. This was down 580 basis points compared to the year-ago period and down 1,110 basis points compared to the prior quarter. Non-GAAP gross margin in the first quarter of 2024 was 29.5%. down 410 basis points compared to 33.6% in the prior year comparable period, and down 550 basis points compared to the fourth quarter of 2023. Relative to the prior year period, we experienced a higher cost of inventory across both businesses, as well as changes in product mix, in particular with lower mix of NFB products. In the prior year, we were still benefiting from an NFB market that was just coming into a healthier supply position. We also experienced a greater mix of service provider products and increased marketing spend within the CHP retail business as compared to the prior year period. We exited the first quarter with 928,000 paid subscribers, and we generated $11.7 million in service revenue in the quarter, a year-over-year increase of 21.2%. We continue to see increased emphasis placed by consumers on cybersecurity protection privacy, and premium support. As noted earlier, we plan to make improvements here with an aim to grow our recurring revenue. Total Q1 non-GAAP operating expenses came in at $64.6 million, down 4.8% year-over-year and up 2.1% sequentially. Our headcount was 628 as of the end of the quarter, down from 635 in Q4. We are currently refining our long-term strategy and will align spending with the areas that will deliver long-term growth and expanding profitability. In the near term, we continue to see profitable and upside across ProAV managed switches, premium Orbi Wi-Fi mesh systems, 5G mobile hotspots, and subscription services, and expect to continue to invest for growth in these areas. Our non-GAAP R&D expense for the first quarter was 11.9% of net revenue. as compared to 11.6% of net revenue in the prior year comparable period, and 9.9% of net revenue in the fourth quarter of 2023. To continue our technology and product leadership, we are committed to continued investment in R&D. Our non-GAAP tax benefit was $4.7 million in the first quarter of 2024. Looking at the bottom line for Q1, we reported non-GAAP net loss of $8.4 million and non-GAAP diluted loss per share of 28 cents. Turning to the balance sheet, we ended the first quarter of 2024 with $289.4 million in cash and short-term investments, up $5.8 million from the prior quarter and equating to $9.85 per share. While we were pleased with the decrease in inventory during the quarter, we were expecting a greater reduction. The combination of higher inventory and a higher loss on the quarter drove our cash generation during the quarter below our expectations. During the quarter, $17.2 million of cash was provided by operations, which brings our total cash provided by operations over the trailing 12 months to $64.9 million. We used $2.5 million in purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $7.4 million. Despite our near-term headwinds, we expect to generate cash in the second quarter and the rest of the year, in part, due to further expected inventory reductions as we work towards our target of three months. In Q1, we spent $11.4 million to repurchase approximately 783,000 shares of NECIER common stock at an average price of $14.62 per share. We have 1.7 million additional shares reserved in our current authorization, and since the beginning of 2020, we have spent $134.6 million to repurchase 4.9 million shares. We are committed to returning value to our shareholders and plan to continue to opportunistically repurchase shares in future periods. Our fully diluted share count is approximately 29.6 million shares as of the end of the first quarter. Now, turning to the first quarter results for our product segments, the connected home segment, which includes our industry-leading Orbi, Nighthawk, and Armor brands, generated a net revenue of $96 million during the quarter, down 6.6% on a year-over-year basis, and down 18.9% sequentially. In the comparable prior year period, our CHP business benefited from higher gross shipments and a larger total addressable market, leading to a year-over-year decline in the retail channel. However, the contribution of our premium products to our CHP retail business remained over 25% of sales to end users. up over 500 basis points from the prior year period, bolstered by the addition of our recently released Wi-Fi 7 Orbi 97X mesh system and our premium mobile hotspots, all of which command some of our highest ASPs. Also, as CJ mentioned, we've thus far focused our efforts on the high-end premium segment of the market, but we see potential for profitable growth as well in the lower price tiers. On the NFB side, destocking on our channel partners remained a headwind, leading to net revenue of $68.6 million in the first quarter, below our expectations, and down 2.4% sequentially. However, end-user demand was in line with our expectations and led by our growing ProAV managed switch line. However, the reduction in inventory carrying levels at our channel partners beyond our expectations pressured our top line, which declined 12.2% year-over-year. Facing a challenging macroeconomic and geopolitical environment, we will work rapidly to right-size the channel