Ladies and gentlemen, thank you for standing by, and welcome to NETGEAR's Fourth Quarter 2021 Conference Call. [Operator Instructions]. I would now like to turn the conference over to Erik Bylin. Please go ahead, sir. Thank you, operator. Good afternoon, and welcome to NETGEAR's Fourth Quarter and Full Year 2021 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO; Mr. Bryan Murray, CFO. The format of the call will start with a review of the financials for the fourth quarter and full year provided by Bryan, followed by details and commentary on the business provided by Patrick, and we'll finish with first quarter of 2022 guidance provided by Bryan. We will then have time for any questions. If you have not received a copy of today's release, please visit NETGEAR's Investor Relations website at www.netgear.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, operating margins, tax rates, expenses and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these 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. At this time, I would now like to turn the call over to Mr. Bryan Murray.

Thank you, Erik, and thank you, everyone, for joining today's call. Net revenue for the quarter ended December 31, 2021, was $251.2 million, down 31.6% year-over-year and within our guidance range. We were able to achieve non-GAAP operating margin of 2.7%, above the midpoint of our guidance range despite the difficult global supply chain conditions that persisted in the quarter. Although demand for our higher-margin SMB products remains quite strong, we were limited in our ability to meet the demand due to broad supply chain challenges exacerbated by a temporary factory closure caused by the Omicron variant. On the CHP side, I'm pleased to share that our planned channel inventory optimization efforts were materially completed in the fourth quarter. For the full year of 2021, NETGEAR net revenues were $1.17 billion, down 6.9% compared to the year ended December 31, 2020. Our efforts in the past year to refocus our products towards the higher average selling price premium segments of the market and momentum in both ProAV and our SMB wireless offerings helped deliver revenue at 17% above pre-pandemic levels. In addition, the CHP consumer WiFi market seems to have stabilized at 15% above 2019 levels. As we execute on our strategy to shift our portion of the U.S. consumer WiFi market towards the premium end, we remain confident that the trends we discussed at our recent Analyst Day will continue to accelerate and expand the available market opportunity for NETGEAR. In the fourth quarter, we generated non-GAAP operating income of $6.9 million. This translated into a non-GAAP operating margin of 2.7%, which is 830 basis points below the prior year period. As a reminder, in the prior year period, we were able to pass along considerable leverage to the bottom line due to the surge in demand, including opportunistic demand from our service provider partners directly tied to the pandemic. However, as previously mentioned, supply constraints hindered our higher-margin SMB business in Q4 2021 from reaching its full top line and bottom line potential in the quarter due to component and material scarcity, increased freight costs and the added challenge of a temporary factory closure due to the Omicron variant. On the CHP side, we executed on our plan to optimize our retail channel partners' inventory positions, which added further pressure on our ability to leverage the top line. Additionally, as part of our core strategy to shift away from the lower end of the market, we promoted less. Although our full year SMB revenue outperformed our expectations at the beginning of the year, it was not enough to offset the lost top line leverage from our CHP business, where we saw the market settle in at about 15% larger than pre-pandemic levels. And although our team adjusted as quickly as possible, the challenging supply chain environment throughout the year, compounded by elevated freight costs and higher component costs, impacted our bottom line, with full year non-GAAP operating income of $95.1 million and a non-GAAP operating margin of 8.1%, below the low end of our annual guidance provided at our 2020 Analyst Day. For the fourth quarter of 2021, net revenue for the Americas was $159.4 million, a decline of 38.6% year-over-year and down 18.3% on a sequential basis. EMEA net revenue was $50 million, which is down 25.8% year-over-year and down 12.1% quarter-over-quarter. Our APAC net revenue was $41.7 million, which is up 4.4% from the prior year comparable quarter and up 9.6% sequentially. All three regions saw growth year-over-year in our SMB business. However, in the Americas and EMEA, it was not enough to offset the declines in CHP for both the retail and service provider channels, in part, due to our efforts to optimize channel partner inventory positions. For the fourth quarter of 2021, we shipped a total of approximately 2.7 