Q3 2023 NETGEAR Inc Earnings Call
Speaker 1: Hello and welcome to NETGEAR's third quarter 2023 results conference call.
Hello, and welcome cannot gears third quarter, 'twenty 'twenty 'twenty results conference call.
Speaker 1: 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. At that time, if you have a question, you will need to press the star 100-year push button phone. I would now like to turn the conference over to Eric Bylon. Please go ahead, sir.
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 at that time. If you have a question you'll need to press the star one.
Push button phone I would now like to turn the conference over to Eric Violin. Please go ahead Sir.
Speaker 2: Thank you. Good afternoon and welcome to NETGEAR's third quarter of 2023 Financial Results Conference call.
Thank you.
Good afternoon, and welcome to Netgear third quarter of 2023 financial results Conference call.
Speaker 2: Joining us from the company are Mr. Patrick Lowe, Chairman and CEO , and Mr. Brian Murray, CFO .
Joining us from the company are Mr. Patrick Lo Chairman and CEO and Mr. Bryan Murray CFO.
Speaker 2: The format of the call will start with review of the financials to the third quarter provided by Brian , followed by details and commentary on the business provided by Patrick, and finished with the fourth quarter of 2023 guidance provided by Brian . We'll then...
The format of the call will start with a review of the financials for the third quarter provided by Bryan.
By details and commentary on the business provided by Patrick and finish with the fourth quarter of 2023 guidance provided by Bryan.
Then have time for any questions you.
Speaker 2: If you have not received a copy of today's release, please visit NetGears Investor Relations website at www.netgears.com.
Not received a copy of todays release, please visit <unk> Investor Relations website at Www Dot net dot com.
Speaker 2: Before we begin the formal remarks, we advise you that today's conference call contains four looking statements.
Before we begin the formal remarks, we advise you that todays conference call contains forward looking statements.
Speaker 2: Board-looking statements include statements regarding expected revenue, operating margins, tax rates, expenses, and future business outlook.
Forward looking statements include statements regarding expected revenue.
Operating margin.
Rates expenses and future business outlook.
Speaker 2: actual results or trends could differ materially from those contemplated by these forward-looking statements.
Actual results or trends could differ materially from those contemplated by these forward looking statements.
Speaker 2: For more information, please refer to the risk factors discussed in neckier's periodic filings with the NTC, including the most recent form 10-
For more information please refer to the risk factors discussed in next year's periodic filings with the SEC, including the most recent Form 10-Q.
Speaker 2: 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-gap-
Any forward looking statements that we make on this call are based on assumptions as of today.
<unk> 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 a reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website.
Speaker 2: A reconciliation of the non-GAP2 GAAP measures can be found in today's press release on our Invest Relations website. At this time, I would now like to turn the...
At this time I would now like to turn the call over to Mr. Bryan Murray.
Speaker 3: Thank you, Eric, and thank you everyone for joining today's call.
Thank you Eric and thank you everyone for joining today's call.
Speaker 3: We are pleased by the continued strong execution of our team this quarter in delivering both revenue and operating margin comfortably above the high end of regattance range. For the quarter ended October 1st, 2023, revenue was $197.8 million. Up 14.0 million.
We are pleased by the continued strong execution of our team this quarter.
Every both revenue and operating margin comfortably above the high end of our guidance range.
For the quarter ended October one 2023.
Revenue was 197 $8 million.
Up 14, 1% on a sequential basis.
But down 27% year over year.
Speaker 3: increased demand in both the CHP retail market and service provider channels.
Increased demand in both the CHP retail market and service provider channels.
Speaker 3: Along with retail counterparts maintaining rather than depleting their inventories, enable us to outperform or top line relative to our original expectations.
Along with retail channel partners, maintaining rather than depleting their inventories.
Build us to outperform our topline relative to our original expectations.
As Wi Fi seven upgrade cycle begins to ramp.
Speaker 3: and we approach the holiday season, we continue to see positive signs that the retail networking market is stabilizing.
And we approach the holiday season, we continue to see positive signs that the retail networking market is stabilizing.
Speaker 3: Notably, in Q3, the US retail market grew double digits sequentially. In line with historical sees now.
Notably in Q3, the U S retail market grew double digit sequentially in.
In line with historical seasonality.
Speaker 3: And the retail portion of our CHP business are premium solutions which consist of our ORE 8 and 9 trying quad band Wi-Fi mesh products.
And the retail portion of our CHP business, our premium solutions.
This consists of our eighth and ninth try and Quad band Wi Fi mesh products.
Speaker 3: and 5G Nighthawk mobile hotspots are continuing to perform well.
And <unk> Nighthawk mobile hotspot.
Our continuing to perform well.
Speaker 3: Sales to end users of these premium products glued double digits yearly.
Sales to end users of these premium products grew double digits year over year.
Speaker 3: dramatically outperforming the total market, which compressed double the gist over the same timeframe.
Dramatically outperforming the total market, which compressed double digits over the same timeframe.
Speaker 3: On the other hand, our SMB business fell short of our top line expectations that the recorder.
On the other hand, our F&B business fell short of our topline expectations in the third quarter.
Speaker 3: The uncertain macroeconomic environment. Continue to fresher.
The uncertain macroeconomic environment continued to pressure for <unk>.
Speaker 3: Our channel partners and we solve them continue to reduce their inventory carrying levels, which constrain the top line of our SMB business, and will continue to limit its top line potential in the quarters to come.
Panel partners and we saw them continue to reduce inventory carrying levels, which constrained the topline of our SMB business and will continue to limit the topline potential in the quarters to come.
Speaker 3: This second consecutive quarter of top line out performance is an encouraging sign that the CHB retail market is stabilizing. And the Y570
This second consecutive quarter of top line outperformance is an encouraging sign that the CHP retail market is stabilizing.
And Wi Fi seven transition is gaining traction.
Speaker 3: Strong mix of our premium, higher margin products combined with the progress we continue to make and growing our service revenue business in CHP helped improve our gross margin.
The strong mix of our premium higher margin products combined with the progress we continue to make in growing our service revenue business in CHP.
Helped improve our gross margins.
Speaker 3: Additionally, we gained top line leverage from the seasonal lift of the back to school season and coupled with the discipline expense management, we returned to profitability.
Additionally, we gained topline leverage from the seasonal lift in the back to school season, and coupled with the disciplined expense management, we returned to profitability delivering.
Speaker 3: Delivering non-gap operating income of $5.3 million. And non-gap operating margin of 2.5 million.
Delivering non-GAAP operating income of $5 3 million and.
non-GAAP operating margin of two 7%.
Speaker 3: with the margin coming in well above the high end of Regan tree.
With the margin coming in well above the high end of our guidance range.
Speaker 3: Our non-gas operating margin was up 200 basis points compared to the year ago periods and up 890 basis points compared to the prior quarter.
Our non-GAAP operating margin was up 200 basis points compared to the year ago period.
890 basis points compared to the prior quarter.
Speaker 3: For the third quarter of 2023, net revenue for the Americas was $141 million.
For the quarter ended for the third quarter of 2023 net revenue for the Americas was $141 million.
Speaker 3: a decline of 16.7% year-of-year, and up 20.9% on a sequential basis.
A decline of 16, 7% year over year.
And up 29% on a sequential basis.
Speaker 3: In me and that revenue was $35.7 million, a decrease of 20.4% year of a year, and at 1.3% quarter of a quarter.
EMEA net revenue was $35 7 million.
A decrease of 24% year over year.
One 3% quarter over quarter.
Speaker 3: Our APAC net revenue was $21.1 million, which is down 40.3% from the fire repairable period and up 2.4% sequential.
Our APAC net revenue was $21 1 million.
Which is down 43% from the <unk>.
Prior year comparable period and up two 4% sequentially.
Speaker 3: For the third quarter of 2023, we shipped a total of approximately 1.8 million units, including 991,000 nodes of wireless products.
Yes.
For the third quarter of 2023, we shipped a total of approximately $1 8 million units, including 991000 nodes of wireless products.
Speaker 3: Shipments of all wired and wireless routers and gateways combined were about 520,000 units for the third quarter of 2023.
