Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Thank you, Rob. Good afternoon, and welcome to NETGEAR's First Quarter of 2024 Financial Results Conference Call. Joining us from the company are Mr. C.J. Prober, CEO; and Mr. Bryan Murray, CFO. The format of the call will start with commentary on the business provided by C.J., followed by a review of the financials for the first quarter and guidance for the second quarter 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, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, operating margins, tax expense, expenses and future business outlook. Actual result 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-K. 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, non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures found in today's press release on our Investor Relations website. At this time, I'd like to turn the call over to C.J.

Thanks, Erik, and good afternoon to those of you joining this call. So I'm just past my 90-day anniversary with NETGEAR, and I am unequivocally more excited about the opportunity ahead than when I joined. I've just completed my listening tour that involve meeting dozens of customers and partners as well as the global NETGEAR teams across 9 countries in the Americas, Europe and Asia. And I'll be opening today's call by covering 3 main topics: First, the decisive near-term actions we're taking for the long-term health of the business that are reflected in our Q1 results and Q2 guidance. Second, near-term strategy adjustments to both our consumer and B2B businesses. And third, our plan for developing a long-term strategy and prioritizing the allocation of our capital to build a higher growth, more profitable business. One important theme that cuts across all these topics is that our decision making is focused on creating long-term value for shareholders. The Board has aligned my incentive compensation with shareholder value creation. In our most recent equity grants to the broader executive team that will be disclosed in next year's proxy, we have similarly implemented an incentive structure that rewards executives on shareholder value creation. In doing so, we're moving away from incentivizing performance based on a much narrower metric like subscriber count or subscription revenue. All of these steps we are taking to transform this business will be driven by the goal of creating higher growth, more profitable business that delivers long-term value for our shareholders. With that context, let me start with a couple of decisive actions we're taking for the long-term health of the business that are reflected in our Q1 results and Q2 guidance. First, as you all know, the macroeconomic environment remains challenged, and we're seeing higher-than-expected inflation and…

Thank you, C.J., and thank you again, everyone, for joining today's call. We are pleased with the execution by our team this quarter in delivering revenue within our guidance range amidst a challenging marketplace. For the quarter ended March 31, 2024, revenue was $164.6 million. down 12.8% on a sequential basis and down 9% year-over-year. However, we saw greater-than-expected destocking across both sides of the business in the first quarter as the macroeconomic environment pressures continue to persist and weigh on our channel partners. This came along with a shift in product mix, which, combined with a slightly more promotional CHP retail market, led to profitability come in below our expectations. As C.J. alluded to, we believe we have an opportunity to work tightly with our channel partners and execute what we believe to be the remaining destock in the second quarter. This accelerated destock is a significant driver behind the step-down in revenue and profitability that you see in the second quarter guidance and a critically important step to creating value in the second half of the year and beyond. Simply stated, we are looking to get the destock headwind behind us as quickly as possible to enable our future growth in both CHP and NFB businesses. On the CHP side, the U.S. retail market overall underperformed our expectations due to continued pressures with the challenging macroeconomic environment on consumer spending. This resulted in higher promotional costs than we expected in the first quarter, in part due to the lack of new products to boost the market while we consume our existing supply. Meanwhile, we did see some upside with our service provider customers with associated revenue coming at approximately $28 million, partially beginning the top line challenge on the retail side but unfavorably impacting our gross margin performance.…

[Operator Instructions] Your first question comes from the line of Hamed Khorsand from BWS.

It's Hamed. But just I wanted to ask you, why is a hard reset. What's the sign that all of a sudden, you need to change things up all of a sudden?

Yes. I'll take a shot at that, Hamed. There is -- I guess it's a combination of factors. I think if you break them down into things that we weren't expecting or the team wasn't expecting back in December of last year and then things that have changed since then. So obviously, the CHP market, as we talked about, was not recovering to our expectations. And on top of that, we continue to be the market leader in premium. We can -- premium continues to grow, but we're not pulling as many people up. And so when you combine that with the higher-than-expected destocking and the costs related to holding that channel inventory, and then as we looked at product performance in Q1 and some of the longer in the 2 inventory, it just all added up to, hey, we should get through this as quickly as possible. It's kind of like think about it is acting quickly to get over a COVID hangover that's been made worse by some of these market conditions that I've mentioned. So when we -- when it became clear that the December guidance wasn't going to be achievable, we wanted to set ourselves up for long-term success and make these decisive actions to put the business in a good place for obviously, a better second half of the year, not relative to second -- the December guidance, but relative to the first half because we're pulling forward a lot of this pain to set us up for a better second half. And so that was the thinking.

