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. [Operator Instructions] I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Thank you, Glen. Good afternoon. And welcome to NETGEAR’s third quarter of 2021 financial results conference call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO; and Mr. Bryan Murray, CFO. The format of the call we will start with a review of the financials for the third quarter provided by Bryan, followed by details and commentary on the business provided by Patrick, and finish with fourth quarter of 2021 guidance provided by Bryan. We will then have time for any questions. If you have not received a copy of today’s press 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. Bryan Murray.

Thank you, Erik and thank you everyone for joining today’s call. Net revenue for the quarter ended October 3, 2021, was $290.2 million, down 23.3% year-over-year and within our guidance reigns despite greater than anticipated worldwide supply chain challenges. We’re also able to achieve non-GAAP operating margin of 6.7% or 70 basis points above the top end of our guidance range, helped by continued strong performance in our higher margin SMB business. We remain confident in our long-term strategy of providing premium WiFi products to lead innovation in the consumer networking markets and expand our paid service subscriber base. The hybrid and remote work models are becoming the norm for employees worldwide, whose home office requirements continue to increase the complexity, connection speed and coverage needs. We retained our leadership position in U.S. consumer WiFi market share, which remained at roughly 46%. Meanwhile, the wave of businesses reopening and new startups worldwide continue to propel our SMB business forward, with double-digit growth of 33% year-over-year. Even with our topline being held back by the aforementioned supply disruptions, we experienced our third quarter in a row of double-digit year-over-year growth and our highest quarterly SMB revenue in nearly seven years. This was spearheaded by strong demand from BART [ph] channels worldwide, where the team did a great job in securing demand towards available products. SMB wireless products and our managed switches propelled by ProAV applications were the driving forces behind this solid result. In the third quarter, we generate non-GAAP operating income of $19.5 million. This translated into a non-GAAP operating margin of 6.7%, which is 420 basis points below the prior year period, primarily as a result of significant topline leverage in the prior year period, aided by opportunistic demand in the service provider channel tied to the pandemic. Our…

Thank you, Bryan. As we have shared for the last several quarters, work-from-home is here to stay and along with it, the need for household networking devices, capable of distributing greater bandwidth continues. With a hybrid and work from everywhere models becoming more pervasive, consumers need for greater bandwidth, improved coverage and faster connection speeds persist at homes. NETGEAR is the leader of the premium WiFi retail market continues to lead the industry in bringing cutting-edge high performance products to market. I’m excited to announce that in the fourth quarter just in time for the holidays, NETGEAR is introducing the next generation of smartphone WiFi mesh systems. The most powerful Orbi to-date. The Orbi quad-band mesh WiFi 6E system makes the newly available 6 gigahertz WiFi band assessable to homeowners. This unique first of its kind mesh system utilizes pod band technology to deliver up to 10 gigabit internet speeds to more devices simultaneously and with less interference and lag. This remarkable improvement is thanks to the fourth 6 gigahertz band along with upgraded 5 gigahertz WiFi radio and antenna designs. NETGEAR is the first company to bring the quad-band solution to market to enable unprecedented WiFi performance consumers. Furthermore this new system supports up to 10 gigabit internet speed input offers additional 2.5 gigabit Ethernet output ports for wired connections and supports the new more secure WPA3 encryption standards. Finally, the quad-band Orbi WiFi 6E includes a free 30-day trial of the newly enhanced NETGEAR Armor service, which we expect will further add to our paid subscriber base. This exclusive product is not available for pre-order in the U.S. and soon will be in the U.K. as well for roughly $1,500. In colors of gold, white and limited edition bucket, and we’ll add to the portfolio of our products…