Shipments of all wired and wireless routers and gateways combined were about 520000 units for the third quarter of 2023.
Speaker 3: The net revenue split between home and business products was about 64% and 36% respectively.
The net revenue split between home and business products was about 64% and 36% respectively.
Speaker 3: The net revenue split between wireless and wire products was about 61% and 39% respectively.
The net revenue split between wireless and wired products was about 61% and 39% respectively.
Speaker 3: Products introduced in the last 15 months constituted about 16% of our third quarter shipments.
Products introduced in the last 15 months constituted about 16% of our third quarter shipments.
Speaker 3: While products introduced in the last 12 months contributes about 11% over the recordership.
While products introduced in the last 12 months contributed about 11% of our third quarter shipments.
Speaker 3: From this point on, my discussion points will focus on non-gap numbers.
From this point on my discussion points will focus on non-GAAP numbers.
Speaker 3: The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today.
The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today.
Speaker 3: Non-gap gross margin in the third quarter of 2023 was 35%, which is up 740 basis points as compared to 27.6% in the prior year comparable period, and up 340 basis points compared to 31.6% in the second quarter of 2023.
non-GAAP gross margin in the third quarter of 2023 was 35%, which is up 740 basis points as compared to 27, 6% in the prior year comparable period, and up 340 basis points compared to 31, 6% in the second quarter of 2023.
Speaker 3: As compared to the prior year period, increased shipments of our premium higher margin CHP products and considerably lower total freight costs drove the improvement.
As compared to the prior year period increased shipments of our premium higher margin CHP products.
And considerably lower total freight cost drove the improvement.
Speaker 3: As compared to the prior quarter, Q3 experienced a higher mix of premium, higher margin products. And overall, we were more efficient with our marketing spending.
As compared to the prior quarter Q3 experienced a higher mix of premium higher margin products.
And overall.
We were more efficient with our marketing spend.
Speaker 3: Total Q3 non-gap operating expenses came in at $64 million, which is down 4.7% year-over-year and down 2.2% sequentially.
Total Q3, non-GAAP operating expenses came in at $64 million.
Which is down four 7% year over year and down two 2% sequentially.
Speaker 3: Our headcount was 644 as of the end of this quarter, down from 653 in Q2.
Our head Count was 644 is it into this quarter down from 653 in Q2.
Speaker 3: We will continue to strategically invest in our business and hire it in key areas we believe will deliver future growth and profitability, such as Pro EV Managed Switches.
We will continue to strategically invest in our business and higher in key areas, we believe will deliver future growth and profitability.
Such as <unk> managed switches.
Premium <unk> Wi Fi mesh systems.
Speaker 3: 5G mobile hotspots, and subscription services.
<unk> mobile hotspots.
And subscription services.
Speaker 3: However, we continue to evaluate other areas of the business on a regular basis driving further cost efficiency.
However, we continue to evaluate other areas of the business on a regular basis driving further cost efficiencies.
Speaker 3: Our non-GAAP R&D expense for the third quarter was 10.1% of net revenue, as compared to 8.5% of net revenue in the prior comparable period, and 11.4% of net revenue in the second quarter of 2023.
Our non-GAAP R&D expense for the third quarter was 10, 1% of net revenue.
As compared to eight 5% of net revenue in the prior year comparable period.
Seven 4% of net revenue in the second quarter of 2023.
Speaker 3: To continue our technology and subscription service leadership, we are committed to continued investment in R&D.
To continue our technology and subscription service leadership, we are committed to continued investment in R&D.
Speaker 3: Our non-gap tax expense was $0.7 million in the third quarter of 2023.
Our non-GAAP tax expense was <unk> 7 million in the third quarter of 2023.
Speaker 3: Looking at the bottom line for Q3, we reported non-GAAP net income of $6.9 million and non-GAAP diluted earnings per share of 23 cents.
Looking at the bottom line for Q3, we reported non-GAAP net income of $6 9 million.
And non-GAAP diluted earnings per share of <unk> 23.
Turning to the balance sheet.
Speaker 3: We ended the third quarter of 2023 with $228 million in cash in short-term investments, up $25.2 million.
We ended the third quarter of 2023 was $228 million in cash and short term investments.
Up $25 $2 million from the prior quarter.
Speaker 3: As we projected in July , we were able to return to positive free cash flow in the third quarter.
As we.
<unk> in July we were able to return to positive free cash flow in the third quarter.
Speaker 3: as we made meaningful progress in reducing our inventory and improving our bottom line.
As we made me as we made meaningful progress in reducing our inventory and improving our bottom line.
Unknown Executive: Hello and welcome to NETGEAR's third quarter, 2023 results conference call. Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode.
Speaker 3: During the quarter, $26.1 million of cash was provided by operations.
During the quarter $26 1 million of cash was provided by operations.
Speaker 3: which reduced our total cash used by operations over the trailing 12 months to $4.4 million. We used $2 million in purchase.
Which reduced our total cash used by operations over the trailing 12 months to $4 $4 million.
Unknown Executive: Later, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press the star 100 push button phone.
We used $2 million in purchases of property and equipment during the quarter.
Speaker 3: which brings our total cash use for capital expenditures over the 12 months to $5.2 million.
Which brings our total cash used for capital expenditures capital expenditures over the trailing 12 months to $5 2 million.
Erik Bylin: I would now like to turn the conference over to Erik Bylin. Please go ahead, sir. Thank you.
Speaker 3: We expect to continue generating positive free cash flow as we believe we will further reduce our inventory levels over the next couple of quarters and drive to our pre-pandemic carrying levels of three to four months.
We.
To continue generating positive free cash flow as we believe we will further reduce our inventory levels over the next couple of quarters and drive to a pre pandemic carrying levels of three to four months.
Erik Bylin: Good afternoon and welcome to NETGEAR's third quarter of 2023 financial results conference call. Joining us from the company are Mr. Patrick Lowe, Chairman and CEO and Mr. Bryan Murray, CFO. The format of the call will start with review of the financials for the third quarter provided by Bryan, followed by details and commentary on the business provided by Patrick, and finished with a fourth quarter of 2023 guidance provided by Bryan. We will then have time for any questions.
Now turning to the third quarter results for our product segments.
Speaker 3: The Connected Home segment, which includes our industry leading Orbi, Nighthawk, Nighthawk Pro Gaming, Armor, and Mural Brands, generated strong revenue of $127.3 million during the quarter, down 15.4% on a year-over-year basis and up 29.4% sequentially.
The connected home segment, which includes our industry, leading <unk> Nighthawk Nighthawk Pro Gaming Harbor and Bureau brands generated strong revenue of $127 $3 million during the quarter down.
Down 15, 4% on a year over year basis, and up 29, 4% sequentially.
Erik Bylin: If you have not received a copy of today's release, please visit NETGEAR's Investor Relations website at www.netgears.com. Before we begin the former remarks, we advise you that today's conference call contains four looking statements. Four 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 four 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 10Q.
Speaker 3: The year-over-year decline in both the retail and service provider channels is a result of the larger total addressable market and higher inventory carrying levels at our channel partners in the prior year period.
The year over year decline in both the retail and service provider channels as a result of a larger total addressable market and higher inventory carrying levels and our channel partners in the prior year period.
Speaker 3: Despite the year-over-year overall retail market contraction, demand for our premium Orbi 8 and 9 Wi-Fi mesh and 5G mobile hotspots continue to grow up double digits.
Despite the year over year overall retail market contraction and demand for our premium <unk> eight and nine Wi Fi mesh and <unk> mobile hotspots continued to grow up double digits.
Speaker 3: Bolstered by the addition of a recently-released Wi-Fi 7 product, namely the Orbi 97X mesh system and the Nighthawk RS700 router, these higher margin, high-end products with high ASPs were an important contributor to delivering revenue and operating margins well above the high end of our guidance.
Bolstered by the addition of our recently released Wifi seven products, namely the 40, 97 X mesh system and the Nighthawk Rs 700 router. These higher margin high end products with high Asps.
