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

Thank you, operator. Good afternoon, and welcome to NETGEAR's Second Quarter of 2025 Financial Results Conference Call. Joining us from the company are Mr. CJ Prober, CEO; and Mr. Bryan Murray, CFO. The format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the second quarter and guidance for the third 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 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. 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.

Thanks, Erik, and thank you all for joining our call. We are very pleased to report that Q2 was another great quarter for NETGEAR, with results much better than anticipated, including historically high gross margins and another quarter of non-GAAP profitability the team simply delivered. Even more importantly, our transformation to deliver long-term shareholder value via profitable growth is progressing as planned, and we continue to execute well against our newly formed long-term strategy. Today, I'll review our second quarter financial highlights, give an update on each of our 3 business units and cover a couple of macro points that are top of mind. In Q2, we outperformed our guidance on both the top and bottom line. Despite ProAV supply constraints that limited shipments, net revenue came in at $170.5 million, above the high end of our outlook, and we delivered non-GAAP gross margins of 37.8%, an all- time high for the company. We also outperformed our non-GAAP operating margin guidance and delivered non-GAAP profitability for a second quarter in a row. This performance reflects continued progress in our transformation journey. A year removed from the major channel destocking we executed in Q2 of 2024, our tighter operational discipline is paying dividends. We've streamlined inventory, stabilized DSOs at their lowest level in nearly 8 years and realigned our supply chain to support leaner, more resilient execution. Nowhere is this transformation more evident than in the profitability of our 3 business units. Last quarter, we shared that each business unit improved its year-over-year contribution margin by over 400 basis points. This quarter, we're excited to share that we've achieved positive contribution margins across each business. This milestone is even more impressive considering the varied opportunities and challenges within each segment, and it serves as a great testament to the progress we…

Thank you, CJ, and thank you, everyone, for joining today's call. Thanks to the excellent execution of our team, we continued the momentum from our strong start to the year. and delivered a fifth consecutive quarter where we exceeded the high end of our guidance ranges for revenue and operating margin. We delivered year-over-year top line growth of 18.5%, along with sequential growth of more than 5%, with strong performances from our NFB and home networking businesses. I'm also pleased to share that we delivered non-GAAP gross margin of 37.8%, an all-time high for NETGEAR, with DSOs at their lowest level in nearly 8 years, truly a testament to the operational excellence the team is performing at as we drive to profitable long- term growth. As a reminder, we successfully conducted a channel destocking a year ago, setting the groundwork for the results you see today, but also suppressing our revenue and profitability in the year ago comparable quarter. The second quarter's outperformance was driven mainly by a strong showing by our higher-margin NFB business segment, along with home networking coming in above our initial expectations, supported by stocking in anticipation of Prime Day, which occurred earlier this month. The health of the channel's inventory levels and our ability to match sell-in with sell-through were significant contributors to our success around the first half of the year, positioning ourselves for streamlined execution. End-user demand for our ProAV Managed Switch products grew double digits, and we continue to see penetration of our broader WiFi 7 portfolio pick up momentum for our home networking business. For the quarter ended June 29, 2025, revenue was above the high end of our guidance range, coming in at $170.5 million, up 5.2% on a sequential basis and up 18.5% year-over-year. In Q2, we completed the…

[Operator Instructions] We'll take the first question from Logan Katzman, Raymond James.

Maybe to start here on ProAV. I was just curious if you guys could talk a little bit more about what's going on there and the supply constraints in a little bit more detail. And I think if I heard you correctly, you expect this to end here 1Q '26, but I just want to confirm. And then it sounds like you guys were able to sell through backlog pretty well. But I was just curious how much you guys are carrying into Q3?

Logan, great question. Happy to take that, and Bryan can weigh in with any additional thoughts. So I think maybe a couple of just framing points. We've historically talked about the 3 NFB businesses for simplicity as being kind of 1/3, 1/3, 1/3 in terms of size. With the growth that we've seen on the Pro AV side of things, that's actually become about half of NFB's top line and about 25% of NETGEAR's overall top line. So it's not a big business for us. So with the -- as we said on the call, 14% sequential growth, that was above our plan. Despite that, we saw an increase in our backlog of high single-digit, low double-digit millions. So obviously, the demand generation there is great and a huge shout out to our operations team for being able to increase supply to allow us to deliver above plan. And the differentiation on the product side, it's everything from hardware to software to the ecosystem that we built, and it's really kind of validation that these investments that we outlined at the beginning of the year around the restructuring in Q1, we're putting investments against NFB. We already started that at the end of last year. It's paying off. So as it relates to supply, we expect to start to burn down the backlog towards the end of Q3. So we'll start that process. And then we expect to be in a position in Q1 to begin to build a safety stock position. Now of course, if we continue to over-deliver on our expectations, it may take a little bit longer. But based on the visibility we currently have on supply, which we really addressed the opportunities we've had to accelerate that with our partners. That's what we're thinking. Q3, Q4, burn down the backlog, Q1, we start to build a safety stock position.

