Good afternoon. My name is Kirsten and I will be your conference operator today. At this time, I would like to welcome everyone to the NETGEAR Fourth Quarter and Fiscal Year 2017 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to your host, Mr. Genualdi. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to NETGEAR's fourth quarter and full year 2017 financial results conference call. Joining us from the Company are Mr. Patrick Lo, Chairman and CEO, and Ms. Christine Gorjanc, CFO. The format of the call will start with a review of the financials for the fourth quarter and full year provided by Christine, followed by details and commentary on the business provided by Patrick. We will also discuss our plan to separate our Arlo business into a separate public company, and finish with first quarter of 2018 guidance provided by Christine. We will then have time for any questions. If you have not received a copy of today's release, please visit NETGEAR's Investor Relations Web-site 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, our plans regarding the separation of the Arlo business, 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 Web-site. At this time, I would now like to turn the call over to Ms. Christine Gorjanc.

Thank you, Christopher, and thank you everyone for joining today's call. We have a lot to discuss on today's call, given that we just announced that the NETGEAR Board of Directors have unanimously approved the pursuit of the separation of the Arlo business from NETGEAR. The separation is expected to be effected through an initial public offering of less than 20% of newly issued shares of common stock of Arlo Technologies, Inc., with NETGEAR to retain the remaining interest. We currently intend that following the IPO, NETGEAR will distribute its remaining shares of Arlo to our stockholders in a spin-off that is generally intended to be tax-free to our stockholders for U.S. federal income tax purposes. Before we dive into further details regarding the separation, I'd like to first provide commentary on our results for the fourth quarter of 2017 and the full year 2017. For the full year 2017, NETGEAR net revenues were $1.41 billion, which is up 5.9% compared to full year 2016 net revenue. Non-GAAP diluted EPS for the full-year 2017 was $2.74. Net revenue for the fourth quarter of 2017 came in above the high end of our guidance, primarily driven by the continued growth of our Arlo and Orbi product lines. Overall, NETGEAR net revenue for the fourth quarter ended December 31, 2017 was $397.1 million, which is up 7.9% on a year-over-year basis and up 11.7% on a sequential basis. We are pleased to report that this is an all-time record in quarterly net revenue for the Company. NETGEAR net revenue by geography once again reflects our ongoing strength in North America as well as further improvement in the EMEA region. Net revenue for the Americas was $275.1 million, which is up 8.5% year-over-year and up 12.6% on a sequential basis. EMEA net revenue…

Thank you, Christine, and hello everyone. I'd like to highlight our achievements during the fourth quarter of 2017 as well as our recent announcements from the 2018 Consumer Electronics Show. During the fourth quarter, we rolled out and announced some very exciting new services across our three business segments. First, we've been actively rolling out Circle with Disney smart parental controls across the Nighthawk and Orbi lines. We have partnered with Circle to bring their industry-leading parental controls to our line of high-performance WiFi routers and systems. In today's world, managing a child's screen time and content is top of mind of every parent. Circle parental controls manage a child's screen time and content almost – Circle parental controls are the most robust on the market, allowing parents to manage the screen time at the platform level across multiple devices. We are offering basic parental control for free, premium parental controls for $4.99 a month, and outside-of-home mobile device parental controls for another $4.99 per month. Additionally, we announced at CES that we have partnered with cyber security industry leader, Bitdefender, to bring NETGEAR Armor to the market. NETGEAR Armor provides advanced cyber-threat protection for consumers across all of their devices. While the security is no longer only a concern for enterprises, it is critical to residential homes as well. We believe that the best place to secure your home from the cyber threat is at the router level where Internet traffic enters and exits the home. With NETGEAR Armor, consumers will be able to run vulnerability assessments, perform dynamic URL blocking, protect end-point devices inside and outside of the home, and receive additional state-of-the-art security capabilities that will ensure all of your IoT devices and users are protected. This will be offered to our customers through a firmware update…

