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. Good afternoon, and welcome to NETGEAR's Third Quarter of 2024 Financial Results Conference Call. Joining us from the company are Mr. C.J. Prober, CEO; and Mr. Bryan Murray, CFO. Format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the third quarter and guidance for the fourth quarter provided by Bryan. We'll then have time for any questions. If you've 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 expense, 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, except as required by law. 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 CJ.

Good afternoon, and thanks for joining the call today. Today marks my 9-month anniversary with NETGEAR, and I'm thrilled with our progress and the speed at which we're executing on our transformation. Our focus remains on creating long-term shareholder value. I'm more confident than ever that we will transform NETGEAR into a growing and higher-margin business, generating increased cash flow that will reward our current shareholders and attract new investors along the way. Today, I will cover the following 3 topics: first, highlights from Q3; second, an update on our transformation on the heels of our recently completed strategic planning process; and third, our capital allocation plan. Q3 was an excellent quarter. We delivered above the revenue and operating income guidance that we increased in September. We were profitable, and we increased our cash balance by over $100 million through lowering our inventory and successfully defending our intellectual property. There are several factors that contributed to these strong results, and I'll highlight a few. First, we acted aggressively to rebalance the business. After identifying channel stocking issues earlier this year, we implemented a successful destocking plan. That is behind us, and we're now matching sell-in with sell-through, which also brings the benefit of more linearity of our top line. I'm very proud of how the team worked with suppliers and customers to aggressively get this behind us. Second, we're executing. We achieved a $27 million reduction in inventory in Q3 as we March towards our goal of reducing finished goods inventory to 3 months of supply by the end of the year. This more disciplined approach to inventory is driving improved demand and supply planning execution, and the team is stepping up to the challenge. Third, we are identifying exciting growth opportunities within NETGEAR. Our ProAV business had another record…

Thank you, CJ, and thank you, everyone, for joining today's call. We are once again pleased with the execution by our team this quarter in delivering both revenue and profitability above our guidance range, including a return to profitability. These outstanding results were driven by higher-than-expected service provider revenue, buoyed by the early launch of our new Nighthawk M7 Pro 5G WiFi 7 mobile hotspot. As a reminder, we took decisive action in the prior quarter to accelerate destocking of the channel to better position both sides of the business for more predictable performance aligned to the market trends and reduce volatility. We have already begun to see the benefits of this plan as evidenced by this quarter's results. We also saw the additional benefit of reduced DSOs, which came in at 88 days, our lowest level in over 3 years, due to the improved linearity with channel partners needing to maintain their lean inventory positions throughout the quarter. Our more profitable NFB segment performed well against our expectations and once again delivered a record quarter in-market sales of our ProAV managed switch products. In CHP, we saw continued strength in premium products. We made further progress in expanding our product portfolio, addressing other segments of the market, and we were able to pull in the launch of our next-generation M7 Pro mobile hotspot. While the CHP retail market size declined in the third quarter, the decline continued to slow in Q3 compared to earlier in the year. However, we do see the U.S. retail market remaining quite promotional in part due to the holiday period. For the quarter ended September 29, 2024, revenue was $182.9 million, up 27.1% on a sequential basis and down 7.6% year-over-year, above the high end of our guidance. In addition, by continuing to drive…

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

CJ, I just wanted to start -- congrats on the TP-Link settlement -- an update on what's potentially to come from this. I think there's still some legislation out there, some national security concerns. Maybe just remind investors of the potential impact from here and things that are still potentially on the docket. And Bryan, related to this on the TP-Link settlement, maybe you could follow up just at a high level, as we look at the income statement, particularly this quarter, what are the one-timers that we shouldn't be repeating versus what's more permanent. And I'm mainly looking at non-GAAP gross margin and operating margin. For example, non-GAAP G&A came down from 16% to 6%. Does that stay down there? So if you could just walk us through any one-timers in the quarter versus what is more permanent.