Thank you, Patrick. It’s widely publicized that the rapidly changing macroeconomic environment is causing disruption global supply chains for companies of all sizes and industries. NETGEAR is not immune to this. Despite the progress and the reopening of economies worldwide, the third quarter of 2021 saw the continuation of numerous headwinds, including component shortages, associated price increases and even longer transit times with dramatically increased costs, all exacerbated by flare ups of the Delta variant. These worldwide supply chain constraints combined with lower than expected end user demand of retail CHP business presents a significant challenge to meeting our previous topline growth projections for the fourth quarter. We expect SMB to continue seeing strong demand in WiFi 6 access points and ProAV switches only to be limited by supply in the fourth quarter and into 2022. On the CHP business, looking ahead to the fourth quarter of 2021, we see market growth moderating to approximately 15% above the same period in 2019. Our previous destocking efforts to optimize inventory levels in the third quarter made progress, but we plan for these efforts to continue into the fourth quarter. We also expect our service provider revenue to decline sequentially due to supply constraints. Accordingly, our expectations for net revenue in the fourth quarter is in the range of $250 million to $265 million. As a result of loss of leverage from our topline and in combination with the significant freight and component cost increases, we will see in the next quarter and beyond, we expect fourth quarter GAAP operating margin to be in the range of negative 0.5% to 0.5% and non-GAAP operating margin is expected to be in the range of 2% to 3%. Our GAAP tax rate is expected to be approximately 80% and our non-GAAP tax rate is expected to be 26.5% for the fourth quarter of 2021. While we are confident in our ability to provide guidance at this time, we do so with the caveat that considerable uncertainty remains in the market due to COVID 19 pandemic and deteriorating supply chain conditions. And should unforeseen events occur and particular challenges related to closure of our manufacturing partners operations, increased transportation delays into any of our regional distribution centers or greater than expected freight or component costs, our actual results could differ from the foregoing guidance. We would now like to answer any questions from the audience.

[Operator Instructions] Your first question comes from Adam Tindle with Raymond James. Your line is open.

Okay. Thanks. Good afternoon. I just wanted to start, maybe Bryan and Patrick could potentially comment a little bit, but obviously understand a very difficult supply environment with supply constraints going on right now. But at the same time, you’re talking about the need to destock, meaning you have excess supply or excess inventory. And I’m trying to square those two dynamics of supply constrained environment but the need to destock. Why is that the case, where is it concentrated and how much destocking is left?

Well, let me talk about the shortage is primarily on the SMB side and while the destock is mostly on the CHP side, and Bryan, you could add more color to it.

Yeah. It -- kind of just building on what Patrick was saying there, SMB is certainly facing shortages across a number of the product categories for that business and we expect that to continue on until at least the second half of next year. At this point, we’re hopeful that we will start to see improvement in the back half of 2022. On the CHP side, the one area, I would say, we are facing supply constraints would be for those products that we’re selling to our service provider customers. Certainly in the LTE and 5G mobile hotspots, we are facing challenges there and expect for Q3, sorry, Q4 that will probably be in that $30 million to $35 million range, which is below what we are expecting coming into the second half of this year. From a channel inventory standpoint on CHP, you may recall back in July we had set out to reduce channel inventory levels given the market was at that time steering towards a 20% growth over 2019. And really kind of right sizing the channel footprint based on the levels that we’ve stocked in in the first half of the year to that level, but as I said earlier, with -- the market actually delivering about 15% growth, so below our expectation. There’s further room to deliver in terms of destocking the channel, we expect to deliver most of that in the fourth quarter.

Okay. That’s helpful color. I appreciate it. And maybe just a higher level one for Patrick, I am talking about competitive dynamics. Recently, some of the cybersecurity firms have been partnering with WiFi companies or creating their own products and I kind of think of this as an opportunity or a potential threat. From an opportunity standpoint, for example, Fortinet invested, I think, just under $100 million in Linksys. From a threat standpoint, Palo Alto was organically pursuing this market, that consumer WiFi market via their own organic product. So maybe you could bucket both the opportunity, would you consider partnering, the way that Linksys did, for example, and what would the terms you’d be looking for, and then the threat how to defend against new incumbents, like, Palo Alto?