Erik Bylin: Any four looking statements that we make on this call are based on assumptions as of today. NETGEAR undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-gap financial measures will be mentioned on this call. A reconciliation of the non-gap to gap measures can be found in today's press release on our Investor Relations website.
Were an important contributor to delivering revenue and operating margins well above the high end of our guidance.
Speaker 3: serving as another proof point of the long-term growth and profitability potential of our core strategy.
Serving as another proof point of the long term growth and profitability potential of our core strategy.
Speaker 3: On the SMB side, net revenue came in at $70.5 million in the third quarter, below our expectations.
On the SMB side net revenue came in at $75 million in the third quarter below our expectations.
Bryan Murray: 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. We are pleased by the continued strong execution of our team this quarter and delivering both revenue and operating margins comfortably above the high end of regattance range.
Speaker 3: The softness in S&B was due to the uncertain macroeconomic environment weighing on the S&B market, especially in geographies with stagnant or even negative GDP growth, such as Germany, Greater China, and Japan, which are our biggest markets outside of North America.
The softness in F&B was due to the uncertain macroeconomic environment weighing on the SMB market, especially in geographies with stagnant or even negative GDP growth.
Such as Germany, Greater China, and Japan, which are our biggest markets outside of North America.
Bryan Murray: For the quarter ended October 1st, 2023, revenue was $197.8 million, up 14.1% on a sequential basis, but down 20.7% year over year. Increased demand in both the CHP retail market and service provider channels, along with retail channel partners maintaining rather than depleting their inventories, enable us to outperform our top line relative to our original expectations. As the Wi-Fi 7 upgrade cycle begins to ramp and we approach the holiday season, we continue to see positive signs that the retail networking market is stabilizing.
Speaker 3: Our SMB channel partners continue to compress inventory levels in the quarter and are expected to continue doing so in the quarters ahead.
Our SMB channel partners continued to compress inventory levels in the quarter and are expected to continue doing so in the quarters ahead.
Speaker 3: Despite this, we continue to see growth in our ProAV suite of products and remain confident they will be a long-term growth driver of our SMB business. I'll now turn the call over to Patrick.
Despite this we continue to see growth in our <unk> suite of products and remain confident they will be a long term growth driver of our SMB business.
I'll now turn the call over to Patrick for his commentary.
Thank you Brian.
Speaker 4: I would like to thank our Netgear team for delivering many great achievements in the third quarter.
I'd like to thank Alan Netgear team for delivering many great achievements in the third quarter.
Speaker 4: We had the most successful launch of new Wi-Fi technology in our history.
We had the most successful launch of new Wi Fi technology in our history.
Speaker 4: with our Wi-Fi 7 quad band OB97X and Nighthawk RS700 router.
With a Wifi seven quad band or B <unk>.
And Nighthawk Rs 700 router.
Bryan Murray: Notably, in Q3, the US retail market grew double digits sequentially in line with historical seasonality. And the retail portion of our CHP business are premium solutions, which consist of our Ori 8 and 9 Tri-Inquod Band Wi-Fi Mesh products, and 5G Nighthawk Mobile Hotspots are continuing to perform well. Sales to end users of these premium products grew double digits year-to-year, dramatically outperforming the total market, which compressed double digits over the same time frame.
Speaker 4: We attained an overall gross margin of 35%. By driving an ideal combination of high margin products in CXP and SME with fewer promotional discounts.
We attained an overall gross margin of 35% by driving an ideal combination of high margin products in <unk> and SME with fewer promotional discounts.
Speaker 4: We continue to grow the number of value-added service subscribers to 844,000, achieving 25% growth in service revenue to $10.6 million for the quarter.
We continue to grow with a number of value added service subscribers to 844000.
<unk>, 25% growth in service revenue to $10 6 million for the quarter.
Speaker 4: We worked together with our retail channel partners to right-size the inventory levels and believe they have reached the level they would like to maintain.
We work together with our retail channel partners to right size, the inventory levels and believe they have reached the level they would like to maintain.
Bryan Murray: On the other hand, our SMB business fell short of our top-line expectations in the third quarter. The uncertain macroeconomic environment continued to pressure, our channel partners, and we saw them continue to reduce their inventory carrying levels, which constrained the top line of our SMB business, and will continue to limit its top line potential in the quarters to come. This second consecutive quarter of top line outperformance is an encouraging sign that the CHB retail market is stabilizing, and the Wi-Fi 7 transition is gaining traction.
Speaker 4: We continue to see growth in market demand for our pro-AV line of SMB products.
We continue to see growth in market demand for our pro line of SMB products.
Speaker 4: And finally, our team worked tirelessly to reduce our own inventory and generate meaningful cash for our balance sheet.
And finally, our team worked tirelessly to reduce our own inventory and generate meaningful cash for our balance sheet.
Speaker 4: We started shipping our first two Wi-Fi 7 products exclusively on our U.S. direct-to-consumer web store in the second-to-last week of Q3, and market reception well exceeded our expectations.
We started shipping our first two Wi Fi seven products exclusively on our U S direct to consumer web store in the second to last week of Q3 and.
Bryan Murray: The strong mix of our premium, higher margin products combined with the progress we continue to make in growing our service revenue business in CHP helped improve our gross margins. Additionally, we gained top line leverage from the seasonal lift of the back to school season and coupled with the discipline expense management, we returned to profitability, delivering non-gap operating income of $5.3 million and non-gap operating margin of 2.7 percent, with the margin coming in well above the high end of our guidance range. Our non-gap operating margin was up 200 basis points compared to the year-and-go period, and up 890 basis points compared to the prior quarter.
And market reception, well exceeded our expectations.
Speaker 4: The OB97X, our Wi-Fi 7 quad band mesh, delivered sales in the first two weeks double that of our prior launch of the quad band Wi-Fi 6E mesh, the OB96K.
The <unk> nine 700, <unk>, our Wi Fi seven Quad band mesh delivered sales in the first two weeks.
Double that of our prior launch of the Quad band Wi Fi six E mash, the Ob 96 cakes.
Speaker 4: Dunnihawk Y57 Router, RS 700.
The Nighthawk Wi Fi router out at 700.
Speaker 4: instantly became our number one selling premium router.
The study became our number one selling premium router.
Speaker 4: overtaking our previous top of the line, Y560 router, the R8XE5
Overtaking our previous top of the line Wi Fi <unk> router, the <unk> 500.
Speaker 4: Well, Wi-Fi 7 clients are not widely available yet.
While Wi Fi seven clients are not widely available yet.
Speaker 4: The early technology adopters have clearly given us the stand of approval.
The early technology adopters have clearly given us that stamp of approval.
Bryan Murray: For the third quarter of 2023, net revenue for the Americas was $141 million, a decline of 16.7 percent year-of-a-year, and up 20.9 percent on a sequential basis. In me and net revenue was $35.7 million, a decrease of 20.4 percent year-of-a-year, and down 1.3 percent quarter of a quarter. Our APAC net revenue was $21.1 million, which is down 40.3 percent from the prior period to parable periods and up 2.4 percent sequentially. For the third quarter of 2023, we shipped a total of approximately 1.8 million units, including 991,000 nodes of wireless products.
Speaker 4: As Wi-Fi 7 clients become widely available starting April or May of next year, we believe the retail market and our CHP revenue will ride the upgrade cycle.
As Wi Fi seven clients become widely available starting April or May of next year.
We believe the retail market and our CHP revenue will ride the upgrade cycle.
Speaker 4: and we believe this will return our CXP business back to growth.
And we believe this will return our CSP CHP business back to growth.
Speaker 4: We are readying a strong pipeline of Wi-Fi 7 introductions in 2024 across all our major product lines.
We are readying, a strong pipeline of by $5 seven introductions in 2024 across all our major product lines Augie mash.
Speaker 4: ALDI mesh, Nihawk routers, Nihawk mobile hotspots, and SMB insight access points.
Nighthawk routers, the Nighthawk <unk> a hotspot.
F&B insight access points.
Speaker 4: We are excited about these opportunities to expand our top and bottom lines in 2024 on a year-over-year basis for every quarter.