million units, including 2 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 900,000 units for the fourth quarter of 2021. The net revenue split between home and business products was about 69% and 31%, respectively. The net revenue split between wireless and wired products was about 68% and 32%, respectively. Products introduced in the last 15 months constituted about 33% of our fourth quarter shipments, while products introduced in the last 12 months contributed about 22% of our fourth quarter shipments. From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today. Non-GAAP gross margin in the fourth quarter of 2021 was 30%, which is down 60 basis points as compared to 30.6% in the prior year comparable quarter and down 10 basis points compared to 30.1% in the third quarter of 2021. Total Q4 non-GAAP operating expenses came in at $68.4 million, which is down 5% year-over-year and up 0.8% sequentially. Our headcount was 771 as of the end of the quarter, down from 780 in Q3. We continue to manage our headcount, but we'll add resources and invest in areas that we believe will deliver future growth, such as in software development and apps and services. Our non-GAAP R&D expense for the fourth quarter was 8.7% of net revenue as compared to 6% of net revenue in the prior year comparable period and 7.6% of net revenue in the third quarter of 2021. To continue our technology and subscription service leadership, we are committed to continued investment in R&D. Our non-GAAP tax rate was negative 16.9% in the fourth quarter of 2021. The current quarter tax rate benefited from revisions to certain estimates that impact the full year tax expense. Looking at the bottom line for Q4, we reported non-GAAP net income of $8.1 million and non-GAAP diluted EPS of $0.27. Turning to the balance sheet. We ended the fourth quarter of 2021 with $271.5 million in cash and short-term investments, down $20.7 million from the prior quarter. During the quarter, $3.9 million of cash was provided by operations, which brings our total cash used by operations over the trailing 12 months to $4.6 million. We used $2.9 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $9.9 million. In Q4, we spent $17.5 million to repurchase approximately 539,000 shares of NETGEAR common stock at an average price of $32.52 per share. Since the start of our repurchase activity in Q4 2013, we have spent $627.5 million to repurchase 17.8 million shares. We are committed to returning value to our shareholders and plan to continue to opportunistically repurchase shares in future quarters. Our fully diluted share count is approximately 29.8 million shares as of the end of the fourth quarter. Now turning to the fourth quarter results for our product segments. The Connected Home segment, which includes our industry-leading Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenue of $174.2 million during the quarter, which is down 41.2% on a year-over-year basis and down 16.5% sequentially. We experienced a year-over-year decline in both retail and service provider channels, with the prior year comparative period being boosted by heightened consumer demand and response to the pandemic, along with stocking a depleted channel to meet heightened demand. Additionally, we took actions to optimize our retail channel partners' inventory levels in the current year period to align them to our current demand expectations. Our strategy to focus on the premium higher-margin products with higher service attach rates positions NETGEAR for long-term profitable growth, and we are seeing exceptional demand for these premium products. In concert with our goal to shift our product mix towards the premium segment, we pushed fewer promotions than planned for our lower-priced products in the fourth quarter. Consequently, our share in U.S. consumer WiFi declined 2 percentage points sequentially to 44%. Our service provider business performed largely in line with expectations. The SMB segment continued to execute in the face of supply challenges and generated net revenue of $77 million for the fourth quarter of 2021, which is up 8.6% on a year-over-year basis and down 5.6% sequentially. Driven by supply chain challenges, we increased spending in air freight to compensate for shipping and production delays, offsetting the higher margin contribution from this business. We continue to see exceptional momentum for our managed switch products driven by further inroads to develop the ProAV market. We also continue to see strong demand for our SMB wireless offerings led by our WiFi 6 cloud managed mesh wireless access points, thanks to increased adoption of the hybrid remote work environment and increases in new businesses being established. Encouragingly, our market share in switches sold through the U.S. retail channel remained strong at 52% in Q4. I'll now turn the call over to Patrick for his commentary. After which, I will provide guidance for the first quarter of 2022.