Yes. I think our target customers are different. As I mentioned in the discussion that we’re introducing our own version of similar services on our Orbi Pro Series for the SMB side. So we would be able to let IT manager centrally manage one of the SSIDs in the home offices, who our Insight central management, as well as the new Insight VPN services. So we are ahead of them because they just announced they didn’t ship, right, and then we’re already shipping. But, of course, our target customers are different. Theirs are primarily Fortune 5000. Ours are primarily what we call micro businesses. The other thing is, I have stressed for many quarters, as well as just now in our discussion, we are focusing more and more on the premium or the super premium WiFi segment where people would not tolerate any lag, would not tolerate any uncovered areas in their houses. So we find a lot of our customers, as a matter of fact, dissatisfied with the WiFi provided by their own company or by the service providers that pluck our high end mesh systems into that particular provided piece of equipment. And looking at the spec that what Palo Alto Networks or Fortinet, I’m talking about, they are -- I mean two generations behind what we are going to offer. And with more and more offer of 1.4, 2 and 10 gigabit coming into the house, I think for very uncompromised customers we can continue to sell this super high end. So, all-in-all, we believe that it’s not really in the same space that we’re competing. From a cooperation standpoint, I am open -- we’re always open for so call operations. For example, the partners that we use to provide our VPN, Insight VPN services have been providing similar Fortune 5000 companies, IT departments for really, really big companies and the software and the services they provide are really rock solid and now we’re partnering with them to provide similar services to IT departments of small and micro businesses.

Understood. That’s helpful. Thank you very much.

Yeah.

[Operator Instructions] Your next question comes from Hamed Khorsand with BWS Financial. Your line is open.

Hi. First off, did I hear you right? You said unit shipped was 3.4 million.

That’s right.

And that unit count is quite low compared to 2019 Q3. I’m just wondering if you’re just missing the market or exit market since then where it was 3.8 million that quarter, now you’re at 3.4 million unit shipped?

Well, I just like to point out that back in 2019, in the same quarter we were at 52% of market share and right now we are at 46%. I think that is the major difference.

Okay. You just…

And furthermore -- and furthermore in that time, we have more minutes towards the low end, right now we have more dollars towards the higher ASP products.

Okay. That was where I was going my follow up. Okay. And then as far as the super premium you’re looking at, what kind of trends have you seen so far this quarter, especially through the destocking that kind of gives you confidence that you could continue to expand this market?

Well, I mean, as I discussed in the previous time that we are only selling this super premium on our own netgear.com stores direct, so we can see the orders coming in every day.

Okay. But what are the super premium customers also be more inclined to use a middle person or someone to install it that they do it themselves?

We provide that service as well.

Okay. All right. That’s it for me. Thank you.

Okay. Great. Thanks.

Your next question comes from the line of Paul Silverstein with Cowen. Your line is open.

Thanks, guys. I appreciate you taking the questions. Patrick and Bryan, with respect to this 70 -- roughly 75% of revenue derived from Connected Home from consumer, it sounds like it -- and that risk of asking an argument in question, it sounds like you’re both attacking opportunity in the high end but it’s -- well, let me ask the question different way. How much of your pursuit of premium and super premium is a function of seeing a robust market opportunity measured by revenue and by margins and attending bottomline. And how much of it is really driven out of necessity that your 75% revenue coming from consumer? It sounds like that market is already disappointing with relatively low prospect of meaningful improvement anytime soon independent of supply chain constraints, independent of COVID economic impact? And the related question would be, when you talk about 15% down from 20% growth outlook relative to 19%, which I assume you’re trying to get to a normalize bits? Is that the right bits? What is the growth outlook for consumer WiFi, maybe 19% is not the right place to look, maybe it’s far lower than that, but let me let you respond?