We are excited about these opportunities to expand our top and bottom lines in 2024 on a year over year basis every quarter.
Bryan Murray: Shipments of all wired and wireless routers and gateways combined were about 520,000 units for the third quarter of 2023. The net revenue split between home and business products was about 64 percent and 36 percent respectively. The net revenue split between wireless and wire products was about 61 percent and 39 percent respectively. Products introduced in the last 15 months constitutes about 16 percent of our third quarter shipments, while products introduced in the last 12 months contributes about 11 percent of our third quarter shipments.
During Q3.
Speaker 4: Our CHP sales and marketing teams worldwide work hard to work in showcasing and marketing our high margin products across all categories.
Our <unk> sales and marketing teams worldwide, we're hard at work in showcasing and marketing our high margin products across all categories Mash routers mobile hotspots cable gateways and laptop Wi Fi adapters to achieve the best mix of high margin.
Speaker 4: mesh, routers, mobile hotspots, cable gateways, and laptop Wi-Fi adapters to achieve the best mix of high-margin products in recent years.
<unk> in recent years.
Speaker 4: Our SMB team is doing the same with our Pro AV product.
Our SMB team is doing the same with our pro products.
Bryan Murray: From this point on, my discussion points will focus on non-gap numbers. The reconciliation from gap to non-gap is detailed and our earnings released distributed earlier today. Non-gap gross margin in the third quarter of 2023 was 35 percent, which is up 740 basis points as compared to 27.6 percent in the prior year's comparable period. Enough 340 basis points compared to 31.6 percent in the second quarter of 2023. As compared to the prior period, increased shipments of our premium higher margins each be products and considerably lower total freight costs grow the improvement.
Speaker 4: And so without of these efforts, we were able to achieve 35% growth marginal overall.
As a result of these efforts we were able to achieve 35% gross margin overall.
Speaker 4: We believe as more Wi-Fi 7 products launch in 2024, we will have room to further improve our overall growth margin in the new year.
I believe as more Wi Fi seven products launch in 2024, where we have room to further improve our overall gross margin in the new year.
Speaker 4: We added 40,000 paid service subscribers in Q3, reaching a count of 844,000.
We added 40000 paid service subscribers in Q3 <unk>.
Reaching a count of 844000.
Speaker 4: We grew our paid service revenue to 10.690.
We grew our paid service revenue to $10 6 million.
Speaker 4: We are on pace to reach our goal of 875,000 paid service subscribers by the end of the year, further growing our service revenue, which would be a major contributor to our gross margin expansion for years to come.
We are on pace to reach our goal of 875000 paid service subscribers by the end of the year further growing our service revenue.
Bryan Murray: As compared to the prior quarter, Q3 experienced a higher mix of premium higher margin products and overall, we were more efficient with our marketing spend. Total Q3 non-gap operating expenses came in at $64 million, which is down 4.7% year-of-year and down 2.2% sequentially. Our head count was 644 as is in this quarter, down from 653 and Q2. We will continue to strategically invest in our business and hire in key areas we believe will deliver future growth and profitability such as Pro-AV managed switches, premium orby Wi-Fi mesh systems, 5G mobile hotspots, and subscription services.
Would be a major contributor to our gross margin expansion for years to come.
Speaker 4: We will continue to add compelling features to our armor services to protect our customers' connected devices throughout their home.
We will continue to add compelling features to our AMA services to protect our customers connected devices throughout their homes.
Speaker 4: We intend to add more privacy protection features in 2024, thus increasing the appeal of our armor service to even wider audience.
We intend to add more privacy protection features in 2024.
Thus, increasing the appeal of our armor service to even wider audiences.
Speaker 4: with a strong reception of a Wi-Fi 7 launch and the stabilization of the size of the retail addressable market.
With a strong reception of our Wi Fi seven launch and the stabilization of the size of the retail addressable market.
Speaker 4: Our retail channel partners are more confident that the retail network market will stay at current levels or potentially even increase.
Our retail channel partners are more confident that the retail network market will stay at current levels or potentially even increase.
Bryan Murray: However, we continue to evaluate other areas of the business on a regular basis, driving further cost efficiencies. Our non-gap already expense for the third quarter was 10.1% of net revenue, that compared to 8.5% of net revenue in the prior period, and 11.4% of net revenue in the second quarter of 2023. To continue our technology and subscription service leadership, we are committed to continue investment in R&D. Our non-gap tax expense was $0.7 million in the third quarter of 2023.
Speaker 4: They have demonstrated this by no longer depleting the inventory.
We have demonstrated this by no longer depleting the inventory.
Speaker 4: and we will continue to bring new products to market to add to their confidence.
And we will continue to bring new products to market to add to their confidence.
Speaker 4: This quarter will bring out two new versions of our Premium Nighthawk Mobile Hotspots, the M6 Pro.
This quarter, we will bring out two new versions of our premium Nighthawk mobile hotspots <unk> proud of.
Speaker 4: The first one is for the US market with compatibility on the Verizon net.
The first one is for the U S market with compatibility on the Verizon network.
Speaker 4: The second one is what the Japanese market, with compatibility to all major carriers in Japan.
The second one is for the Japanese market with compatibility to all major carriers in Japan.
Bryan Murray: Looking at the bottom line for Q3, we reported non-gap net income of $6.9 million and non-gap diluted earnings for share of 23 cents. Turning to the balance sheet, we ended the third quarter of 2023 with $228 million in cash in short term investments, up $25.2 million from the prior quarter. As we projected in July, we were able to return to positive free cash flow in the third quarter, as we made meaningful progress in reducing our inventory and improving our bottom line.
Speaker 4: There are more Wi-Fi 7 mesh routers and mobile hotspots to be introduced in each quarter in 2024.
There are more Wi Fi seven mesh routers and mobile hotspots to be introduced in each quarter in 2024.
Speaker 4: On the SMB side, our Pro-AB managed switches continued their year-on-year growth with more commercial-AB integrators and manufacturers adopting our easy-to-configure switches for various applications.
On the SMB side, our pro AAV managed switches continued their year on year growth with more commercial AAV integrators and manufacturers adopting our easy to configure switches for various applications.
Speaker 4: video conferencing, control room display, digital signage, concert tours, sporting events, eSports arenas, lecture halls, churches, and performance centers.
Conferencing control room displays digital signage concert tours sporting event esports arenas lecture halls churches and performance centers.
Bryan Murray: During the quarter, $26.1 million of cash was provided by operations, which reduced our total cash used by operations of the trailing 12 months to $4.4 million. We used $2 million in purchase of property equipment during the quarter, which brings our total cash used for capital expenses over the trailing 12 months to $5.2 million. We expected continuing generating positive free cash flow as we believe we will further reduce our inventory levels over the next couple of quarters and drive to our pre-pandemic carrying levels of three to four months.
Speaker 4: We recently participated for the first time in the biggest European broadcast equipment ratio, IBC in Amsterdam. Show casing our new M4350, switch with imminent support of the SMPTE 2110 broadcast protocol.
We recently participated for the first time in the biggest European broadcast equipment trade show <unk>.
<unk> in Amsterdam.
<unk>, our new M 43, 50 switch with imminent in support of the SME Pte 21, 10 broadcast protocols.
Speaker 4: We are seeing lots of enthusiasm from potential partners, equipment and manufacturers and integrators alike.
We are seeing lots of enthusiasm from potential partners equipment manufacturers and integrators alike.
Speaker 4: We are excited about this opportunity in 2024.
We are excited about this opportunity in 2024.
Speaker 4: We also recently introduced our first residential wire to router, P-O-60X. It is well received by the high-end residential pro-AB integrators. We believe we will be able to expand further into this market in 2024.
Bryan Murray: Turning to the third quarter results for our product segments, the connected home segment, which includes our industry leading Orby, Nighthawk, Nighthawk Progaming, Arbor, and Miro Brands, generating a strong revenue of $127.3 million in the quarter. Down 15.4% on a year-over-year basis, and up 29.4% sequentially. The year-over-year decline in both the retail and service provider channels is a result of a larger total addressable market and higher inventory carrying levels at our channel partners in the prior year period.