inventory held by our partners, impacting our second quarter top line guidance. Nevertheless, we remain confident in the long-term growth potential of the ProAV business and the adjacent markets we are expanding into. Now let me discuss our Q2 2024 outlook. While we expect to continue to see strong underlying demand of our CHP premium products as well as our ProAV managed switches, We are taking action to manage our way through NFB and CHP destocking activities with our channel partners in the second quarter. We are changing course from our previous plan to do this more organically given the increasing pressure to reduce inventory levels and the increasing cost associated with a slower approach. The estimated impact to our second quarter to accelerate the destocking is in the range of $25 to $30 million. We believe taking this immediate action as compared to spreading it over multiple quarters will allow us to align our revenue with sell-through and ultimately manage a more efficient and predictable channel in future quarters. Our revenue from the service provider channel is expected to be approximately $15 million in the second quarter as our largest customer in this channel prepares for the launch of our next generation mobile hotspots in the second half of the year. Accordingly, we expect second quarter net revenue to be in the range of $125 million to $140 million. As we continue to make meaningful progress in reducing our own inventory levels, we will be continuing to consume higher cost inventory. We expect we will be back at historically normal inventory cost after we reach our target inventory levels of three months. We expect our second quarter GAAP operating margin to be in the range of negative 30.9% to negative 27.9%. And non-GAAP operating margin to be in the range of negative 22% to negative 25%. The GAAP tax expense is expected to be in the range of $1 million to $2 million. And our non-GAAP tax benefit is expected to be in the range of $7 million to $8 million in the second quarter of 2024. Operator, that concludes our remarks, and we would be happy to take any questions.
spk02: Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from a line of Hamid Khorasan from BWS. Your line is open.
spk03: Hey, it's Hamid. Excuse the background noise. But just wanted to ask you why the hard reset? What's the sign that you know all of a sudden you need to change things up all of a sudden?
spk01: Yeah, I get I'll I'll take a shot at that. I mean there is. I guess it's a combination of factors. I think if you break them down into things that we weren't expecting or the team wasn't expecting back in December of last year and then things that. uh you know have changed since then so obviously the chp market as we talked about was not recovering to our expectations and on top of that you know we continue to be the market leader in premium we can premium continues to grow but we're not pulling as many people up and so when you combine that with the higher than expected destocking you know, in the cost related to holding that channel inventory. And then as we looked at product performance in Q1 of some of the longer in the tooth inventory, it just all added up to, hey, we should, you know, we should get through this as quickly as possible. It's kind of like think about it as acting quickly to get over a COVID hangover that's being made worse by kind of some of these market conditions that I've mentioned. So when it became clear that the December guidance wasn't going to be achievable, we wanted to set ourselves up for long-term success and make these decisive actions to put the business in a good place for obviously a better second half of the year, not relative to the December guidance, but relative to the first half because we're pulling forward a lot of this pain to set us up for a better second half. Um, and so, so that was the thinking.
spk03: Okay. Now, what do you mean by accelerating D stocking? Are you giving the product away for free? I mean, why, why wasn't NIC year able to do this before? Because D stocking has been part of the vocabulary for the last two years when it comes to NIC year earnings.
spk01: Yeah, it's, um, it varies a little bit by channel. I mean, interestingly, it's very mixed, even across both businesses. So some of our channel partners are at historic lows to a point where we're actually having to improve kind of how we operate the business in order to avoid POS. Others, it just became, as the macro conditions continued to persist and people were expecting lower interest rates, each one of these partners that has more inventory than they would like, you know, they start, you know, turning the screws on, you know, their own internal teams around how do we get, you know, lower and lower and lower. And then that just blows back on us in terms of cost and missing, you know, selling opportunities because they've got the wrong mix of inventory. And so we are going to, it varies by partner. We've got a plan and we're going to do it in an orderly way with our partners. It's mostly going to be by just not shipping in you know, products that they need. And it's going to set us up, you know, to be in a better position to meet demand going forward.
