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, Amanda. Good afternoon and welcome to NETGEAR's Fourth Quarter and Full Year 2022 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 will start with a review of the financials for the fourth quarter and full year provided by Bryan, followed by details and commentary on the business provided by Patrick and finish with the first quarter of 2023 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. 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, Eric, and thank you everyone for joining today's call. Net revenue for the quarter ended December 31, 2022 was $249.1 million which came in at the high end of our guidance range flat on a sequential basis and down 0.8% year-over-year. NETGEAR's innovative highly differentiated premium products, namely our ProAV managed switches, 5G mobile hotspots, and 10 gig Tri and Quad-band WiFi mesh products continue to experience strong demand. In the fourth quarter, the team executed well to overcome supply challenges for these in-demand products, and this effort resulted in another record quarter of revenue for SMB business led by ProAV and strong growth of our 5G mobile hotspots with our service provider partners. Our non-GAAP operating margin was negative 1.6% in the middle of our guidance range. For the full year of 2022, NETGEAR net revenues were $932.5 million down 20.2% compared to the year-ended December 31, 2021. While 2022 was a difficult year due to challenges from the supply chain, foreign exchange and high transportation costs, I'm proud of the progress we've made in executing on our strategy to grow our SMB business and transition our CHP business to the premium higher margin segments of the market, where we enjoy considerable competitive differentiation. While the broader U.S. consumer retail market decreased approximately 25% for the full year, our premium products materially outperformed the market, up double digits for the full year. A clear validation of our core long-term strategy to focus on the premium segment. We expect that the trends for both businesses that we discussed at our Analyst Day will continue to expand the available market opportunity for NETGEAR. These higher margin products are the key to delivering growth and increasing profitability in the long term. As we look to the first quarter, broad-based inflationary…

Thank you, Bryan. 2022 was a year of transition for NETGEAR as we drove our premium strategy while navigating headwinds from the supply environment, foreign exchange and elevated transportation costs. We made significant strides in executing on our strategy to focus on the growing higher margin premium segment of the market, voice [ph] during our confidence in NETGEAR's long-term growth potential. In both sides of our businesses, the growth areas we discussed at our current Analyst Day, namely our premium WiFi mesh systems, 5G mobile hotspots and ProAV managed switches saw continued momentum even in the phase of macroeconomic headwinds and supply chain challenges. For the full year, we delivered revenue of $932.5 million, a decline of 20% year-over-year, a reflection of - in a saturating SMB business and a steady service provider business, but offset by the retail CHP business coming off of pandemic buying levels. I'm thrilled to share that our SMB business spearheaded by our ProAV line continued its strong upward momentum. And we delivered a third consecutive quarter of record revenue to set a record for full year revenue up 19%. This impressive result was enabled by our team's effort to secure additional supply to meet continued strong demand. Strategic development of our managed Ethernet switch products specifically tailored for the commercial AV industry have set NETGEAR apart from the competition and allowed us to steadily grow our ProAV manufacturers and integrator partnerships. It's a testament to the strength of our SMB business that we have seen considerable top and bottom line improvement since the beginning of the pandemic. While demand continues to grow even in the face of unprecedented supply chain, geopolitical, and economic challenges to build on the impressive SMB momentum. As we mentioned at our recent Analyst Day, we are turning our attention…