We also recently introduced our first residential wired router.
60 X. It is well received by the high end residential pro AAV integrators, we believe we will be able to expand further into this market in 2024.
Speaker 4: We are making good progress in returning our inventory turns to between 3 and 4.
We're making good progress in returning our inventory turns to between three and four.
Speaker 4: We significantly reduce our inventory and generate it meaning folk cash in Q3.
We significantly reduced our inventory and generated meaningful cash in Q3.
Speaker 4: We are confident that our inventory levels will return to normal by mid 2024.
We are confident that our inventory levels will return to normal by mid 2024.
Bryan Murray: Despite the year-of-year overall retail market, contraction, demand for a premium ORB-8 and 9 Wi-Fi mesh and 5G mobile hotspots continue to grow up double digits. Bolstered by the addition of a recently released Wi-Fi 7 products, namely the ORB-97X mesh system and the Nighthawk RS-700 router, these higher margin, high-end products with high ASPs, were an important contributor to delivering revenue and operating margins well above the high-end of our guidance, serving as another proof point of the long-term growth and profitability potential of our core strategy.
Speaker 4: We will have pet wins in the next three quarters as inventory costs go up due to the timing of the arrival in prior period.
We will have headwinds in the next three quarters as inventory costs go up due to the timing of the arrival in prior periods we.
Speaker 4: We will continue to work on better product mix, cost containment, and new product instructions to mitigate some of the negative effects. Our team is committed...
We will continue to work on better product mix cost containment and new product introductions to mitigate some of the negative effects.
Our team is committed to such efforts.
Speaker 4: Turning to our SMB business. We are seeing some of our large markets like Greater China, Germany, and Japan face macro uncertainty from geopolitical tensions, high interest rates, and sluggish economic growth.
Turning to our SMB business, we are seeing some of our large markets like greater China, Germany, and Japan phase macro uncertainty from geopolitical tensions high interest rates and sluggish economic growth.
Bryan Murray: On the SMB side, NET revenue came in at $70.5 million in the third quarter, below our expectations. The softness in SMB was due to the uncertain macroeconomic environment weighing on the SMB market, especially in geographies with stagnant or even negative GDP growth, such as Germany, Greater China, and Japan, which are our biggest markets outside of North America. Our SMB channel partners continue to compress inventory levels in the quarter and are expected to continue doing so in the quarters ahead. Despite this, we continue to see growth in our pro-AV suite of products and remain confident that they will be a long-term growth driver of our SMB business.
Speaker 4: This is impacting our SMB business. In these markets and causing our channel partners to lower the inventory carrying levels, which will limit the top line potential of SMB in the coming quarter.
This is impacting our SMB business in these markets and causing our channel partners to lower the inventory carrying levels, which will limit the top line potential of SMB in the coming quarters.
Speaker 4: Despite the inventory compression, we believe there are ample near-term hand wins. These are simple near-term hand wins and the underlying long-term growth opportunity of the business driven by our pro-AB solutions. Remains in time.
Despite the inventory compression. We believe there are ample near term headwinds. These are simple near term headwinds and the underlying long term growth opportunity of the business driven by our <unk> solutions remain intact.
Speaker 4: And with that, I'll turn it back over to Brian to comment on our opportunities and obstacles in the coming quarter and year.
And with that I'll turn it back over to Bryan to comment on all opportunities and obstacles in the coming quarter and year.
Patrick Lowe: I'll now turn the call over to Patrick for his commentary. Thank you, Brian. I would like to thank our NET gear team for delivering many great achievements in the third quarter.
Thank you Patrick.
Speaker 3: We expect to continue to experience strong, underlying demand and the premium portion of our CHP product portfolio.
We expect to continue to experience strong underlying demand in the premium portion of our CHP product portfolio.
Speaker 3: riding on the success of a Wi-Fi 7 launch well into 2024.
Riding on the success of Wi Fi seven launch well into 2024.
Speaker 3: We are also encouraged that our retail channel partners are now maintaining rather than depleting their inventory.
Patrick Lowe: We have the most successful launch of new Wi-Fi technology in our history. With our Wi-Fi 7 quad-band, OB-970X, and Nighthawk RS 700 routers, we attained an overall gross margin of 35 percent by driving an ideal combination of high margin products in CXB and SMB with fewer promotional discounts. We continue to grow the number of value-added service subscribers to 844,000, achieving 25 percent growth in service revenue to $10.6 million for the quarter.
We are also encouraged that our retail channel partners are now maintaining rather than depleting their inventories.
Speaker 3: However, we will continue to work with our FNB channel partners to optimize their inventory carrying levels during the next few quarters.
However, we will continue to work with our SMB channel partners to optimize our inventory carrying levels. During the next few quarters.
Speaker 3: Accordingly, we expect CHP to be approximately flat sequentially in line with market seasonality and SMB to be down sequentially.
Accordingly, we expect CHP to be approximately flat sequentially in line with market seasonality.
In SMB to be down sequentially.
Speaker 3: which result in overall fourth quarter net revenue being in the range of $175 million to $199 million.
Which would result in overall fourth quarter net revenue being in the range of $175 million to $190 million.
Speaker 3: As we continue to make meaningful progress in reducing our own inventory levels, we will be consuming older, higher cost inventory.
As we continue to make meaningful progress in reducing our own inventory levels, we will be consuming older higher cost inventory.
Speaker 3: We expect we will back to normal inventory levels and normal inventory costs by the middle next year.
We expect to move back to normal inventory levels are normal inventory cost by the middle of next year.
Patrick Lowe: We worked together with our retail channel partners to write five inventory levels and believe they have reached the level they would like to maintain. We continue to see growth in market demand for our Pro-AV line of SMB products. And finally, our team worked tirelessly to reduce our own inventory and generate meaningful cash for our balance sheets.
Speaker 3: Accordingly, we expect fourth quarter gap offering margin to be in the range of negative 4.4% to negative 1.4%.
Accordingly, we expect fourth quarter GAAP operating margin to be in the range of negative four 4% to negative one 4%.
Speaker 3: and non-gap operating margin to be in the range of negative 2% to positive 1%.
The non-GAAP operating margin to be in the range of negative 2% to positive 1%.
Speaker 3: Our gap tax expense is expected to be in the range of $1 million to $2 million.
Our GAAP tax expense is expected to be in the range of 1 million to $2 million.
Speaker 3: and our non-gap tax expense, its expenses are being arranged of zero to $1 million for the fourth quarter of 2023.
And our non-GAAP tax expense is expected to be in the range of zero to $1 million for the fourth quarter of 2023.
Patrick Lowe: We started shipping our first two Wi-Fi 7 products exclusively on our US Direct to Consumer Web Store in the second to last week of Q3 and market reception well exceeded our expectations. The OB-970X, our Wi-Fi 7 quad-band mesh delivered sales in the first two weeks, double that of our prior launch of the quad-band Wi-Fi 6E mesh, the OB-960X. Dunnihawk Y5-7 Router, RS-700. Instantly, became on number one studying premium router, overtaking our previous top of the line Y5-6E router, the R-AX-E500. Well, Y5-7 clients are not widely available yet. The early technology adopters have clearly given us the stand of approval.
Speaker 3: We expect we expect we will continue to generate meaningful cash in Q4 and beyond. We would now like.
We expect we expect we will continue to generate meaningful cash in Q4 and beyond.
We would now like to answer any questions from the audience.
Speaker 1: If you would like to ask a question, please press star, followed by the number one on your telephone keypad. We'll pause for a moment to compile the keypad.
Would you like to ask a question. Please press star followed by the number one on your telephone keypad.
We'll pause for a moment to compile the Q&A roster.
Speaker 1: Your first question comes from the line of Hamid Korsan from BWS Financial. Please go ahead. Your line is open.
Your first question comes from the line of handmade Khoisan from VW as financial. Please go ahead. Your line is open.
Speaker 5: Hi, so first question I had was about this inventory. It's your intended to burn off in the timing of the margin.
Hi.
First question I had was.
About this inventory, that's you're intending to burn off and the timing of of margins.
