NETGEAR, Inc.

Thank you, operator. Good afternoon and welcome to Netgear's fourth quarter and full year 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 fourth quarter and full year, and guidance for the first quarter of 2025 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 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, except as required by law. 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 CJ.

Thanks, Eric, and thank you all for joining our call. Today, I'm going to cover the following topics, a recap of 2024, our Q4 highlights, context and impact of our Q1 restructuring, and high-level thoughts on our 2025 plans. Later, Brian will recap financials for the year and quarter, as well as our Q1 outlook. I just passed my one year anniversary with Netgear, and I'm thrilled with the progress we've made over the past year. I'm particularly proud of our team's adaptability, given we implemented significant changes in three main areas, our organization, our operating model, and our strategy. These changes set us up to achieve our long-term goals and we've been able to deliver on the business while evolving for the future. On the organization front, we restructured Netgear to bring more focus and leadership to our biggest market and growth opportunities. Most notably, we brought in new leadership and capabilities dedicated to our B2B segment, which we call Netgear for Business, or NFB. A new president, commercial leader, channel leader, product leader, and UX leader, to name a few. These established leaders continue to attract great talent at a time when we're seeing significant disruption at other companies in the industry. We also revamped our values and shifted the company's orientation from short-term results to long-term value creation. Other newly hired executives in our legal, strategy, people, corporate development, and finance teams are inspiring the rest of our organization to dare to transform, which is our most notable new value. Operationally, after I completed a listening tour in the first quarter, we began taking immediate action to remedy near-term challenges facing Netgear. Our first order of business was to eliminate a years-long overhang of excess channel inventory that remained from COVID-driven supply shortages. We were able to accomplish this within one quarter, and that has resulted in cleaner, more efficient operation where we're able to match sell-in with sell-through each quarter. We quickly realized the benefits of this destocking, which can be seen in the lowest DSOs we've had in over seven years with receivables down approximately 29 million or 16% year over year. Alongside this effort, we drove an accelerated effort to lower our finished goods inventory and made great inroads to reach our objective of three months of supply, reducing inventory by approximately 86 million or 35% from the prior year. Aside from specific supply challenges related to certain long lead time items, the team has done an outstanding job delivering to demand in this much streamlined operating model that has resulted in consistently strong cash flow generation. In September, we announced an important settlement in a patent dispute with TP-Link. This settlement was a clear validation of our intellectual property and added more than $100 million in cash to our balance sheet. Since then, the government scrutiny of TP-Link as a national security risk has been exposed by Bloomberg and the Wall Street Journal, raising questions about TP-Link's ability to continue to participate in the U.S. market. We are monitoring this situation very closely. Our strong cash position enabled us to buy back over $33 million in stock at an average price of just under $16 per share representing over a 40% discount to pricing entering this week. Our $409 million in cash and equivalents, which is up $125 million in 2024, serves as a tremendous foundation to pursue the key prongs of our capital allocation and long-term growth strategies both of which we expect to drive long-term value for investors. On the strategic front, we developed the new North Star for Netgear, rooted in powering extraordinary experiences. Early in the year, we implemented a significant shift in our home networking strategy, focused on product simplification, and the impact has been quite favorable. For NFB, we identified some critical resource gaps on the go-to-market side, and invested to close those gaps in the second half of the year. More broadly, we completed a thorough three-year strategic review that clarifies our investment priorities and innovation agenda as we enter the next phase of our transformation. Our focus across all our businesses is on driving differentiation via software and growing our recurring revenue. Now turning to our Q4 highlights. Our strong execution led to another quarter where we surpassed the high end of our guidance range for revenue and operating margin. We also had another strong quarter of cash generation, bolstered by a decrease in DSOs, enabling $13 million of cash to be added to the balance sheet, and we repurchased almost $11 million of shares on top of that. Our recurring revenue grew 25% year over year, and we exited in 2024 with almost $35 million in annual recurring revenue. This acceleration is attributed to the simplification of our Armour subscription service, value proposition, and the launch of our Armour Plus tier last quarter. In ProAV, we built on the tremendous momentum we have by delivering another record quarter of end-user sales Launching Engage 2.0 and adding almost 50 new manufacturing partners for a total of more than 370. One of our new partners on the broadcast side is NVIDIA. Since their acquisition of Mellanox, their focus has been on AI networks, opening the door for us to be one of their managed switch solution providers for the broadcast market. We also made great progress evolving our Insight platform that powers our enterprise Wi-Fi deployments. In Q4, we launched a significant update that enables cloud