Got it. That's helpful. And maybe to piggyback off that a little bit. I know you guys talked a little bit about the OpEx increases here as it relates to investing into the business. But how should we think about OpEx ramping through the back half of this year? And then any operating leverage or anything, any color you guys can give for 2026 on that front as well?

Yes. Let me take that one. So we clearly made some tremendous progress in Q2. We hired more than 70 people. As you know, we kicked off the year and did a restructuring to free up about $20 million in annual spend that we plan to reinvest at an equivalent level back into the business, largely into the NFB business. Q1, we got off to a bit of a slow start with the hiring, as we've discussed before, but made great progress in the second quarter. As we look out to the third quarter, I would say we have continued investments going there. We're likely to see an increase in our OpEx in the mid-single-digit increase. And some -- largely, that's due to these investments that we're making. There are a couple of other items that I'd probably like to highlight and point out. One, with the Exium transaction closing late in Q2, we'll have a full quarter expense of that newly acquired team and including some investments there to get that integrated into our Insight platform. There are also a couple of unusual items, I would say, with regards to the Q2 OpEx outlook. One is we'll have double rent expense. So after 17 years of being in our current headquarter space, we decided it was time for a change. And so we will be making a move at the end of the quarter. We're able to cut our footprint by about 1/3, but we will remain cost neutral on the facility. So during this 3- month period, while we're getting that up and running, we'll have double rent expense. That's about $1 million. The other thing is that we have a pretty meaningful litigation defense cost that will hit in the quarter. It's probably an incremental $1 million as well that -- we absolutely will be defending ourselves, and we're not going to settle on claims that don't have merit. So those last 2 items, I would say, a bit unique. You take those out likely Q4, I would expect a sequential decrease in that low single- digit range off of the back of the Q3 level. But net-net, if you model this out, I think we're largely steering towards OpEx. When you normalize 2024 for the exceptional release that we got with regards to the TP-Link settlements, when you normalize for that on a full year basis, we're probably trending to about a similar level of OpEx compared to last year.

Got it. Okay. No, that's helpful. And maybe hitting on some of the investments you guys are making in NFB. I know you guys talked about it on the prepared remarks, and we saw the press release for professional services there. Maybe first, what parts of NFB is this going to affect the most? And then also, maybe what's your expectations on how and when this is going to impact the model? And yes, any other color you guys can provide on the professional services side there?

Yes. Let me start with that, Bryan can weigh in. And I'll make it a little broader, Logan, in professional services. So as we've talked about, we have 3 business units. And all 3 have different businesses, but they have a common strategic theme and that in all of them, we're looking to differentiate via software and add value to customers via differentiated software and leverage that to shift our business model to recurring revenue. And today, when you look at our ARR, it mostly comes from our home networking business unit. And there's a lot of opportunity to scale that. Jonathan has a ton of experience, built Fitbit subscription business from scratch. So we're excited about that. We're excited about the increased top of funnel that we're going to get from the 370 launch that we announced yesterday. But NFB, which is currently relatively nascent, we have 3 main levers to grow our recurring business. First is we've got our current Insight cloud management platform with a licensing model that doesn't work. So we're revamping that, and we expect to expand our Insight business quite significantly as we do that. We made the acquisition of Exium that fills an important gap in security. We're going to integrate Exium into Insight. So that's a 1 plus 1 equals 3 for customers. We have other plans for how we leverage Exium's security footprint in other products that will also drive recurring revenue. So we're excited about that. Professional services, which is what you asked about is the third leg of that stool for NFB. And if you think about companies like ours, you'll see services attach at 40%, 50%. We're at 0%. We give a lot of that way today for free. We're actually getting customers asking us to offer this. So it's a win for customers because they're going to get better value from NETGEAR. It's a win for us because it's a new source of revenue. And all 3 of those are kind of in the early stages of deployment, professional services, to answer your very specific question, will support the AP business initially. But we expect to see real growth on the recurring revenue side in NFB in 2026. It's a big, big focus of ours.

Got it. Got it. That's helpful. And then maybe shifting to the consumer side of the business. I just wanted to see kind of where we're at with TP-Link and any updates there?

Yes. We're obviously reading the same tea leaves as everybody else is. when you speak to people about the whole situation of Chinese companies operating in the U.S. and the lack of parity that exists, what's interesting is it's kind of people view this as a bit of a no- brainer for the U.S. And not to make it political in any way, but the new administration, if you the sense I was listening to a podcast that he was on just on the way to the office today in they -- I mean, they get the lack of parity with China and they're taking steps to address that. And so when you combine that with all the activity around commerce, what we've read about the DOJ the Senate, the congressional leaders having a sustained focus on this. I mean our confidence remains high that this is going to be a tailwind for us, either specifically or generally. And we're really well positioned to capitalize on it if that ends up being the case. We're the second market leader. We've got the broad portfolio. The biggest gap in our portfolio was the low-end mesh. We just launched the 370. So in routing and mesh, we're really well positioned. We've got the brand. And then we have said publicly that we're making an investment in inventory. So if something were to happen here that we're well positioned to capture it. Now there's a broad spectrum of approaches you could take there. You could do nothing or you could go all in, and we're not doing any -- either of those. We're being quite strategic about where we're making incremental inventory investments. And you might see that reflected in our Q3 balance sheet kind of in the low double-digit, high single-digit millions of dollars just to reflect an incremental investment in inventory so that we're positioned to capture any upside that would come from that.