Adam, I'll take the first part of that. So not at all related to our settlement, but as you referenced, there is and continues to be a lot of government activity around networking equipment from foreign adversarial countries. And as you probably noticed, there's a bit of a fever pitch with the election approaching around cyberattacks involving the PRC using botnets enabled by home networking -- home and small business networking equipment. And so, the big development since our last earnings was the Select Committee for China sent the Department of Commerce a letter, very strongly worded letter, mentioning, this is their quote, "glaring security issue and significant national security threat that the TP-Link poses. And so, that was quite a development. And that group at the Department of Commerce is the same group that banned Kaspersky, the software security company from Russia. So we're following this closely. And there's a number of other developments relating to the ROUTERS Act, which is targeting a similar thing, and that's made its way through the House already. It's in the Senate. Obviously, with the election, I think all these types of things slow down a little bit. So it will be interesting to see, and we're watching closely what happens after next week.

And Adam, to your question on the onetime items that are in the non-GAAP earnings for the quarter with regards to the TP-Link settlement, it's actually fairly straightforward and may be easy to see in the 8-K that we put out there. But effectively, it's really about $11 million as a contra expense item that would have offset G&A in the quarter. And that was a recovery for all the past legal fees. They're all prior period legal fees associated with pursuing those actions against TP-Link. And so, on a normalized basis, you could just add that $11 million back in and get to an established baseline of OpEx.

And I want to talk about the windfall of cash here and, CJ, the capital allocation priorities. I guess I want to pick on the organic investment piece of this first. As we see here based on the Q4 guidance, a more of a normalized quarter. We're not quite at sustainable breakeven on the non-GAAP operating line here in this model just yet. So I want to better understand how you're thinking about potential further investments in the model given the current operating structure of the business and what that would do in time to breakeven on the non-GAAP operating income line.

Yes. No, great question. So maybe just I can reiterate some of the things we mentioned on the call, just from top line down. So we had a nice growth in NFB this past quarter. So we're excited about that. We see an opportunity to strengthen the performance of that business. And so, overall, we're expecting top line growth. Next year, we also see opportunities to expand gross margins for the year. And part of that's due to the increasing mix of NFB. Part of it's tied to all the work that we're doing around clearing out legacy products and matching finished goods inventory with demands, and there's even some additional upside there as hopefully this freight situation resolves itself. And then as it relates to OpEx, we're taking a really close look at our spending across the board because as we look at our businesses and where to invest, we want as much of that investment to come from just reallocating spend and investments. We do expect, though, to make some incremental investments on top of that reallocation next year, and we're not expecting to be profitable for the year in 2025. We see a clear path to get there, but we remain really focused on driving long-term growth. We're not ready to put a stake in the ground as to what quarter we're going to turn breakeven or profitable, but I'm very confident that we are going to get there. And part of the plan is just really setting us up for -- we see a lot of growth opportunities, particularly on the NFB side, and making sure that we're set up to capture those.

And on capital allocation, broadly, it was helpful that you outlined the buckets, and this might be a tough question to answer. But if I look at the balance sheet, I think you're at about $400 million of cash. I think you previously alluded to somewhere around $150 million needed to run the business, and wanted to confirm that's still the view. And if so, that leaves us with around $250 million of excess cash here. If we could just understand how you're thinking about the general weighting between those 3 categories, the share repurchase or returning cash to shareholders, organic investment, and M&A at this point and just make sure that I'm understanding the excess cash correctly.

Yes. Great question. So the one qualification I'll make to the $150 million of working capital requirements is if there were to be a big shift, regulatory shift, addressing some of the topics you asked about at the outset, that would require more working capital than we've outlined there and quite a bit more. And so, we don't want -- we'd obviously want to be in a position to capitalize on that. But then putting that aside, if you just look at our priorities, we're definitely looking to return capital to shareholders. So we're expecting this quarter to repurchase more shares on a dollar basis than we did in the prior few quarters. And that's an important priority for us. We think that if you look at returning capital to shareholders is a much more significant portion of our cash than the organic investments we're planning. On the M&A side, as I said, our number one priority is to get the business back to profitable growth and addressing the opportunities in our core businesses. However, we are going to evaluate opportunities, the ones that I outlined as examples. But that's obviously very one-off and speculative at this stage. We're really focused on getting the business turned around. And so, hopefully, that framing helps put it more into context.

At this time, there are no further questions. I would now hand today's call back over to CJ Prober, CEO, for closing remarks.

Well, thanks for joining, and we really appreciate the support of our global team partners, customers, and our investors and look forward to continuing the open communication on our transformation. And on that note, Bryan and I we're planning to join Adam at the RJ Conference in New York in December. So whoever is there, we look forward to seeing you.

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