Speaker 5: How much, what is the normal gross margin that you're aiming for right now? What kind of impact are you thinking that this will have the next step?
How much what is the normal.
Yes.
Gross margin to Youre aiming for right now what kind of.
Impact are you thinking that this will have in the next two to three quarters.
Speaker 3: Yeah, so in terms of Q4, we think there's probably about 150 basis point headwind relative to Q3.
Yes. So in terms of Q4, we think theres, probably about 150 basis point headwind relative to Q3.
Patrick Lowe: As Y5-7 clients become widely available starting April or May of next year, we believe the retail market and our CHP revenue will ride the upgrade cycle, and we believe this will return our CHP business back to growth. We are readying a strong pipeline of Y5-7 introductions in 2024 across all our major product lines, all V-Mash, NETGEAR routers, NETGEAR hotspots, and SMB Insight Access Points. We are excited about these opportunities to expand our top and bottom lines in 2024 on a year-over-year basis for every quarter.
Speaker 3: which is pretty much reflected in the guidance that we provided.
Which is pretty much reflected in the guidance that we provided.
Speaker 3: It will reach its peak in the Q1 period and then taper off from there and going into Q2 in the second half of 2024.
It will reach its peak in the Q1 period.
And then taper off from there going into Q2 in the second half of 2024.
Speaker 3: And really it's about as we're aggressively working down our inventory levels. You would have seen about a $42 million sequential decrease. You know, we're stopping the inflow and the operational cost supporting the procurement of that inventory.
Really it's about as we are aggressively working down our inventory levels, you would have seen about a $42 million.
Sequential decrease.
Topping the inflow and the operational cost supporting the procurement of inventory as a percentage weigh a little bit heavier on the overall cost of the inventory.
Speaker 3: As a percentage, weigh a little bit heavier on the overall cost of the inventory.
Speaker 3: But in the sense about 150 basis points headwind in Q4 it takes up a little bit from there into Q1 and then we'll take our office report.
But as I said, it's about 150 basis point headwind in Q4.
Ticks up a little bit from there into Q1.
Patrick Lowe: During Q3, our CXB sales and marketing teams will wide work hard at work in showcasing and marketing our high-module products across all categories. MASH, routers, mobile hotspots, cable gateways, and laptop Y5 adapters to achieve the best mix of high-module products in recent years. Our SMB team is doing the same with our Pro-AB products. As a result of these efforts, we were able to achieve 35% growth margin overall. We believe, as more Y5-7 products launched in 2024, we will have room to further improve our overall growth margin in the new year.
Sure.
And then it will taper off as we progress.
Speaker 4: Yeah, our aim is using 35% as the base of our standard. And after burning all of these higher costs in the inventory, we believe that we can continue to improve on that gross margin beyond 35.
Our aim is using 35% as the base.
Outstanding.
And after burning off these higher cost inventory, we believe that we can continue to improve on that gross margin beyond 35%.
Speaker 5: Okay, and then given your commentary around inventory, I'm assuming that your aim is something around 80 to 90 million dollars of, you know, conversion to cash here. What is the timing of that inventory converting from accounts receivable to cash? Because your DSO still are pretty elevators.
Okay, and then given your commentary around inventory I'm, assuming that your aim is something around $80 million to $90 million of.
Conversion to cash or.
What is the timing of that inventory.
Converting from accounts receivable to cash because your DSO still are pretty elevated.
Speaker 3: Yeah DSOs tend to go up in the fourth quarter. I expect that trend to continue. You may recall in the past and we continue to this, we support a couple of retailers with extended payment terms leading to the holiday season.
Yes, Dsos tend to go up in the fourth quarter I would expect that trend to continue.
Patrick Lowe: We added 40,000 paid service, subscribers in Q3, reaching a count of 844,000. We grew our paid service revenue to 10.6 million. We are on pace to reach our goal of 875,000 paid service subscribers by the end of the year, further growing our service revenue, which would be a major contributor to our growth margin expansion for years to come. We will continue to add compelling features to our armor services to protect our customers' connected devices throughout their homes. We intend to add more privacy protection features in 2024, thus increasing the of our armor service to even wider audiences.
You may recall in the past and we continue to do this we support a couple of retailers with extended payment terms leading into the holiday season.
Speaker 3: So I think DSS will go up, but that's in line with what our normal experience would be. Terms of the impact in reducing inventory, I would say that we're probably gonna move in a similar direction to what you saw on Q3 in each of Q4 and Q1. The heaviest lift will happen in those two quarters.
So I think Dsos will go up but thats in line with what our normal experience would be in terms of the impact in reducing inventory.
I would say that we're probably going to move in a similar direction to what you saw in Q3 in each of Q4 in Q1, I think the heaviest lift will happened in those two quarters.
Speaker 3: and I would expect that the free cash flow implications are
And I would expect that the free cash flow implications are.
Speaker 6: slightly ahead of what we delivered in Q3 as a result of those.
So slightly ahead of what we delivered in Q3 as a result of those efforts.
Speaker 4: believe that by Q3O next year will be back to normal in generating cash equivalent to net burning.
I believe that by Q3 of next year, we'll be back to normal in generating cash equivalent to net earnings.
<unk> net earnings yet.
Patrick Lowe: With the strong reception of our Y5-7 launch and the stabilization of the size of the retail addressable market, our retail channel partners are more confident that the retail network market will stay at current levels or potentially even increase. They have demonstrated this by no longer depleting the inventory, and we will continue to bring new products to market to add to their confidence.
Speaker 5: So what I'm trying to get to is your cash balance is going to increase quite a bit. Why hasn't the company come out and start buying the spec stock at $10?
So what I'm trying to get to.
Your cash balance is going to increase quite a bit.
Why hasn't the company come out and start buying back stock at $10.
Speaker 6: So, we're often an opportunistic bias over a stock. We continue to have those conversations. As you saw, this Q3 was the first period we returned to positive free cash flow. That's obviously a consideration point, but repurchasing stock is still a conversation. We continue to...
So we're alternative opportunistic buyers of our stock we continue to have those conversations.
As you saw this Q3 was the first period, we returned to positive free cash flow, that's obviously consideration point, but.
Patrick Lowe: This quarter will bring out two new versions of our premium Nighthawk Mobile Hotspots, the M6 Pro. The first one is for the US market, with compatibility on the Verizon network. The second one is for the Japanese market, with compatibility to all major carriers in Japan.
Repurchasing stock is still a conversation we continue to have.
Speaker 5: What's a better opportunity than $10? I mean, how much further downing?
I mean, what's the what's a better opportunity than $10.
How much further down are you expecting the stock would go.
Speaker 4: Well, I mean, we definitely are looking at all these. I mean, we believe that, yeah, we will always be the opportunistic buyer in the market, especially now we are confident in generating.
Well I mean, we definitely are looking at all of these.
We believe that yes, we will always be the opportunistic buyer in the market, especially now we are confident in generating cash.
Patrick Lowe: There are more Wi-Fi 7Mash routers and mobile hotspots to be introduced in each quarter in 2024.
Okay. Thank you.
Patrick Lowe: On the SMB side, our Pro-AB managed switches continued their year-on-year growth with more commercial-AB integrators and manufacturers adopting our easy-to-configures switches for various applications. Video conferencing, control room displays, digital signage, concert tours, sporting events, eSports arenas, lecture halls, churches, and performance centers.
Sure.
Speaker 1: Your next question comes from the line of Jake Norison from Raymond James. Please go ahead. Your line is open.
Your next question comes from the line of Jay <unk> from Raymond James. Please go ahead. Your line is open.
Speaker 7: Hey, thank you for taking my questions. Firstly, can you guys touch on your early indications from holiday season? How is this similar or different from years past? And have there been any changes to your sort of promotional philosophy for this holiday season?
Hey, Thank you for taking my questions.
Firstly can you guys touch on your early indications from holiday season, how is this similar or different from years past and have there been any changes to your sort of promotional philosophy for this holiday season.
Speaker 4: As a matter of fact, I think a good education from the Prime Day 2 that Amazon put together it seems like the holiday season is in networking is pretty much like the rest of the retail market is galvanizing into the high-end as well as the low-end.