Thank you, Bryan. As we enter the third year of this pandemic, it is undeniable that 2021 was a challenging year and a continuation of unprecedented times. In order to adapt to this new environment, homeowners and businesses need the ability to quickly transition from in-person to virtual interaction and vice versa, making reliable, high-speed WiFi an indispensable utility rather than a nice to have. Our team has worked hard to overcome significant supply challenges to deliver revenue of $1.17 billion for the full year, a 6.9% decrease year-over-year. Although our typically higher-margin SMB business helped to partially offset the leverage cost from lower revenue on the CHP side, we were impacted by a number of headwinds, including elevated component and freight costs and a factory closure to end the year with non-GAAP operating profit of $95.1 million, a decrease of 14.1% year-over-year. As we shared in our recent Analyst Day, it is clear that hybrid remote work is here to stay, and along with it, homeowners' requirements for better WiFi coverage, connection speed and bandwidth capability. With each connected device added to the household and each upgrade of an older connected device, the ordinary WiFi router becomes less and less equipped to handle bandwidth-intensive applications like streaming, video conferencing, and virtual reality gaming. This mix of WiFi mesh systems is much more appealing than a simple router for someone looking to improve their connected home experience. Customers who are focused on a best-in-class premium experience and unparalleled WiFi performance are a rapidly growing segment of the market, and we have retooled our portfolio of products and services accordingly to capture and grow our share in this premium segment, which we saw expand sequentially in the fourth quarter to 38% of the total growing WiFi mesh market. As the leader of the premium WiFi retail market, NETGEAR has focused unceasingly on bringing cutting-edge high-performance products and services to market. Our strategy of focusing on the premium segment of the market is paying off, and we are seeing strong uptick of our recently released Orbi Quad-band Mesh WiFi 6E System, the world's first quad-band WiFi 6 mesh system, the Orbi 9 that makes the newly available 6 gigahertz WiFi channel accessible to homeowners. We believe this and the rest of our portfolio of products at the super premium portion of the market, where systems exceed the $1,000 mark, with continued strong growth in units sold, average selling prices, profitability, and service attach rates, as well as expanding the market. The Orbi Quad-band Mesh WiFi 6E System, Orbi 9, is already the top seller on our online direct stores. To deliver an uncompromised experience from start to finish, we have made our online store shopping experience a key part of our strategy by offering an improved curated premium experience with features such as rich content, product selectors, a live check concierge service, unique offers, and an installation service. Especially when purchasing directly from netgear.com, buyers in the premium segment of the market display impressive brand loyalty, are much more likely to subscribe to one of our value-added services, and spend more per order, increasing our profitability. We plan to expand our sales through netgear.com stores through 2022 and beyond. We continue to innovate to deliver the best products to add value to customers. I'm excited to share that industry analysts and experts at this year's CES awards named five of our offerings as 2022 Innovation Award honorees, further cementing our leadership in the premium segment of the market. Our recently released Orbi Quad-band Mesh WiFi 6E System was the first of the honorees. The remaining awards went to our newly released Orbi 5G WiFi 6 Mesh System, Orbi Pro WiFi 6 Mesh System, Nighthawk Tri-Band WiFi 6E Router and Insight Business VPN service, which clearly demonstrates excellence across our portfolio of products. Now let me share more on these exciting new product directions. On the CHP side, our reach in the premium WiFi mesh systems market continued to strengthen, anchored by tri-band and quad-band WiFi 6 mesh offerings. Even though we saw reduced market share on the lower end, our sales in the premium category were up 11% sequentially. We will continue to expand this premium segment by introducing new differentiated products throughout 2022 to meet the demands of these ultra-connected homes. This market-leading performance is not by accident. I am proud of our team for their success in pivoting to meet the needs of this premium market, as we rounded out our high-performance Orbi product line this quarter with the addition of the Orbi 5G Tri-Band WiFi 6 Mesh System. This system combines widely available superfast 5G mobile connectivity with our award-winning Orbi WiFi 6 Mesh System to enable blazing fast speeds and unsurpassed performance with ultra-low latency and no downtime. Available now on netgear.com at a retail price of about $1,100, this product comes with a free 30-day trial period of NETGEAR Armor, our advanced multilayer cybersecurity solution and a key part of our strategy to grow our paid subscriber base. Our relentless focus on innovation to provide best-in-class offerings for our valued customers has been and continues to be a key driver in the acquisition of our paid subscribers. With the proliferation of devices and the transformation of homes into essentially branch offices, securing these new home office networks is paramount to services like NETGEAR Armor becoming indispensable. NETGEAR closed out the year with 584,000 subscribers, surpassing our end-of-year projections of 575,000 subscribers for year-over-year growth of 33.6%. With the growth of the ultra-premium segment and its higher attach rate, we remain positive about the long-term profitability impact on our business and our ability to reach 750,000 subscribers by the end of the current year. Turning to our SMB business. The team delivered full year growth of 27% over 2020 and 9.5% over pre-pandemic levels using 2019 as a reference point despite continuous supply constraints. New businesses are forming faster than ever at the highest level since 2004 in the United States. New and reopening businesses want to upgrade their technology to enhance productivity, security, and performance. This momentum drove strong demand for our WiFi 6 cloud managed mesh wireless access points. Also, the investment in the ProAV business is paying dividends with continued momentum of sales of our managed switches. Although we entered the market just a few years ago, we have made substantial progress, thanks to the strategic development of our family of managed Ethernet switch products specifically tailored to the unique needs of the AV industry. The industry transition from analog to digital AV over IP is, without a doubt, accelerating, use cases abound for an endless list of video and audio-rich applications whether for next-generation recording studios, robot-assisted surgical procedures, ultra-high-definition video walls, digital signage, home automation and AV entertainment, e-gaming lounges, digital classrooms, and places of worship, data visualization for sporting and other events and more. In the fourth quarter, we added a significant number of ProAV OEM partnerships and garnered marquee wins with the largest AV integrators worldwide. Finally, as mentioned last quarter, we expanded our service offerings for SMB business with the NETGEAR Insight Business VPN, which also received recognition at CES. Insight Business VPN connects branch offices and work-from-home employees to the corporate WiFi network through an encrypted, trusted and persistent VPN connection. The Insight Business VPN makes cloud-enabled network control of managed switches, wireless access points, and routers, effortless and seamless. All in an attractive price point of $9.99 per device per year. And with that, I'll turn it back over to Bryan to comment on our opportunities and obstacles in the coming quarter and year.