management for our managed switches and cloud APIs for our integration partners. Both improvements have been long time requests for our partners and are critical for us to expand our share in this large and growing market. These innovations in Armour, Insight, and Engage are great examples of how we're innovating with software, and this momentum will provide a solid foundation for our plans to accelerate these efforts in 2025. In our mobile business, the M7 Pro that was launched at the end of Q3 has been very well received by customers. In Q4, a similar product was launched in Australia in partnership with Telstra. These products set the bar for performance as the first mobile hotspots that combine 5G and Wi-Fi 7. While we drove considerable change in the organization in 2024, shedding old habits and building new muscles, we felt there was a novel opportunity to implement a significant restructuring to further propel our success. This was very much implemented from a position of strength. So I'd like to take a moment to provide the context for this. After completing our three-year strategic plan, we shifted to creating a detailed annual operating plan for 2025. As part of this process, we wanted to ensure we were set up for success coming into the year. We embraced our Dare to Transform value and planned a restructuring aimed at achieving the following goals. Funding our investment priorities, primarily focused on our B2B business. Reducing our loss position in 2025 and putting us on an accelerated path to return to profitability. Targeting cost reductions in businesses that would be a drag on profitability in 2025. Reorganizing into a flatter and more efficient organization by reducing layers of management and increasing span of control. and unlocking our ability to transform key functions more quickly. All of these goals were achieved with the restructuring we implemented in mid-January, which impacted approximately 50 team members, and when combined with other cost cuts, resulted in a reduction of over $20 million in baseline annual operating expenses. While changes that impact people are always difficult, this restructuring has been well received by our global team and we're moving forward on building the future with urgency. We expect to redeploy these savings back into the business and invest in our highest opportunities for profitable growth, most of which are in our NFD business this year. As part of these changes, we elevated Graham McLendon to lead a newly created business unit focused on our mobility products, and we're recruiting for a new leader for our home networking business, and a company-wide Chief Technology Officer to further accelerate our technology transformation. Going forward, we plan to report the results of each of our three business units, Netgear for Business, Mobile, and Home Networking, and we plan to share profitability metrics for each of these businesses, given their financial profiles vary quite significantly. For 2025, while we plan to limit our formal guidance to quarterly numbers for the foreseeable future, we remain steadfast on our plans to grow net revenue, expand gross margins, and significantly reduce our loss position this year. We expect to deliver on these goals while investing in long-term value creation. Our NFP business will receive most of our incremental investments for the year, And we'll be focused on insourcing our software capabilities, expanding our product portfolio, and most importantly, building a true B2B go-to-market capability that will allow us to grow our share in the sizable AV and enterprise Wi-Fi markets we are disrupting. One unexpected headwind that we expect to impact us in Q1 is short-term supply constraints for certain ProAV managed switch products. Keeping up with our increasing demand for our ProEV products has been a challenge given the long lead times of certain components, and a key ODM partner has had some operational challenges impacting their ability to deliver on their commitments. While these are being addressed, we expect to undership in Q1, leading to a more muted top-line guidance for NFP this quarter. Despite these short-term supply constraints, we expect double-digit top-line growth for our NFT segment this year. In the first few quarters of 2025, the top line of our mobile view is being impacted by our legacy focus on the premium segment of the market. Like our home networking business, we're transforming our product portfolio to a good, better, best lineup that will address a broader part of the market. We expect these products to launch in the second half of the year with a compelling new companion app that will simplify and streamline the user experience. With the market stabilizing for our home networking products, we're cautiously optimistic about this coming year. If the regulatory scrutiny facing companies affiliated with the PRC were to materialize, we'd expect a significant positive impact to this business segment. Throughout 2025, we will continue to execute on the balanced capital allocation strategy we outlined last quarter. Our priorities remain on organic investments and returning capital to shareholders as opportunistic buyers of our stock at a minimum to cover dilution from our stock issuances. We are exploring acquisition opportunities and remain committed to being ultra-disciplined when evaluating ways to inorganically accelerate our transformation. So, In summary, our transformation is working, we had a great 2024, a strong Q4, we implemented a restructuring in January to position ourselves even better against our 2025 goals, and we plan to carry all this momentum forward through 2025. For this year, we expect to grow net revenue, expand gross margins, and significantly reduce our loss position. Longer term, We remain focused on driving growth, profitability, and most importantly, shareholder value creation. I could not be more excited about what we've accomplished and where we're going. And with that, I'll hand it off to Brian.