Thank you, Patrick. We expect to continue to experience strong underlying demand in the SMB business and the premium portion of our CHP product portfolio. However, on the retail portion of CHP, we expect a normal seasonal decline coming off the holiday period. And we will continue to work with our retail channel partners to optimize their inventory levels. This should lead to improving results in CHP as we progress through the year. Given the strong performance in the fourth quarter, which allowed our service provider customers to improve their supply positions, we expect first quarter revenue from the service provider channel to decrease to approximately $25 million. Together, these factors lead us to expect our first quarter net revenue to be in the range of $185 million to $200 million. We expect the SMB business to continue to see improving supply, which should allow us to lower reliance on higher cost air freight spend. This should offset the impact of reduced top line leverage relative to our recently completed fourth quarter. Accordingly, our GAAP operating margin for the first quarter is expected to be in the range of negative 4.7% to negative 3.7% and non-GAAP operating margin is expected to be in the range of negative 2% to negative 1%. Our GAAP tax rate is expected to be approximately 30% and our non-GAAP tax rate is expected to be 5% for the first quarter of 2023. 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 the COVID-19 pandemic and supply chain conditions continuing to remain challenged. And should unforeseen events occur in particular challenges related to the 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 today comes from the line of Hamed Khorsand with BWS Financial. Your line is now open.

Hi, could you just talk about what's going on with your cash flow. You're doing a great job reducing inventory in the channel, but that's not really translating into cash coming in your DSOs now 100.

Yes, sure, Hamed. So a couple of things there. I would say the cash flow impacts of the inventory would be more tied to our own inventory, which has been pretty stable. The channel inventory is obviously that, if the customers we're helping them optimize but from a cash flow standpoint impact to NETGEAR, it would be the inventory owned by NETGEAR which has had been relatively stable. Underlying there is that we've actually been working down CHP inventory and as we've said a couple of times today, we are getting into a healthier place on the SMB side, which will allow us to reduce our reliance on air freight spend. From an AR standpoint and the DSOs in Q4, you may recall we typically offer seasonal dating programs with some of our bigger retail partners, were tied to the holiday season, they will extend our payment terms and will participate in those programs. So it's not unusual to see an elevated Q4 DSO. That said, I do -- we did say this at the Analyst Day, we do expect that we'll generate free cash flow at a rate of about 200% of non-GAAP net income for 2023. I do expect that Q1 will start to see some cash flow converting largely because of where the AR position ends in Q4 with those dating programs. So we still feel confident about our ability to generate cash going forward.

And then as far as your SMB is concerned, how fixed are you to supply chains as of this moment because your commentary saying less air freight. So does that imply that SMB is going to increase sequentially from here. Do you have that kind of visibility?

There is still shortage here and there, but it's not as prevalent as before. I mean I would say before we have to spend air freight on almost every single thing we need. Right now, we are much less than that, but then there is still some popular items that are in high demand. We still have the air freight and then sometimes we're short of them. So it's hard to say, I mean we will still see how the supply situation is going forward to be sure that we'll continue the sequential uptick, every quarter, of course, that's what the market demand is like, but unfortunately we're limited still by supplies.

Okay. And the last question is on the CHP side, is it going to be more of a profound decline than what is seasonally normal for you as far as Q1 versus Q4. And this number if I back out, service provider has declined quite a bit from '21 levels. How much more can it decline?

It is hard to say, if we look at it, the Q4 of 2022 versus Q1 or Q4 of 2021 the market declined a whopping 20% to 25% in that range, would you want to be the same? We hope that it probably is, but it could be worse. I mean, given all the layoffs and given all the inflation situation. Now, the good thing is at the premium end is not affected because we're still seeing growth. However, I see good portion of our revenue is depending on the mid to low end, which is significantly affected by the general economic situation. So, if you see that big whopping decline so is because of two factors, one is this huge year-on-year decline. Second one is, we continue to have work to do to reduce channel inventory because when there is a decline in the end-market sales then the channel wants to decrease that channel inventory further. So that's why combining these two, you will see a more pronounced step down in revenue on the CHP side, yes.

Okay, thank you.

Sure.

Your next question comes from the line of Jake Nordson with Raymond James. Your line is now open.

Hi, I was just hoping to get a little more color on the cadence of improvement in supply chains in SMB that can be maybe more of a first half '23 back half and then further sort of with China reopening, is there any expectations of supply chain improvement in the CHP side of the business, maybe in the first half of '23?