And the next question will come from Jay Goldberg from Seaport Research Partners.

So CJ, I was just wondering if you could talk a little bit more about home networking. I know you've had some big plans there. How are those progressing? How do you see yourself in the market today? Where are things going?

Yes, great question. So if you look at the market, how the market is evolving, units have been increasing, right? So there was a time post-COVID where the market was declining from a unit perspective. Units today are increasing. ASPs are declining largely because of some super aggressiveness that we're seeing from TP-Link. We did gain share last quarter in home networking despite not having our full portfolio in the market. We lost some of that back. This quarter, we gained share in Prime Day. So there's a big back and forth happening with TP-Link from a share perspective. But when we shifted our strategy last year to play in bigger parts of the market, that meant we're going downstream with our routing products, downstream with our mesh products. The 370 is the most recent launch there. It's really positioned us well with consumers. And with Jonathan on board, we're starting to work on the longer-term road map, which we've given indications that we -- in past calls, Jay, before you having joined, that we do view NETGEAR is playing a bigger role in the home in solving connectivity problems. And so we have big aspirations for this business. And I'm excited about the position we've put ourselves in to really compete. And we've got a great foundational subscription service that we're building off of as well. So that's kind of where we stand. We're in a bit of a dog fight right now. And -- but we've got some really good and exciting plans for the future here.

Great. So Bryan, I was wondering if you could just dig in a little bit to gross margin, some of the puts and takes that got you to the numbers you're putting in this quarter. And then I won't ask you to give guidance for the whole year, but sort of how should we think about those trends as we progress?

Yes. Thanks for joining today, Jay. So obviously, record quarterly gross margin at 37.8%, a fantastic result. We're a bit ahead of pace of where we probably thought we would be coming into the year. Obviously, the key contributor there is the mix of the NFB business and the success that we're seeing there, driven by the ProAV Managed Switch portfolio. We are continuing to see the benefits of getting past higher cost inventory. That's going to be a permanent benefit as we move forward. Obviously, we're managing a tighter supply chain. We got our inventory in order. The channel inventories in order, we'll get benefits from that as well. We did have a onetime benefit, I would say, in the quarter that was specific to home networking that was in relation to sales returns experience, where we've seen dramatic improvement there. That was about 100 basis point impact on our total consolidated gross margin, 250 basis points specific to home networking. So that's probably a nonrepeatable thing. But putting all that together and given today's business mix, we would expect to be able to maintain the mid- to high 30% gross margin profile. Longer term, CJ touched on a few of these things earlier, like obviously, the continued growth of NFB will play a role given it's about 47% gross margin today. But the services businesses that we expect to accelerate in all of our businesses really will be kind of the next iteration or the next wave of accretion. The one thing I would kind of just say that we're focused on, we're able to mitigate at this point, but there is certainly a lot of noise and press out there with regards to memory pricing and DDR4 specifically, where the major suppliers in this market are taking those products end of life. And there have been some short-term pricing noise out there in the market. Like I said, we've been able to mitigate it thus far, but it's something that we're paying attention to. But really, I guess, summarizing back to it, we're pretty confident we've delivered this benefit and expanded our gross margins, and we're going to be able to maintain the mid- to high 30% range until we see that next wave of accretion with the services.

That's very helpful. And so I guess just last question, CJ, can you give us an update on your software in-sourcing, how that's progressing? Maybe tease a little bit about what we're going to see at the Analyst Day on the software front.

Yes. It's a huge focus of ours, as I mentioned earlier. So great progress. We completed the VAAG acqui-hire, which was a real accelerant to building out our Chennai location. So we've onboarded about 60 engineers. We have a great team more focused on the home networking side of things, the app side, the cloud side of the home networking business being built out in Cork. We've got a great leader there. She's building out a great team. And then other parts of our organization are also building out their teams in Richmond, in the Vancouver area and in Taipei. So it's going well. But the amazing thing about this in-sourcing is, and I've said this before, but I'll say it again, it leads to better quality product, faster execution, so big wins for the customer, and it costs us about the same. So it's not like we're pouring money into this. We're burning down the contractor spend that we've had on outsourced vendors that just don't have the incentive to adopt automation and AI like we're doing internally here. So it's a real multiplier for us and super excited about all the teams that we've -- team members that we've onboarded recently. And if I didn't say it at the outset, thanks for joining the call. Great to have you.

And everyone, at this time, there are no further questions. I'd like to hand the call back to Mr. CJ Prober for any additional or closing remarks.

Just a quick shout out to the Global NETGEAR team. Thanks for delivering on another great quarter.

And once again, ladies and gentlemen, that does conclude today's conference. You may now disconnect.