Thank you, Patrick. U.S. consumer WiFi market seems to have stabilized and with the material efforts to optimize our retail channel partners' inventory levels in Q4 2021 completed, we expect the normal decline of the first quarter of CHP revenue from the retail channels versus the fourth quarter of the prior year to be muted. Normal seasonality of the retail portion of the CHP business is expected to resume from the second quarter onwards. Due to the lumpy nature of our service provider business, we expect first quarter revenue from this channel will be approximately $20 million. In addition, revenue for our SMB business will continue to face supply constraints, limiting our ability to achieve its full top line potential. Together, these factors lead us to expect our first quarter net revenue to be in the range of $225 million to $240 million. We continue to face a number of near-term headwinds, starting with elongated transit times due to numerous disruptions on the logistics front. We are also expecting that sea transportation costs will remain significantly elevated through the first half of 2022, and we will continue to spend on air transportation to maximize supply of our SMB products. Additionally, the impact of higher component costs will take full effect. We are selectively increasing prices to offset higher sea transportation and component costs over time starting in the first quarter, but the margin benefit of these price increases will increase as the year progresses. As a result of these factors, plus reduced leverage from our top line, our GAAP operating margin in the first quarter is expected to be in the range of negative 1.5% to negative 0.5%. And non-GAAP operating margin is expected to be in the range of 1% to 2%. Our GAAP tax rate is expected to be approximately negative 29%, and our non-GAAP tax rate is expected to be 29% for the first quarter of 2022. We remain hopeful that sea transportation costs will ease and our SMB supply will improve in the second half of the year, thus creating a much more favorable environment for us in our top and bottom lines. While we are confident in our ability to provide guidance at this time, we do see with a caveat that considerable uncertainty remains in the market due to the COVID-19 pandemic and supply chain conditions continuing to remain challenged. Should unforeseen events occur, in particular challenges related to closure of our manufacturing partner operations, increased transportation delays into any of our regional distribution centers, or greater-than-expected freight or component costs, our actual results could differ from the forward-going guidance. We would now like to answer any questions from the audience.