Thank you, Patrick. For the first quarter of 2018, we anticipate revenue will be in the range of approximately $330 million to $345 million. First quarter GAAP operating margin is expected to be in the range of 0.8% to 1.8%, which includes approximately $8.5 million of one-time cost associated with the separation which includes professional service fees for various advisory and audit related costs. Non-GAAP operating margin is expected to be in the range of 6.5% to 7.5%, which includes approximately $1.5 million of costs associated with the separation of Arlo and the corresponding dis-synergies created as we hire talent to duplicate certain roles to prepare that business to stand up on its own. Our GAAP tax rate is expected to be approximately 28% and the non-GAAP tax rate is expected to be approximately 25% for the first quarter of 2018. Due to the significant changes and complexities of the Tax Cuts and Jobs Act, the first quarter of 2018 tax rate guidance is provisional only and therefore is subject to further analysis, interpretation and clarification of the tax reform legislation. Operator, that concludes our comments and we can now take questions.

[Operator Instructions] Our first question comes from the line of Rob Cihra from Guggenheim. Your line is open.

Thanks very much and congratulations I guess on your -- exciting to be spinning off Arlo. A couple of questions on just the existing business; in Q4, just the Arlo business was up, Arlo revenue was up in the teens sequentially, which is less than one would normally think in a seasonal Q4, and I realize you guys shipped or built a decent amount of channel inventory in Q3 ahead of time and then called that out at the time, so that was expected, but outside of that what was linearity like? And I guess your channel inventories exiting Q4 actually went from sort of being high going into it and then looking actually low coming out, curious if that's the panning word for Q1 and then I have a couple of follow-ups, if that's all right.

So, looking at the channel inventories at the end of 12/31/17, as we had noted, they are always based on the last six weeks of sell-through. Those last six weeks are probably the highest six weeks of our year. So that's why they typically look a little bit lower as you come out of Q4, but we do expect that we have a reasonable amount in the channel as we go forward into Q1.

And regarding the sequential revenue difference, it's actually a little bit more than the seasonality as a matter of fact, and as we go into the Q4 and as we prepare for the separation of Arlo from the rest of the business, I think we actually would look at the actual more accurate provision of sales returns as well as contra-revenue, which is all folded into the actual Q4 reported segment revenue of Arlo. So, that's why it looked like the seasonality is not as severe as before, but there's a lot of puts and takes into the net revenue calculation.

Right, okay, that makes sense. And then similarly I guess just on service provider, I mean it's obviously come down, it's not as meaningful anymore, but it was a little lower even than sort of a 55 million a quarter you had been guiding to, I mean should we now still think or should we now think maybe 50 million a quarter, is this the right number or what's your best guess knowing that your visibility is only so good looking through 2018?

Yes, we still believe that it's in the 50 million to 55 million range, but as you all know, service provider is pretty lumpy. One quarter it would be 50 million, the other quarter it would be 58 million, it is hard to say. But generally speaking, we are staying in that range between 50 million to 60 million, averaging 55 million, yes.

Okay. And then lastly, just Patrick, I know you mentioned, so Christine is going to be the CFO of Arlo, you are going to remain CEO of NETGEAR. What is your role ultimately going to be at Arlo or are you not going to have one? And that's it. Thank you.

In the overlapping period before the final spin-off, I would sit on the Board of Arlo, but once the 100% spin-off is done, I will quit the Board of Arlo then. They are truly independent of each other from a management standpoint. But of course, I will be still a shareholder.

Right. Okay, great. Thank you very much.

Your next question comes from the line of Trip Chowdhry from Global Equities. Your line is open.

Patrick, a very, very solid quarter. Congratulations on Arlo spin-off. Lot of good news here. I have about three, four questions if I can ask, that will be great. I can start with the very first one, we are spinning off Arlo as an IPO, when are we going to spin-off Orbi and then Nighthawk as IPOs?