No. I mean, we can only look at what the market is as of today in dollar terms, right? And let me be clear about that, compared to 2019, as a matter of fact, most of the growth of 15% is from ASP increase. And the ASP increase is primarily driven by us by moving more into the super premium. And as Bryan mentioned in the discussion, that premium segment of tri-band and quad-band has grown doubled year-over-year. And remember, Q3 last year was a crazy quarter, the demand has gone through the roof, everybody rush out to buy WiFi and even against a huge quarter, we still double the premium segment of the market. But that clearly is a greenfield, is a new segment that we occur to be. And you said right, it’s a more profitable segment, both from a percentage and a dollar standpoint. As much as we could win 52% market share in the blue $100 routers, you guys have 15 of them to rival one of this super premium and so that in of itself is very lucrative from the dollar profit span. Now, more importantly is, there is very little of our competitor do in chasing us in the technology required to offer quad-band, they are on tri-band. So we believe that we will continue to enjoy a much higher market share in that particular segment. So when you sum it up, is more profitable, is absolutely a growth segment irrespective of what the rest of the market demand is and we have a technological leadership that our competitors would take years to just to chase us, but by then we’ll move on to hafta-band on WiFi 7. So we believe that we’ll continue to maintain a leadership position and that’s why we’re going after this.

Mr. Patrick to those comments, can I ask you -- could you remind us, the super premium in the market or the premium and super premium? What -- how -- what percentage of revenue is that for you today? What is its growth rate for you? What can it be? At what point can it -- where can it be in the next two years to three years as a percentage of the total revenue?

No. We do not -- we traditionally do not break down product line revenues. But the only thing we can say is, as I just mentioned, that premium end the market that is tri-band and quad-band is 36% of the total, mesh market is doubling, more than doubling year-over-year. So that’s how fast the market is growing. So we believe our growth on that will mimic in the next couple of years and we’ll try to push it, as big as possibly can and our target is to make that premium end more than 50% to 60% of our revenue total plus 60%.

By when?

Probably in two years to no later than three years.

Patrick, well, that’s grow -- well, that -- well, the premium and super premium is growing at over 100% year-over-year, what’s the growth rate for the rest of the consumer market?

Oh! Yeah. So you could argue then it probably the strength in the rest of the market, because of ASP design by all competitors. Let me gives you an idea, Google’s WiFi three pack used to sell for $299. It’s now selling for $149.

It is that -- is that churn influence your ASP, you’re saying ASP erosion of 40% plus?

For ASP?

A -- your ASP is on the lower end of the market. That’s the type of erosion you’re saying?

No. I’m just saying that at the low end, yeah, we definitely see ASP erosion for the market participants. But we stay above the fray, we basically do not participate in that kind of price erosion. So, for example, for the same three pack, that we compete against the Google and the Amazon, we’re still at $249 to $299.

Patrick to begs and return to the question, while you’re enjoying 100% plus growth, assuming you’re growing with the market or better than market giving your dominant position, while you’re enjoying that growth in the premium in the market, what type of decline are you seeing in the rest of the market for you?

No. It’s just like Tesla is going like crazy, while the rest of the gasoline car industry is shrinking. It’s a new field. It’s a completely new field.

I -- all right. I’ll take it offline. I understand what you’re saying, but there’s still math involved over the next several years as the premium, super premium grows dramatically before you get that portion of the market being the dominant portion of your revenue. But I’ll take it offline. That’s fine. I appreciate the responses.

Sure.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you for joining us today. The current macroeconomic environment is definitely challenging from the logistics and supply and component standpoint. But I’m confident that in our team’s ability to navigate through these happenings and continue to march towards our goal of dominating in the premium end of the consumer market and in the ProAV side of the SMB. Our commitment to innovation and brands set us apart in the market and we remain poised to enable the work from everywhere environment and I’m excited at the forefront of this transition. To explain further of our product portfolio, technology and strategy, we plan to have our Analyst Day -- Annual Analyst Day early December and we’re going to send invitations out shortly and look forward to seeing you all them over Zoom. Thank you.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.