Ladies and gentlemen, thank you for standing by. At this time all participants are in a listen-only mode. [Operator Instructions] I’d now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Thank you, David. Good afternoon, and welcome to NETGEAR’s Second Quarter of 2023 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 second quarter provided by Bryan, followed by a detailed commentary on the business provided by Patrick, and finish with third quarter of 2023 guidance provided by Bryan. 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 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 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. We are pleased by the execution of our team this quarter as we delivered net revenue above the high end of our guidance range. For the quarter ended July 2, 2023, revenue was $173.4 million, down 22.3% year-over-year and down 4.1% on a sequential basis. Enabled by increased demand, our largest service provider partner outperformed our original expectations. In the retail portion of our CHP business, our premium products, which consist of our Orbi 8 and Orbi 9 Tri-Band and Quad-Band WiFi mesh products, and 5G mobile hotspots once again outperformed the broader market, with worldwide sales to end users growing year-over-year and sequentially. Also, we’re beginning to see positive signs in the retail networking market and its channel inventory are stabilizing. Momentum behind our ProAV line of managed switches delivered another strong quarter in end user sales, up 44% year-over-year, more than offsetting some of the weakness in the traditional SMB market, which has been negatively impacted by the uncertain macroeconomic environment, particularly in Asia and Europe. While we outperformed our Q2 expectations on the top-line, we continue to experience meaningful headwinds in the form of $29 million of channel inventory reductions across both our CHP and SMB businesses during the quarter. Additionally, a higher mix of service provider revenue and seasonality in our CHP retail channel business affected our gross margins. Accordingly, we delivered non-GAAP operating loss of $10.7 million and non-GAAP operating margin of negative 6.2%, with the margin coming in at the high end of our guidance range. This was down 430 basis points compared to the year ago period and a decline of 230 basis points compared to the prior quarter. For the second quarter of 2023, net revenue for the Americas was $116.6…

Thank you, Bryan. I’m pleased that our results in Q2 came in about our guidance. It’s clear that the growth areas that we have based our strategy on namely premium WiFi mesh systems, 5G mobile hotspots and paid service subscriptions, as well as ProAV managed switches, so continued momentum even in the face of macroeconomic headwinds. We remain confident that these strategic investment will help lead NETGEAR to long-term growth and profitability expansion. Despite the headwinds of our channel partners optimizing the inventory levels to historically low levels, our higher margin, higher ASP premium products are selling well together with a rising paid subscriber base. Accordingly, we delivered strong non-GAAP gross margin of 31.6%, an increase of 390 basis points year-over-year, and a testament to the improving transition to the high end of our product portfolio. As the market continues to stabilize, we have begun to see signs of normal seasonality, which gives us hope that we will experience improved predictability in our business once channel inventory reduction abates. In our safety business, the demand for our high speed high performance WiFi and mesh systems is strong. For our best selling Orbi 8 and Orbi 9 mesh WiFi products and user sales grew year-over-year solidifying confidence in our roadmap for the second half of the year as the imminent WiFi 7 upgrade cycle begins with our rollout of WiFi 7 Orbi mesh. We expect ASP’s margin and service attached rates to expand in tandem and a confident in our ability to deliver long-term growth and profitability. Other than our recently announced WiFi 7 router, the Nighthawk RS700, we’ll start shipping our WiFi 7 Orbi mesh, Orbi 97x during Q3. Together they will form our initial push into WiFi 7 with additional new WiFi 7 products to follow in the coming…

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, even in the face of ongoing broad-based inflationary pressures and an uncertain macroeconomic environment. We are starting to see indicators that the broader consumer retail networking market is beginning to stabilize. However, as interest rates remain high, we will continue to work with our channel partners across both businesses to optimize their inventory carrying levels, but expect a revenue impact from these efforts to be at a lesser level than experienced in the second quarter. Accordingly, we expect our third quarter net revenue to be in the range of $175 million to $190 million. We expect third quarter GAAP operating margin to be in the range of negative 7% to negative 4%, and non-GAAP operating margin to be in the range of negative 4% to negative 1%. Our GAAP tax rate is expected to be approximately 15% and our non-GAAP tax rate is expected to be 25% for the third quarter of 2023. We would now like to answer any questions from the audience.

Thank you. [Operator Instructions] We’ll take our first question from Hamed Khorsand with BWS Financial. Your line is now open.

Hi. So my first question was, could you just talk a little bit more about the service provider order? How much was it for you as far as total revenue is concerned? And does this change your outlook as what service provider revenue would look like for the full year?