Thank you, CJ, and thank you everyone for joining today's call. We once again deliver both revenue and operating margin above the high end of our guidance range. These results were driven by strong in-user demand for products across both sides of the business, with our ProAV managed switch products driving a momentum on the NFB side, and further penetration of our broader Wi-Fi 7 portfolio picking up momentum for our CHP business. For the quarter ended December 31, 2024, revenue was above the high end of our guidance range at $182.4 million, down 0.2% on a sequential basis, and down 3.3% year over year. In addition, with strong working capital management in Q4, we generated approximately $19 million in free cash flow and ended the quarter with nearly $409 million in cash and short-term investments, net of $10.7 million in stock repurchases during the period. As a reminder, in the first half of the year, we took decisive action to accelerate destocking of the channel to better position both sides of the business for more predictable performance aligned to the market trends. We started to reap the benefits of these efforts in the second half of the year with improved linearity in Q4. As such, we lowered DSOs to 80 days, our lowest level in over seven years, down from 88 days in the prior quarter, which was a strong contributor to our cash generation in the quarter and a sign of our strong operational execution. After successfully putting the destocking behind us, We entered the second half of the year well positioned to match sell-in with sell-through at our channel partners. Consequentially, in Q4, the NFB segment grew healthily to $80.8 million in revenue for the fourth quarter, up 2.9% sequentially and up 14.9% year-over-year. Impressively, although we were chasing supply of certain products throughout the quarter and unable to capture the full market potential of this business, Our ProAV managed switch products once again saw end-user demand grow double digits year over year to record levels. Momentum is clearly building behind NFV's growth trajectory, bolstered by the investments we've made in the business. We not only grew our strategic manufacturing partnerships by almost 50, but I'm pleased to share that we've also joined two broadcast alliances, further expanding our reach into this new vertical. In CHP, our premium products outperformed the broader market, And we continue to see great performance for our recently released Wi-Fi 7 offerings that help fill out our good, better, best strategy and are tailored to capitalize on the accelerating Wi-Fi 7 upgrade cycle. We saw further improvement in the U.S. consumer networking market performance in Q4, which experienced a low single-digit contraction year-over-year, outperforming our expectations coming into the quarter. In Q4, the CHP business delivered net revenue of $101.6 million. down 14.2% on a year-over-year basis, and down 2.6% sequentially. Service provider revenue was $19.8 million, in line with our expectations. It's clear that the Netgear brand is resonating in the market, with our recently introduced Nighthawk 5G and Wi-Fi 7 mobile hotspots, Nighthawk Wi-Fi 7 routers, and Orbi Wi-Fi 7 mesh products, each performing well and receiving warm customer reviews. With our additional new product introductions planned for release throughout 2025, we expect the full benefits of this new strategy to build over time. We exited the fourth quarter with 556,000 recurring subscribers, and we generated $8.7 million in recurring service revenue in the quarter, a year-over-year increase of 24.5%. We continue to see increased emphasis placed by consumers on cybersecurity protection, privacy, and premium support. further substantiating our belief that focusing on increasing our recurring subscriber base is the optimal strategy to add high margin revenue to the CHP business. For the full year 2024, NEC year net revenues were $673.8 million, down 9.1% compared to the prior year ending December 31st, 2023. The ongoing uncertain macroeconomic environment, elevated interest rates, significant destocking of the channel, and the competitive landscape of the retail consumer networking market impacted our top line and profitability. As a result, we had a four-year non-GAAP operating loss of $49.6 million, resulting in non-GAAP operating margin of negative 7.4%. We believe many of these factors will improve in 2025, and combined with how we're positioning Netgear to take advantage of the highest growth market opportunities in front of us, we anticipate that they should result in revenue growth, expanded gross margin and meaningful improvement in our profitability in the coming year. 