You're right, with the China reopening is certainly would help, now even though our manufacturing and most of our components have already moved out of China, there is still few key components that no other countries would be either capable or willing to do. One obvious one is the power supply, because the dual power supplies, you have to wind all those dual transformers that not many people want to do outside of China. And that is the most sticking point of supply to our switches, especially for ProAV related switches. And we think with the reopening of China that will really help, unfortunately, the freight line especially air freight coming out of China has not really increased much and we depend on those to fly those components to our factories in Vietnam, in Thailand, and in Indonesia. We do expect things will get back to normal, probably in the second half of this year. So we don't have to worry about it. We will have unfettered supply of our ProAV switches in the second half of this year, that's what we are looking forward to. But in the first half, we still have to deal with that situation unfortunately.

Jake, if I may just to add more near term focus there. We do expect a slight improvement in Q2 as Patrick said the improvement really happen in the back half, but it will build through the year. And so from a Q2 standpoint, I think there's two factors that the SMB supply will improve slightly. And I think we're expecting at this point the level of destocking with our retail partners will start to mute. I think those two things will drive non-carrier revenues excluding service provider to something like 5% to 10% sequential increase in Q2. Again the destocking will further drop-off in the second half of the year and service router side will likely stay -- Q2 will stay around the $25 million mark. But we do still think the full-year will land about $140 million.

Perfect, thank you.

Your next question comes from the line of Jared Jungjohann with Cowen. Your line is now open.

Hi, Patrick and Bryan, this is Jared on for Paul, thanks for taking my question.

Sure.

I was just curious if you could walk us through some of the puts and takes for gross margin in 4Q '22 specifically about 300 bps to 200 bps decline.

From a sequential standpoint, I think there are really three factors. I think one be the strengthening U.S. dollar relative to Q3. It was probably net 60 basis point to 70 basis point range. We're also - as you see in our inventory levels, we're sitting on about six months of inventory. So a lot of that has been CHP inventory. So we're working through that, if you can imagine, six months ago we weren't kind of near the peak of freight costs coming in. So we're dealing with that burden as well. We do think that we're turning the corner on that and should be at a much more optimized level as we go into the second half of 2023. So those are the primary drivers.

Thank you very much. And then I just have one follow-up. Relative to the guidance you provided at your Analyst Day on quarterly topline movement. Your new guidance for Q1 is a little bit lower than that and I'm curious if you could provide maybe an update on the service provider revenue.

Sure, sure. I think the biggest difference between what we said at Analyst Day in the Q1 guide that we gave right now is the service provider revenue level. You may recall the comments back in December, we expected $140 million in service provider for the year. At that point in time, we thought it would be a little bit more linear, but given our ability to execute and bring in supply in Q4, at this point we think it's going to be a little bit on the lower side in the first half of the year about $25 million a quarter for the first half. Still reaching its full potential of $140 million for the full year. It's just the timing impact. So that's probably the primary difference from the December discussion.

Perfect. Appreciate all the color. Thank you very much.

There are no further questions at this time. Patrick, I turn the call back over to you.

Great, thank you. Thanks everyone for joining us today. In 2022, we laid the foundation with our innovative best-in-class portfolio of products and services to propel NETGEAR towards a long-term profitable growth. Although the CHP channel inventory reduction will continue into 2023, our highly differentiated Orbi 8 or 9 and soon Orbi 10 Mesh systems and our 5G mobile hotspots M6 and M6 Pro continue to outperform the market. And give us the confidence in our long-term high margin growth transitory. On the SMB side, we are the market leader of the ProAV market transition and we'll continue to make inroads in expanding our presence in the market, while simultaneously open up adjacent ones like the TV broadcast and production industry, as well as the integrated high end fully automated homes segment. I look forward to sharing, an update on our progress on all of these fronts at our next earnings call. Look forward to talking to you all in April. Thank you.

This concludes today's conference. Thank you for attending. You may now disconnect.