Yes. On the quarter, we unlocked the upside of about $10 million from service provider, largely coming from our biggest partner there. And I’d say the majority of that was coming from upside demand in the quarter. There was some, I guess, more rational thought put into inventory carrying levels. You may recall that we discussed last quarter that they were working inventory down to a – the extremely low level never seen before. They softened that a little bit, but most of that $10 million upside is coming from incremental demand pull-through. In terms of going forward and outlook, I would say that the $25 million per quarter level is probably the outlook that we would guide people to at this point.

Okay. And then as far as the home is concerned in retail, usually, Q3 has been a strong spot for you seasonality-wise. What are you not seeing that you would like to see?

No. Actually, we are actually going to see a seasonality returning. So the normal seasonality uplift of 10%, we expect that to happen this Q3.

Okay. And then as far as just pricing and discounts are concerned, what is it that’s preventing you from reaching a breakeven or positive operating margin?

Well, there’s still some channel destocking. And we believe that the channel destocking will last another two quarters. We’re definitely shipping a lot less than what we actually sold through in the end-user market. That’s basically hurting us from a bottom line perspective.

Yes. And if I might add there, the Q2 destocking level that Patrick was referring to was quite sizable, about $29 million. You may recall that Q1 was about $37 million. So it’s been pretty meaningful in the first half of the year. It’s going to continue in the back half, but we think it’s probably at a level of about half of what we saw in the first half to probably a little more front loaded towards Q3. And for that reason, we would likely expect a step-up in Q4, probably in the neighborhood of about 10%, which we do think that think takes us to that non-GAAP level of profitability in the low single-digit margin level.

Okay, thank you.

Sure.

Next, we’ll go to Jake Norrison [ph] with Raymond James. Your line is now open.

Perfect. Thank you. So just talking about that again. So you’ve said you’re seeing signs that the broader retail network market could be stabilizing and you had confidence that inventory levels in the channel are going to stabilize, could you just provide more color on what you’re seeing from both fronts there? There’s going to be a lot of investors asking about the back half load with the operating margin expectation in 4Q, if you could just unpack that, that would be perfect.

Well, what we’re seeing is every quarter relative to pre-pandemic level, the decline is stabilizing. For example, for the last three quarters, each quarter’s market size in U.S. retail is roughly about 15% below the pre-pandemic level. It hasn’t deteriorated. So that’s what we mean by stabilizing, because of that, then the market is following the normal seasonality. That means based on using Q1 as a base and Q2 is down roughly about 5%. And Q2 to Q3, we expect it to be up 10%, and then Q3 to Q4, we expect it to be flat or slightly up. So that’s the normal seasonality returning because the entire market shrinkage is stabilizing relatively to the pre-pandemic level. So that’s what we mean. In terms of channel inventory stabilizing, which means that because, think about this, they used to carry 12 weeks of inventory of a bigger market. Now when the market shrinks, not only that they would shrink to 12 weeks of the smaller market, they actually would like to shrink to eight weeks to 10 weeks of the smaller markets, I think we’re getting there right? We’re getting there. I think it will take us two more quarters to get there to about nine weeks of the smaller market. Yes.

Okay. Perfect. And then last one for me, a little more high level. Just talk about the WiFi 7 refresh opportunity in 2024 and if we’ll see any ASP degradation for the WiFi 6 devices?

We don’t believe so, because of the technology of WiFi 7, which is significantly better in terms of speed and latency. Initially, the ASP will be significantly higher than the WiFi 6. And because – and there aren’t many WiFi 7 clients yet, so we don’t see any erosion in ASP of the WiFi 6 in 2024. But of course, when you go into 2025, yes, we do expect that. But then there will be more WiFi 7 products, and there will be a more weight towards WiFi 7 sales, which is a higher ASP. So we do see, because of that mix effect, ASP will continue to go up in the years to come.

Perfect. That’s all for me. Thank you.

That’s great.

And I show that there are no further questions at this time. I’ll now turn the call back over to Patrick Lo for any additional or closing remarks.

Great. Thanks for everybody joining the call. We’re really pleased we are making continuous year-over-year and quarter-over-quarter progress in the four pillars of our strategy. On the CHP side, it’s basically the three things: premium products, subscription and direct-to-consumer sales. And on the SMB side, it’s really focusing on a tremendous growth opportunity of ProAV. And we’re very excited about going into 2024. And we clearly will share more of those elements and how we could capitalize them more in 2024 in our Analyst Day, which is going to be somewhere at the end of November, early December, and we’ll update you more on those aspects in the next earnings call. So look forward to talking to you all again.

This concludes today’s conference call. You may now disconnect.