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

I just wanted to start on CHP. Nice to see the end of optimizing channel inventory, and market stabilizing is definitely a positive. Today, you're announcing the attempt to raise prices there, and I guess, in light of Groundhog Day, just wanted to ask a question to make -- how to think about making sure we don't end up in the same situation, where we need to optimize channel inventory again a year from now or so due to demand decline on pricing increases. So I guess the question would be maybe for Patrick, the process that you went through to get confident on pulling the trigger on the price hike. And Bryan, if you could add any color on the magnitude and impact to the model, that would be helpful.

Yes. I mean, certainly, we look at the market and see what are the products we believe that we would be able to demand more price power, primarily in the products that we own unique technology with much less competition. For example, like in the cable products, so very few competition in cable gateways, which you have to combine the DOCSIS cable technology with the latest WiFi 6 technology. That's one example. The other example, the 5G for the hotspots, where not a lot of competition over there, especially on the premium end. So we are pretty confident that with those price increases, that will help us to offset some of the component costs as well as transportation cost. And we select the increase in the prices in anticipation of what the market take-up rate will be. So I don't think we're going to be in a situation where we have excess inventory in the market because the products we pick are less price sensitive. And secondly, the other things that we're doing is actually introducing newer products to replace older products. And when we introduced the newer products, the old products are already out of the inventory position in the channel and the newer products actually will carry both at slightly higher prices and with high margin. So that's what we are doing. So you expect us to refresh quite a bit of our product lines throughout the year. So that's the strategy going forward to make sure that we don't have another requirement to do channel inventory optimization. Now to be exact, the last time, we have to go through the channel optimization for inventories because it was hard for us to read, even for the channel partners, how the COVID is going to affect the purchase behavior of consumers. So at its height, it's about 50% about pre-pandemic level, and it's very difficult to predict how it's going to settle in. Is it 15% or 20% or 25%? So it's kind of a 'once in a lifetime' black swan event, and we don't believe that it will repeat that easily. So Bryan?

Yes. I think, Patrick, you covered most of it. I would say in terms of the magnitude and the impact that we're projecting, it's probably in that low to mid-single digit in percentage terms if you're comparing to 2021. There are certainly some segments of the market, obviously not a focal point of a lot of our price increases, that we will see some loss of share, but we're okay with that. As we've been saying consistently, we're focused on moving towards the premium end, which should be a lot less price sensitive.

Okay. That's helpful. And Bryan, maybe just as a quick follow-up, you gave a lot of really good detail at the Analyst Day on how to think about 2022 from the full year from a quarterly perspective, both revenue and margins. Just wondering now with Q1 guidance out and a little bit more visibility, is there anything that you would update as we think about our models for the cadence throughout 2022 for the full year or even on a quarterly basis?

Yes. I think we maintain the guidance that we put out there for the full year. We're still thinking that's the path forward here. I think with regards to the Q1 guidance, we're certainly facing a little bit of a lumpy service provider top line impact, which we expect in Q2 that we will see that improve dramatically. I would expect service provider roughly to double in the second quarter. So there alone, you can see the impact on our top line we leverage just from that. Seasonality, as I said, we expect to return to normal seasonality for the retail portion of CHP. Seasonality for the second quarter can range anywhere from flat to up 5%, 6% as we saw in the 2019 and 2018 period. I think we'll probably see it up towards the top end of that range as our price increases start to take a bigger impact. But again, we limit our full year guidance and believe that the second half will paint a much more optimistic environment for us to achieve a higher margin.

Your next question comes from the line of Jeffrey Rand with Deutsche Bank.

On the ProAV side, do you think there is pent-up demand that has been delayed during the pandemic? And should this drive stronger growth going forward? And what are some of the dynamics you're seeing in this market right now?