spk03: Okay. Thank you.
spk02: Your next question comes from a line of Jake Norton from Raymond James. The line is open.
spk04: Okay, great. Good afternoon. I'm hoping you could just touch a little bit more on the state of the consumer, particularly at the higher end of the market. are you seeing any trade-down activity in your premium cohort? And then just up telling that with, could you touch on what product segments or categories were actually experiencing that excess build of inventory?
spk01: Yeah, so let me take the first one, and then maybe, Brian, you can take the second one. So on the first question, it's not that we're seeing trade-downs. versus what we would have expected, you know, in the annual guidance last year is that we're not pulling as many people up. And, you know, one of the things that we've concluded is like one of the challenges around why we're not doing that is because we're not playing in like the bigger parts of the market. So I mentioned Amazon. And so if you're not present in all the different price points, um, on Amazon, on our.com, it's just very hard. to pull people up. So it's not that they're going down, it's just that we're not pulling as many up as we would like.
spk05: Yeah, Jake, in terms of some of the slower moving inventory, I'll give you some examples. Say one is our wireless LAN business on the SMB side where we think there's a lot of potential there, but we haven't found the perfect execution, the right products to expand there. It's not been a huge portion of our historical Netgear for Business product mix, but we have had hopes in launching, you know, starting with some of the Wi-Fi 6 APs, and we're now actually starting to move to Wi-Fi 7. That's an area where I think we're looking to increase some velocity. Some other examples I'd say on the CHP side are maybe more niche products, but we have some combined mesh and cable offerings that are kind of unique things to consumers there's usually customers who are in the market looking for mesh to solve one problem and then there's other people looking for cable, but we have combined gateway. There that would have been one of those areas, and I think maybe mural to a smaller degree, I mean we talked about why we're exiting that business it's just not a. Great fit in the market So those are some of the examples of areas where I said we've been targeting it obviously. In broader terms, there's certainly some Wi-Fi 6 offerings that we have out there across some of the more broad CHP categories that, of course, we're looking to start moving towards Wi-Fi 7 with a more slimmed-down portfolio of products there, but we do have some products in those areas that we'll be working through.
spk01: Yeah, and maybe one thing that was kind of behind your question is just how to think about the second half of the year. And the destocking in Q1, Brian touched on it, that was significant. The destocking in Q2 is significant. So this is a direct drawdown from revenue. As we said, we expect it to be 25 to 30 million. And so we are expecting, if you think about the second half, putting aside, we've obviously said you gotta put aside the December guidance, but we do expect some regular seasonality there. And one of the things that we've talked about doing is burning down inventory at a higher rate. So that could positively impact revenue, but also negatively impact margin because of the promotional aspect of it. So I don't know if that's what you were ultimately asking, but just wanted to provide a little color there.
spk04: Yeah, that's great. Very helpful. And then just last for me, is there any way we could think about the magnitude of cash generation in the second quarter and the rest of the year and Maybe if you guys are thinking, you know, in more formulaic terms and sort of in the context of share repurchases. Thank you.
spk05: Yeah, in terms of cash generation, I mean, we are going to rate more cash in Q2, largely because the benefits have continued to work down our inventory. I would steer it probably in the magnitude of, you know, maybe half of what we saw in the first quarter to somewhere on the high end, up and around that range. The rest of the year, I would just probably steer you to kind of, we stated our target is to get down to three months of inventory. We're going to aggressively try to work to do that by the end of this year. There will be offsets, obviously, from an income standpoint. Q2's guide would be a consumption of cash there, so there will be offsets to that, but I would say most of the cash generation for this year will still continue to be tied to inventory reduction working towards our target. In terms of capital allocation, I think, which is your second question there you know we repurchase shares in the first quarter, which is something we probably hadn't done in almost two years. And I think we still believe that that we're going to be opportunistic buyers of our stock in this market.
spk02: And there are no further questions at this time. I will now turn the call over to CJ Prober for some final closing remarks.
spk01: Thanks everybody for joining and look forward to future calls over the coming quarters.
spk02: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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