According to SEC rules, we are not allowed to talk about that unfortunately.

All right, no worries, no worries. Second question I have is regarding the subscription services you announced at the CES, which is Circle and Armor. My understanding is, both of these services may be very conducive to almost every Arlo customer, any reason you are selling it as different subscription rather than bundling them together and selling them as a bundled service offering?

As we are going to rollout this Arlo Smart service later this quarter, we are certainly not going to tip our hands to our competitors in how we're going to price it.

Beautiful. Now, from a strategic perspective, definitely many investors have been on the wrong side of your stock. They were thinking wrongly that Google Nest is a very powerful host in the industry. Pretty much Google Nest is a non-event if you think about Arlo, your growth rates, and everything you've done. Google paid $3.5 billion for Nest, and still they failed, considering that Google has lot of resources behind it. Give me some insightful strategic insights that Arlo has done, which has outmanoeuvred almost every big company when it comes to vision intelligence or vision-first devices, what is your secret sauce?

I would say, really just we've got a great team, and as Patrick mentioned, we have the RF, the wireless expertise, we have the battery expertise, we have the channel, we're lean and nimble, and we've been able to do this in many product categories and Arlo is just one of them.

I just would like to supplement. As I always maintain, right, focus is very important, and as Google has so many things to worry about while we have really focused on one thing that gives us the nimbleness as well as the concentration and agility. And that's exactly the reason why I want to spin-off Arlo, because as NETGEAR, we also have many focuses both on Home WiFi, SMB switching, as was Arlo. So by spinning off Arlo, they would be even more focused, more dedicated, more nimble, and more resource-rich. So, we believe that the formula of focus will continue to be a successful formula.

Last question if I may, Nighthawk Pro Gamer is off to a very solid start. What technically is so superior about this product, the Nighthawk Pro Gamer, that none of the other players could either imagine or do it, what is so good about this product, and that's all for me. Thanks again. Congratulations on a very solid quarter and on proposed IPO of Arlo.

Thank you. As we resonate, we are happy to see two technical reviews from two very technical gaming sites, one is PC Gamer, the other one is PGM Android. Both of them summarize it pretty succinctly that there is nothing before our Pro Gaming Router come-out that really combined the best routing hardware with the best gaming software, and when you have the combination of the two, it's unbeatable. So, the new features that we introduced to the software of this Pro Gaming Router, there are two. One is a geo-filtering, which all the gamers really love. The second one is what we call the QoS Dashboard. But then we will continue to roll out even more features that the gamers will love. Some of them will be add-on, some of them will be charged on a monthly basis. So, we clearly are very excited about the future of the NETGEAR Pro Gaming series. We are so excited about it, we are so confident about it that we actually sponsored three gaming teams, e-sports teams around the world, that will carry our logo and continue to promote the superiority of our Pro Gaming line of products.

Your next question comes from the line of Hamed Khorsand from BWS Financial. Your line is open.

I'll just start off with a probably easier one. Can you explain why accounts receivable jumped so much and your DSO was beyond any level you guys have had in the past?

Sure. For the most part of that, we give some of our large retailers seasonal dating terms, which gives them an extra 60 days to pay, and we've had this in years past, and they typically do not pay until Q1. So, it's always based on timing of the revenue and really one of our largest customers, is over a 10% customer, has additional payment terms. Our accounts receivable on that are extremely healthy as we go forward and it just makes the DSOs go up for Q4.

So this is significantly more than last year's quarter. So, is there a mix change or is there extended terms [indiscernible]?

[Indiscernible] get more Arlo into this guy, I mean they are even bigger.

Right, retail is becoming a bigger piece, a bigger percentage of the total mix going forward.

Got it, okay. And then could you just talk a little bit more about just the talent separation and how you are going to go about that, because obviously talent is a commodity [indiscernible] and how you might hurt Arlo or NETGEAR given the talent pool [indiscernible]?