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 fourth quarter of 2024 was 32.8%, down 220 basis points compared to 35% in the prior year comparable period, and up 170 basis points compared to 31.1% in the third quarter of 2024. This marks the second consecutive quarter that we have achieved gross margin above 30%, as we continue to benefit from an improved mix of NFB products, which delivered segment gross margin of 43.9%, an improved product mix from our Wi-Fi 7 lineup, along with decreasing impact of older, more expensive inventory, both enabling CHP gross margin to increase 300 basis points sequentially to 23.9%. Compared to the prior year period, our profitability in the current period was impacted by higher cost inventory and our use of air freight as we begin to operate at leaner inventory levels and chase supply in response to strong demand. Total Q4 non-GAAP operating expenses came in at $63.9 million, up 1% year-over-year and up 15.7% sequentially. As a reminder, non-GAAP operating expenses were lowered in the third quarter by the $10.9 million of legal fee adjustments pertaining to the TP-Link settlement. Our headcount was 655 as of the end of the quarter, up from 638 in Q3. Our non-GAAP R&D expense for the fourth quarter was 10.5% of net revenue as compared to 9.9% of net revenue in the prior comparable period and 11% of net revenue in the third quarter of 2024. To continue our technology and product leadership, we are committed to continued investment in R&D. I'm pleased that we delivered profitability above the high end of our guidance range, enabled by the strength of NFB, the success of our new product introductions within CHP in recent quarters, and improved top-line leverage. Our Q4 non-GAAP operating loss was $4.2 million, resulting in a non-GAAP operating margin of negative 2.3%. a decline of 370 basis points compared to the year-ago period, and a decline of 320 basis points compared to the prior quarter. Our non-GAAP tax expense was $1.2 million in the fourth quarter of 2024. Looking at the bottom line for Q4, we reported non-GAAP net loss of $1.6 million, resulting in a non-GAAP loss of six cents on an earnings per share basis. Turning to the balance sheet, we ended the fourth quarter of 2024 with $408.7 million in cash and short-term investments, up $13 million from the prior quarter, and equating to $14.27 per share. During the quarter, $21.5 million of cash was provided by operations better than our expectations, which brings our total cash provided by operations over the trailing 12 months to $164.8 million. We used $2.5 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $9 million. The fourth quarter marks our sixth consecutive quarter of positive cash generation. In Q4, we resumed our share repurchase program and spent $10.7 million to repurchase approximately 423,000 shares of NECIRA common stock at an average price of $25.20 per share. This brings our stock repurchases for the full year 2024 to $33.6 million, or $15.96 per share. We have approximately 3.4 million shares reserved in our current authorization, and our fully diluted share count is approximately 28.6 million shares as of the end of the fourth quarter. Now, I'll cover our outlook for Q1 2025. We expect to continue to see more predictable performance that is aligned with the market for both of our businesses now that our destocking and inventory reduction actions are substantially completed. However, with NNFB, although end user demand for ProAV line of managed switches remains strong, we are facing lengthy lead times for supply, which will limit our ability to capture the full top line potential of this growing business. On the CHP side, we are seeing signs of market stability. and expect to experience normal seasonality in the retail portion of this business. We expect revenue from the service provider channel to be approximately $15 million in Q1, down on a sequential basis. Accordingly, we expect first quarter net revenue to be in the range of $145 million to $160 million. In the first quarter, we expect to maintain a gross margin performance similar to what we reported in the fourth quarter. However, with our seasonally lower top line, we expect our first quarter GAAP operating margin to be in the range of negative 16.4% to negative 13.4%, and non-GAAP operating margin to be in the range of negative 10% to negative 7%. Our 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 $1.5 million to $0.5 million for the first quarter of 2025. Moving forward, as we orient this business to deliver long-term growth and expand profitability, we will continue to pursue a lean operating model and maintain a focus on investing in the areas of the business with the biggest growth potential. As CJ mentioned, we enacted a significant restructuring in Q1 that drove cost reductions throughout the organization, yielding a reduction in annual operating expenses of approximately $20 million, or over 8% of our annual expense in 2024. This savings will enable roughly the equivalent level of investment into the areas that will drive long-term profitable growth and generate shareholder value, most of which are in our NFB business. Also, in light of the news this week, we think it's important to address the newly contemplated tariffs potentially affecting imports from China, Canada, and Mexico at some point head on. We had been anticipating these tariffs for some time and are pleased to report that based on information known to date, our business should not be materially affected. However, this new trade landscape is evolving in real time, and we are staying vigilant to ensure we are aware of new developments to help minimize their impact, if any, on our business going forward. And with that, we can now open up for questions.