As a matter of fact.
I think a good indication.
Patrick Lowe: We recently participated for the first time in the biggest European broadcast equipment trade show, IBC in Amsterdam. Showcasing our new M4350 switch with imminent support of the SMPTE-2110 broadcast protocol. We have seen lots of enthusiasm from potential partners, equipment and manufacturers and integrators alike.
The Prime day too.
That Amazon put together it seems like.
The holiday season is in networking is pretty much like the rest of the retail market is galvanizing into the high end as well as to lower and so that's why we're seeing really positive reception to our high end products such as <unk>.
Speaker 4: So that's why we're seeing positive reception.
Speaker 4: to our high end products, such as the Wi-Fi 7 products, or even the existing OV-8 and OV-9.
Wi Fi seven products or even the existing or the 8% or benign and the high end routers suggests what we mentioned the 700, a new one and the <unk> 500, <unk> high end, but also there's quite a bit of demand on that lower cost on Wi.
Patrick Lowe: We are excited about this opportunity in 2024.
Speaker 4: and the high end routers suggest what we mentioned, the RS700 the new one and the RAP 500 or what high end.
Patrick Lowe: We also recently introduced our first residential wired router, P-O-60X. It is well received by the high-end residential Pro-AB integrators.
Speaker 4: but also this quite a bit of a demand on the low cost.
Patrick Lowe: We believe we will be able to expand further into this market in 2024. We are making good progress in returning our inventory turns to between 3 and 4. We significantly reduce our inventory and generated meaningful cash in Q3. We are confident that our inventory levels will return to normal by mid 2024.
Speaker 4: Wi-Fi products such as the adapters, such as the extenders, which are really cheap, great fix to spend.
Phy products, such as the adapters, such as the Expanders, which already achieved great fix.
Two two.
Better Wi Fi at home.
Speaker 4: We're also seeing the popularity of our lowest cost cable gateway for 199 because a lot of customers seriously hurt them.
We are also seeing the popularity of our lowest cost cable gateway for 199, because a lot of customers, we realize that by paying $15 a month rent Wi Fi from cable operators, it's much cheaper to buy a cable gateway at $200.
Speaker 4: by paying $15 a month to rent Wi-Fi from cable operators. It's much cheaper to buy a cable gateway at $200 and after 12 months is all gravy.
Patrick Lowe: We will have headwinds in the next three quarters as inventory costs go up due to the timing of the arrival in prior periods. We will continue to work on better product mix, cost containment, and new product instructions to mitigate some of the negative effects. Our team is committed to such efforts.
And after 12 months is all gravy, so I think the.
Speaker 4: So I think the holiday season will be the same in those two areas. Now certainly we're not promoting the RB9. All right, that's our premium products. But yeah, we'll strategically promote some of these lower and higher demand customer products where we have a unique position. We have less competition so that we could jam.
The holiday season will be the same in those two areas now certainly we're not promoting that are benign.
These are premium products, but yes, we will.
Patrick Lowe: Turning to our SMB business, we are seeing some of our large markets like Greater China, Germany, and Japan, face macro uncertainty from geopolitical tensions, high interest rates, and sluggish economic growth. This is impacting our SMB business in these markets and causing our channel partners to lower the inventory carrying levels, which will limit the top-line potential of SMB in the coming quarters. Despite the inventory compression, we believe there are ample near-term headwinds. These are simple near-term headwinds and the underlying long-term growth opportunity of the business driven by our pro-AB solutions.
Strategically from out some of these lower and higher demand.
Customer products, where we have a unique position with less competition. So that we can generate more margin dollars.
Speaker 7: Perfect. Thank you. And then last one for me. Can you just speak to the performance of the cyber security armor service and then funnel of activations this quarter?
Perfect. Thank you and then last one for me.
Can you just speak to the performance of the cyber security armor service and then funnel of Activations this quarter.
Okay.
Speaker 8: The Amma Cybersecurity Service is still our number one service by our subscribers.
The army.
Cyber security service still our number one.
Service.
By our subscribers.
Speaker 4: And overall, we're seeing very strong uptick and strong renewal rate among these customers. So as we say, our intention is to expand the feature set so that we have opportunity to further expand the subscriber base as the system and also potentially increase the odds.
Overall, we are seeing.
Very strong uptake and strong renewal rate among these customers. So as we say our intention is to expand the feature set.
Bryan Murray: Remains in And with that, I'll turn it back over to Brian to comment on our opportunities and obstacles in the coming quarter and year. Thank you, Patrick. We expect to continue to experience strong underlying demand in the premium portion of our CHP product portfolio, riding on the success of our Wi-Fi 7 launch well into 2024. We are also encouraged that our retail channel partners are now maintaining rather than depleting their inventories. However, we will continue to work with our SMB channel partners to optimize their inventory carrying levels during the next few quarters.
That we have opportunity to further expand the <unk> subscriber base as Tim and also potentially increase the Apple.
Speaker 4: And that's the strategy going forward and we did a lot of user survey through our app that customers number one request is to have privacy features such as you know
That's the strategy going forward and we did a lot of user survey.
Through our App.
That customers number one request is to have privacy features.
At jazz.
Speaker 4: shooting away cookies, hiding your identity, things like that. We would definitely add that in 2012.
The shooting away cookies hiding your identity and things like that we would definitely add that in 2024.
Speaker 7: What are you guys internally thinking about ever providing more disclosures around the service?
What are you guys internally thinking about ever providing more disclosures around the service.
Bryan Murray: Accordingly, we expect CHP to be approximately flat sequentially in line with market seasonality and SMB to be down sequentially, which result in overall 4th quarter net revenue being in the range of $175 million to $190 million. As we continue to make meaningful progress in reducing our own inventory levels, we will be consuming older, higher cost inventory. We expect we will back to normal inventory levels and normal inventory costs by the middle of next year.
Such as.
Speaker 4: A quarterly R2 number, you know, turn retention metrics every quarter, things like that. Oh, okay. Alright. Yeah, certainly we would look into that. I think we have said quite during the analyst's days that our Apple is pretty consistent around $50. Heaven changed two years ago. So we expect that during this phase of user acquisition, our Apple would stay the same.
Our quarterly <unk> number.
Churn retention metrics every quarter things like that okay, alright, yes, certainly we would look into that I think we have said quite during the analyst day is that our op was pretty consistent around $50 Hasnt changed.
Two years ago.
So we expect that during this phase of user acquisition.
Bryan Murray: Accordingly, we expect 4th quarter gap operating margin to be in the range of negative 4.4% to negative 1.4%. And non-gap operating margin to be in the range of negative 2% to positive 1%. Our gap tax expense is expected to be in the range of $1 million to $2 million. And our non-gap tax expense is expected to be in the range of $0 to $1 million for the 4th quarter of 2023.
Apple would stay the same and from a churn rate perspective.
Speaker 4: And from a turn-rate perspective, as we said, for those customers who have renewed.
As we said for those customers who have renewed.
Speaker 4: for after the first year, the Churn Ray is actually lower than industry out.
After the first year, the churn rate is actually lower than the industry average.
Speaker 8: our turn rate for those who have reviewed for the first year, getting the second year then from here on out, the turn rate is less than 15%. I think we talked about that last time on the Amundi...
Our churn rate for those who have renewed for the first year getting that second year, then from here on out the churn rate is less than 15%.
I think we talked about that last time on the analyst day.
Bryan Murray: We expect we will continue to generate meaningful cash in Q4M beyond.
Okay. That's very helpful. Thank you so much sure.
Unknown Executive: We would now like to answer any questions from the audience. If you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster.
Okay.
Speaker 1: We have no further questions in a queue at this time. Patrick, I'll turn the conference over to you for closing remarks.
And we have no further questions in the queue at this time, Patrick I'll turn the conference over to you for closing remarks.
Speaker 4: Thank you for joining us today. I'm very pleased by our execution this quarter where our results have demonstrated our high-end premium products and services are resilient and holding up against the broader retail market and inventory compression.
Thank you for joining us today I'm very pleased by our execution this quarter, where our results have demonstrated our high end premium products and services are resilient and holding up against the broader retail market and inventory compression headwind is.