The separation from technical talent perspective is not a challenge at all because as you probably know, we have been running the Company by segment and each segment is already pretty independent in terms of product development. The only thing that we have to duplicate is the support organization, such as finance, such as operations, and also as well in the frontline, in the sales organization. We don't believe we have any challenge in hiring. And furthermore, we don't have to hire them in the Silicon Valley for operations and for finance because a chunk of our operations in Hong Kong as well as in the San Diego, we've got hired talents over there relatively easily. And then even if you look at sales, right, our sales organization is spread across the world. So frankly, we don't have that much salespeople here, that many salespeople here in the Silicon Valley. So, I do not see the separation will create problems in recruitment. And as a matter of fact, it's just exactly the opposite. I mean, people are really excited to join companies that are new.

Okay. And then lastly, just on as far as the pricing and the promotions have been going on at Arlo, is that going to continue in Q1?

Absolutely. I mean we're not letting off our [indiscernible]. I mean we are seeing positive results, as you could see in the latest presentation that we've put on our Web-site. Our Arlo market share grew another 2 points and our WiFi market share, even though we are already in a very high percentage, we grew another point. We are going to [indiscernible] not going to [indiscernible].

Okay, all right. Thank you.

Our next question comes from the line of Woo Jin Ho from Bloomberg. Your line is open.

Patrick, so during the overlap period, do you plan on managing the Arlo business a little differently ahead of the spin, are you going to try to drive growth or are you going to drive the profitability?

I mean as we have said all along, our job is to really make sure we can maximize both products' long-term success, be it the home SMB networking or Arlo, and that is not going to change. We're not going to focus on short-term, we are going to focus on the long-term view, all right. So, we would do whatever we have been doing successfully.

Okay. And in terms of the 2018 financial targets, are you able to reaffirm that 10% overall growth? And then within that, would you remind me what the Connected Home, SMB growth expectations are for 2018?

I mean as we said on the Analyst Day, we expect that all business combined would still grow 10%-plus, and that we believe that Arlo will grow faster, and then the Connected Home and SMB will grow in the low single-digit.

Okay. And then lastly in terms of the margin profile for the Connected Home and SMB ex-Arlo, I mean how are you thinking about the margin profile for those businesses post spin?

The easiest way is to go back a few years when Arlo was small and you look at the segment reporting. That will be a good reference.

Yes, but back then you had a larger service provider exposure. Shouldn't margins be higher?

The service provider was separated out. Those segments, they both were separated out. So, you go back to the times that we report SPBU, RBU and CBU, then the RBU/CBU contribution margin profile at that time will be pretty similar to what we think that the future looks like.

Understood. Thank you.

Our last question comes again from the line of Rob Cihra from Guggenheim. Your line is now open.

Sorry to follow up. Actually just kind of following up the last question too about margins, would you, Christine, are you willing to give us, or able, operating margins by segment in Q4 or do we have to wait for the K for that? That's the first question.

Yes, you'll have that information in the 10-K. So, we'll file that shortly.

Okay. And then I guess just fleshing out Patrick's statement [indiscernible], I mean so with the expected margin profile for Arlo post spin, I mean would that be one that seems you could run at a loss for a while given the fact that you're saying that your focus will be increasing users, and if that's the focus, then it frees you up to not necessarily for a while even focus on profits at all or have you gotten to the point where you could stay where you think the target margin model would be a plus or minus to begin with? Thanks.

At this point, we really can't speculate on anything regarding the IPO but we will provide everyone more information as soon as it's appropriate.

Right. Okay, thank you very much.

We have no further questions at this time.

All right, great. I would like just to thank everybody for joining today's call. I mean we are very clearly, very excited about taking this next step of separating Arlo and NETGEAR, and believe that is the right thing and the right time for each business and our shareholders. We'll keep you updated on our progress in this effort throughout the year and I look forward to speaking with all of you again in April. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.