Yes. The COVID actually has moved the ProAV market forward. For example, the digital classroom as well as the digitization of the events and the places of worship, that really opened up a significant amount of ProAV business and recording studios. As you probably know, the popularity of a lot of streaming content on various platforms, they can't afford the traditional studio, which is too expensive to set up. But with the ProAV equipment, with the newer digital IP camera, they can do it cheaply, and that's also propelling the ProAV. And with ultra-high-definition LED display panels coming up, you've seen a lot of signages as well as video walls being replaced with ProAV driven. So I think the COVID actually definitely pushed along the ProAV market. And it is completely new. We don't even know where it would take us. Together with the digitization of the recording camera, we've actually seen a lot of sporting events making use of these cameras to do umpiring using our ProAV switches to drive it. So we don't even know where is the limit because we are only limited by the ability to supply. Our order books is long, and we just supply as much as we can from the factory output and from the chips that we can get a hand on. So I think there's still a lot of runway and there will be new applications popping up every day. And we're seeing a lot of AV equipment manufacturers moving into digital, into IP.

Great. And how are you guys thinking about operating expenses trending through the year as more traditional business travel, hopefully, returns, but you potentially have less COVID safety costs?

It is completely unpredictable because just when we think that we're done with Delta, we have Omicron. And just when we think the Omicron peak is reached, then we were talking about the Omicron subvariant. For now, we and our customers and our suppliers are all erring on the safety side, avoiding face-to-face meetings. And we don't know when that's going to end. I don't have a crystal ball. But clearly, I don't think in the first half of this year, we will resume any business travel at all and probably will gradually restart in the second half if we don't see another big wave of Omicron-like variant.

[Operator Instructions]. And your next question comes from the line of Hamed Khorsand with BWS Financial.

The first question I had was just in regards to inventory. If the channel is going down, why are your inventory balances still going up? And is this all finished goods product?

Yes, you're right. All of our inventory is finished with some very, very few exceptions. We have procured some components to really kind of buffer a bit given the environment that we're in. But the vast majority is finished goods. The reason it's going up is transit times have elongated. We've been saying this pretty consistently for at least the past year, but I would say that they've actually probably degraded a bit even in the fourth quarter. I think the average transit time we saw for goods going from Southeast Asia to the West Coast of the U.S., which is where we have our U.S. distribution center, is averaging about 70 days. So right off the bat, we're having to own more than 2 months of inventory that's sitting out on the water. We do want to compress that a bit, but it's really going to be driven on by when we can see those transit times return to something closer to the norm. I don't know when that will be, but bear in mind that the pre-pandemic transit times were about 28 days to go that same route, so significantly elevated.

And what's going to be the method of just closing down some of this inventory and selling it through? Is it going to be the retail channel? Or is it going to be just through netgear.com?

Our inventory? I mean our inventory is going to go through all channels, retail and service, right, on the CHP side and direct to consumer. But in terms of compressing it down, we'll be just kind of getting the ability of production and timing of when that goes -- factory to arrive in time for the matched demand will compress with transit times hopefully coming down from the 70 days that we see today.

And the last question was on the paid subscribers going up by about 32,000 from the September quarter. Was that predominantly from the hardware being sold off of netgear.com? Or are you gaining traction from the retail channel?

We're having both. I mean, clearly, on an attach rate basis, that means per 100 units sold is stronger attach rate on netgear.com. But on the other channels, we're also seeing quite a good uptick of net adds of paid subscribers.

There are no further questions at this time. I'll turn the call back to CEO, Patrick Lo for closing remarks.

Thank you. Thank you for joining us today. Although we encountered a number of headwinds in the past year, our relentless innovation and first-to-market strategy clearly differentiate us from our competition. We are clearly making inroads in our long-term strategy of leading the premium WiFi movement in the consumer networking market, expanding our paid service subscriber base and helping businesses navigate the analog to digital AV over IP transition. Our robust portfolio positions us well to continue our profitable growth in the rapidly expanding premium WiFi market segment and capitalize on the ongoing transformation to hybrid work environments. And I'll be talking to you in our next earnings call in April to report more on the progress on all these fronts and looking forward to a very productive year. Thank you.

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