Bryan Murray: Your first question comes from the line of Hamid Korsen from BWS Financial. Please go ahead. Your line is open. Hi, so first question I had was about this inventory that you're intending to burn off and the timing of margins. How much, what is the normal gross margin that you're aiming for right now? What kind of impact are you thinking that this will have in the next two to three quarters? Yeah, so in terms of Q4, we think there's probably about 150 basis point headwind relative to Q3, which is pretty much reflected in the guidance that we provided.
Speaker 4: is clear how commitment into innovation and investments in building a market eating portfolio of products are paying off.
It's clear our commitment to innovation and investments in building a market leading portfolio of products are paying off.
Speaker 4: While we are still facing SMB channel inventory compression in a high interest rate environment in the short term, the top and bottom line expansion potential of our premium CHP products, armor, security service, and pro-AV switches is clear.
While we are still facing SMB channel inventory compression and a high interest rate environment in the short term.
Top and bottom line expansion potential of our premium <unk> products Ahmad Security service and pro <unk> switches is clear negative.
Speaker 4: Negger's well positioned ahead of the Immanen Wi-Fi 7 upgrade cycle with two Wi-Fi 7 products already shipping and many more to come.
<unk> is well positioned ahead of the imminent Wi Fi seven upgrade cycle with two Wi Fi seven products already shipping and many more to come giving us confidence in our ability to deliver even greater revenue and margin expansion and improved predictability in our.
Bryan Murray: It will reach its peak in the Q1 period and then taper off from there going into Q2 in the second half of 2024. And really it's about as we're aggressively working down our inventory levels. You would have seen about a $42 million sequential decrease. You know, we're stopping the inflow and the operational cost supporting the procurement of that inventory as a percentage way a little bit heavier on the overall cost of the inventory. But in a sense, about 150 basis points headwind in Q4, it takes up a little bit from there into Q1 and then we'll taper off this report.
Speaker 4: giving us confidence in our ability to deliver even greater revenue and margin expense.
Speaker 4: and improved predictability in our business as we close out 2023 and into 2024. I look forward to sharing an update on our progress at our Annals Day on December 7th. Look forward to seeing you all.
Business as we close out 2023, and enter 2024 I look forward to sharing an update on our progress at our analyst day on December 7th December seven and look forward to seeing you all.
Thank you.
Speaker 1: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
Bryan Murray: Yes, I'll aim is using 35% as the base of our standard and after burning all of these higher costs inventory, we believe that we can continue to improve on that gross margin beyond 35%. Okay, and then given your commentary around inventory, I'm assuming that your aim is something around 80 to 90 million dollars of conversion to cash here. What is the timing of that inventory converting from accounts receivable to cash? Because your DSOs still are pretty elevated.
Okay.
Bryan Murray: Yeah, DSOs tend to go up in the fourth quarter, I expect that trend to continue. You may recall in the past and we continue to do this, we support a couple of retailers with extended payment terms leading to the holiday season. So I think DSOs will go up, but that's in line with what our normal experience will be. Terms of the impact in reducing inventory, I would say that we're probably going to move in a similar direction to what you saw on Q3 and each of Q4 and Q1.
Bryan Murray: The heaviest lift will happen in those two quarters, and I would expect that the free cash flow implications are slightly ahead of what we delivered in Q3 as a result of those efforts. I believe that by Q3 or next year, we'll be back to normal in generating cash equivalent in net burnings. Close net burnings, yeah. So what I'm trying to get to is your cash balance is going to increase quite a bit.
Bryan Murray: Why hasn't the company come out and start buying back stock at $10? So we're often in an opportunistic buyers of our stock, we continue to have those conversations. As you saw, this Q3 with the first period of return deposit of free cash flow, that's obviously a consideration point, but repurchasing stock is still a conversation we continue to have. What's a better opportunity in $10? I mean, how much further down are you expecting the stock to go? Well, I mean, we definitely are looking at all these. I mean, we believe that, yeah, we'll always be the opportunistic buyer in the market, especially now we are confident in generating cash. Okay, thank you.
Jake Norrison: Your next question comes from the line of Jake Norison from Raymond James. Please go ahead. Your line is open. Okay, thank you for taking my questions.
Patrick Lowe: Firstly, can you guys touch on your early indications from holiday season? How is this similar or different from years past? And have there been any changes to your sort of promotional philosophy for this holiday season? As a matter of fact, I think a good indication from the Prime Day 2 that Amazon put together. It seems like the holiday season is in networking is pretty much like the rest of the retail market is galvanizing into the high end as well as the low end.
Patrick Lowe: So that's why we see positive reception to our high-end products such as the Wi-Fi 7 products or even the existing OV-8 and OV-9 and the high-end routers such as what we mentioned, the RS-700, the new one and the R-A-C-500 O1 high-end but also there's quite a bit of demand on the low-cost Wi-Fi products such as the high-end routers such as what we mentioned, the RS-700, the new one and the R-A-C-500 O1 high-end but also there's quite a bit of demand on the lower cost Wi-Fi products such as the adapters such as the extenders which are really cheap quick fix to the Wi-Fi at home. We're also seeing the popularity of our lowest-cost cable gateway for $199 because a lot of customers we realized that by paying $15 a month to rent Wi-Fi from cable operators it's much cheaper to buy a cable gateway at $200 and after 12 months it's all gravy.
Patrick Lowe: So I think the holiday season will be the same in those two areas. Now certainly we're not promoting the OV-9, all right? That's our premium products but yeah, we'll strategically promote some of these lower-end higher-end routers. And customer products where we have a unique position, we have less competition so that we could generate more margin dollars. Perfect.
Unknown Executive: Thank you.
Patrick Lowe: And then last one for me, can you just speak to the performance of the Cybersecurity Armor Service and then funnel of activations this quarter? The Armor Cybersecurity Service is still our number one service by our subscribers. And overall we're seeing very strong uptick and strong renewal rate among these customers. So as we say, our intention is to expand the feature set so that we have opportunity to further expand the subscriber base and also potentially increase the output.
Patrick Lowe: And that's the strategy to go forward and we did a lot of user survey through our app. That customer's number one request is to have privacy features such as shooting away cookies, hiding your identity, things like that. We would definitely add that in 2024.
Jake Norrison: Are you guys internally thinking about ever providing more disclosures around the service? Oh, such as a quarterly R2 number, you know, turn retention metrics every quarter, things like that. Oh, okay. All right. Yeah, certainly. We would look into that. I think we have said quite during the analyst's day that our Apple is pretty consistent around $50. Hasn't changed since two years ago. So we expect that during this phase of user acquisition, our Apple would stay the same.
Jake Norrison: And from a turn rate perspective, as we said, for those customers who have renewed. For the first year, the churn ray is actually lower than industry average. Our churn ray for those who have reviewed for the first year, getting the second year then from here on out, the churn ray is less than 15%. I think we talked about that last time on the MN State. Okay, that's very helpful.
Unknown Executive: Thank you so much. Sure.
Unknown Executive: We have no further questions in a queue at this time.
Patrick Lowe: Patrick, I'll turn the conference over to you for closing remarks. Thank you for joining us today. I'm very pleased by our execution this quarter, where our results have demonstrated our high end premium products and services are resilient and holding up against the broader retail market and inventory compression. It's clear how commitment to innovation and investments in building a market eating portfolio of products are paying off while we're still facing SMB channel inventory compression and a high interest rate environment in the short term.
Patrick Lowe: The top and bottom line extension potential of a premium CCP products, armor, security service and pro AV switches is clear. NETGEAR's well positioned ahead of the imminent Wi-Fi 7 upgrade cycle with two Wi-Fi 7 products already shipping and many more to come. Giving us confidence in our ability to deliver even greater revenue and margin expansion and improved predictability in our business as we close out 2023 and into 2024.
Patrick Lowe: I look forward to sharing an update on our progress at our analyst day on December 7th. I look forward to seeing you all. Thank you.
Unknown Executive: This concludes today's conference call. Thank you for your participation and you may now disconnect.