Okay. And then what do you mean by accelerating destocking? Are you giving the product away for free? I mean why wasn't NETGEAR able to do this before because destocking has been part of the vocabulary for the last 2 years when it comes to NETGEAR earnings?

Yes. It's -- it varies a little bit by channel. I mean, interestingly, it's very mixed, even across both businesses. So some of our channel partners are at historic lows to a point where we're actually having to improve kind of how we operate the business in order to avoid POS. Others, it just became -- as the macro conditions continue to persist and people were expecting lower interest rates, each one of these partners that has more inventory than they would like, they start turning the screws on their own internal teams around how do we get lower and lower and lower. And then that just blows back on us in terms of cost and missing selling opportunities because they've got the wrong mix of inventory. And so we are going to -- we -- it varies by partner, where we've got a plan, and we're going to do it in an orderly way with our partners. It's mostly going to be by just not shipping in products that they need, and it's going to set us up to be in a better position to meet demand going forward.

Your next question comes from the line of Jake Norrison from Raymond James.

Okay, great. I'm hoping you could just touch a little bit more on the state of the consumer, particularly at the higher end of the market. Are you seeing any trade down activity in your premium cohort? And then just [indiscernible] on that with, could you touch on what product segments or categories were actually experiencing that excess build of inventory?

Yes. So let me take the first one. And then maybe, Bryan, you could take the second one. So on the first question, it's not that we're seeing trade downs versus what we would have expected in the annual guidance last year. It's that we're not pulling as many people up. And one of the things that we've concluded is like one of the challenges around why we're not doing that is because we're not playing in like the bigger parts of the market. So I mentioned Amazon. And so if you're not present in all the different price points, on Amazon, on our dot-com, it's just very hard to pull people up. So it's not that they're going down, it's just that we're not pulling as many up as we would like.

Yes, Jake, in terms of some of the slower-moving inventory, I'll give you some examples. One is our wireless LAN business on the SMB side, where we think there's a lot of potential there, but we haven't found the perfect execution, the right products to expand there. It's not been a huge portion of our historical NETGEAR for Business product mix, but we have had hopes in launching -- starting with some of the WiFi 6 APs, and we're now actually starting to move to WiFi 7. That's an area where I think we're looking to increase some velocity. Some of the other examples I'd say, on the CHP side or maybe more niche products, but we have some combined mesh and cable offerings that are kind of unique things to consumers. There's usually customers who are in the market looking for mesh to solve 1 problem and then there's other people looking for cable, but we had a combined gateway there that would have been one of those areas. And I think maybe Meural to, a smaller degree, I mean, we talked about why we're exiting that business. It's just not a great fit in the market. So those are some of the examples of areas where I'd say we targeting it. Obviously, in broader terms, there certainly some WiFi 6 offerings that we have out there across some of the more broad CHP categories that, of course, we're looking to start moving towards WiFi 7 with a more slim-down portfolio products there, but we do have some products in those areas that we'll be working through.

Yes. Maybe one thing that wasn't -- was kind of behind your question is just how to think about the second half of the year. And the destocking in Q1, Bryan touched on it, that was significant. The destocking in Q2 is significant. So this is a direct drawdown from revenue. As we said, we expect it to be $25 million to $30 million. And so we are expecting -- if you think about the second half, putting aside -- we've obviously said you got to put aside the December guidance, but we do expect some regular seasonality there. And one of the things that we've talked about doing is burning down inventory at a higher rate, so that could positively impact revenue, but also negatively impact margin because of the promotional aspect of it. So I don't know if that's what you were ultimately asking, but just wanted to provide a little color there.

Yes, that's great. Very helpful. And then just last one for me. Is there any way we could think about the magnitude of cash generation in the second quarter and the rest of the year? And maybe if you guys are thinking in more formulaic terms and sort of the context of share repurchases?

Yes. In terms of cash generation, I mean, we are going to generate cash in Q2 largely because the benefits of continuing to work down our inventory. I would steer it probably in the magnitude of maybe half of what we saw in the first quarter to somewhere on the high end, up and around that range. The rest of the year, I would just probably steer you to kind of we stated our target is to get down to 3 months of inventory. We're going to aggressively try and work to do that by the end of this year. There will be offsets, obviously. From an income standpoint, Q2's guide with the consumption of cash, so there will be offsets to that. But I would say most of the cash generation for this year will still continue to be tied to inventory reduction working towards our target. In terms of capital allocation, I think which is your second question there, we've repurchased shares in the first quarter, which is something we probably hadn't done in almost 2 years, and I think we still believe that we're going to be opportunistic buyers of our stock in this market.

And there are no further questions at this time. I will now turn the call over to C.J. Prober for some final closing remarks.

Thanks, everybody, for joining and look forward to future calls over the coming quarters.

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