NETGEAR, Inc. Stock

Thank you. 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 1 on your push button phone. I would now like to turn the conference.

Eric Bilem. Please go ahead, sir. Thank you, operator. Good afternoon and welcome to Netgear's second quarter of 2026 financial results conference call. Joining us from the company are Mr. C.J. Probert, CEO, and Mr. Brian Murray, CFO. The format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the second quarter and guidance for the third quarter provided by Brian. We'll then have time for any questions. If you have not received a copy of today's release, please visit Netgear's Investor Relations website. www.netgear.com.

Before we begin the formal remarks, we advise you that today's conference call contains forward looking statements. For the The next looking statements include statements regarding expected revenue, gross and operating margins. expenses, tax expense, 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 findings with the SEC, including the most recent Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and Netgear undertakes no obligation to update these statements as a result of new information or future events, except as required by law. In addition, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our investor relations website.

At this time, I would now like to turn the call over to CJ. Thanks, Eric, and thank you all for joining our call. We're pleased to share that we delivered another solid quarter that demonstrates the continued momentum behind our transformation to being a software differentiated enterprise led business that's delivering profitable growth and expanding long term shareholder value. Today I'll cover two topics, a recap of our Q2 performance and an update on our transformation. Let's jump in. Q2 showed disciplined execution, strong profitability, and clear progress on the strategic priorities we outlined at the start of the year as we delivered top and bottom line performance above the high end of our guidance range. Enterprise delivered another strong quarter with revenue increasing 7.7 percent year-over-year, which was led by strong growth across the Americas and EMEA. Enterprise now represents more than half of Netgear's total revenue and approximately 69% of our gross profit, demonstrating the increasingly important role this business plays in our growth and financial performance.

Just as important, Enterprise continues to deliver significant profitability expansion. Non-GAAP gross margin reached an all-time high of 54.1%, while non-GAAP contribution margin increased 660 basis points year-over-year to 25.9%, its highest level in more than seven years. Although our ongoing go-to-market transformation in APAC moderated our growth during the quarter, we're addressing those headwinds and believe the changes underway can position APAC to become our fastest growing region. With Enterprise now representing the majority of Netgear's revenue and an even greater share of our gross profit, and with that contribution expected to continue growing, we've elected to change Netgear's Standard Industrial Classification Code, or SIC code, to align with our competition in this enterprise segment. This change takes effect today, and going forward, we should screen better to potential investors by identifying Netgear as the company we are today, an enterprise solutions company. In consumer, we continue to harvest our service provider business and optimize the core consumer business for growth profit given the challenging supply environment. Despite these top of funnel constraints in consumer, we grew our overall annual recurring revenue to $42 million, representing a 15% percent year over year increase.

The stronger mix of business and margin expansion from enterprise combined with the disciplined execution in our consumer business allowed us to move from a non-GAAP operating loss last year to operating profit in Q2 of this year while significantly expanding our EPS as well. as well. Brian will cover the Q2 results in more detail, so I'll conclude my commentary on Q2 by thanking the Netgear Enterprise and consumer teams for their relentless focus on delivering against our commitments. In addition to the quarterly results, we're thrilled with the tangible progress of our longer-term transformation. When I joined Netgear two and a half years ago, it was very apparent that we had an opportunity to unlock significant shareholder value by bringing a stronger focus to our enterprise business. That led to a substantial reorganization and a significant influx of enterprise talent, starting with a new business unit leader, followed by new leaders for most functional disciplines. In transforming our team, a core part of our talent strategy has been to in-source software development while leveraging AI. This effort was accelerated for our enterprise business by three strategic acquisitions, BOG, Xeom, and the source code that had previously been outsourced for our line of managed switches.

I'm thrilled to report that this business unit now has over 200 badge software engineers, and we've almost completely reduced our reliance on outside contractors. This brings with it increased alignment, speed, and quality to our software delivery. AI has been a significant enabler for us, and our team is ahead of the curve. on adoption because we're building this full stack software development capability from scratch, and we're not constrained by legacy development processes. AI landed as an accelerant at the perfect time to help fuel our transformation. Today, the team, organization, intellectual property, capabilities, roadmap, and delivery are strong and have little resemblance to where we were a few short years ago. I'm more confident than ever that This will enable us to better serve an even broader set of customers in the future. The impact of this transformation is evident in the products and services we're now delivering to our customers.

In Q2, we announced the launch of Align, a cloud-managed platform designed to consolidate AV infrastructure services, host applications such as our network management platform Engage, and serve as the open layer for third-party AV apps. Mine was announced at Infocomm, the world's largest AV industry trade show, where it won best of show among its seven industry awards, while also receiving an incredibly positive reception from partners and end customers. We're already working with several third parties to integrate their applications into our Align platform. And given that the cloud management capabilities will require an Insight license, Align will catalyze our recurring revenue business within the enterprise segment. Speaking of insight, we also announced several significant improvements to this platform in the quarter. Our newly designed experience dramatically simplifies the user interface, workflows, and onboarding, revamps our licensing model to drive higher recurring revenue, implements an initial integration of our Xeom security services and establishes the framework for AI powered network operations and AI defined networking. This is a significant milestone in expanding the value we deliver to customers and a key driver of future recurring revenue growth opportunities.

Align and Insight are excellent examples of the transformation underway at NIC year. They demonstrate how we are expanding beyond networking hardware to deliver a broader software and services platform that increases customer value, differentiates our solutions and supports our objective of building a faster growing, higher margin enterprise business. The transformation of our partner and customer ecosystems is gaining momentum as well. In Q2, we surpassed 600 pro AV manufacturing partners, including several new critical leading brands from the broadcast vertical. Our partner program is in full swing, and we now have added over 125 certified Apex partners, our highest tier of partnership that requires a significant investment in Netgear. Our support and services team landed big new customers like National Geographic, Shopify, and Salesforce. We also made great progress in the education vertical with wins in 86 school districts for the 2026 E-Rate season, more than half of which are new to NIC year this year.

As noted in my Q2 recap, all of these accomplishments are favorably impacting the financial results of our enterprise business. We're making high ROI investments in the business while at the same time significantly increasing gross and contribution margin. As we mentioned previously, we implemented a small price increase in Q2. And we're now evaluating more pricing actions in the second half of the year, given the pricing leverage we have, and to ensure the margins for this business remain robust and reflect the value we're delivering to customers. In addition, we now have the foundation in place to grow our higher margin non-device revenue, and we look forward to scaling contributions from insight, security, support, and professional services over the quarters to come. We're just at the beginning of unlocking growth opportunities of this business, and as we shared it in our investor day, the multi-billion dollar adjustable markets are huge, and many of the incumbents are focused on the AI data center build out, opening the door to additional share gains for Netgear. We don't see this changing, and for enterprise, the incremental cost of supply caused by the AI build out is far out by the benefits of this competitive dynamic.

While we're very proud of our progress, I'm even more excited about our go-forward plans. We will continue to enhance our team and the corporate governance overseeing the company. In that regard, today we welcome Douglas Murray to our Board of Directors. Douglas has spent over 30 years in enterprise networking and security, at companies like Juniper Networks and Xtreme Networks. More recently, he was CEO of Big Switch Networks that sold to Arista in 2020 and Vaultix that sold to Cisco in 2023. He's currently CEO of Aavec, which is an AI driven IT management software company that serves many of the same customers and partners that we target. So we're excited to see Douglas's impacts in the years to come.

As I noted earlier, APAC has been a headwind to growth in the first half of this year, while this region has the potential to be our fastest growing market for our enterprise business. I'm thrilled to report we've hired Surajit Sen to lead the transformation of this region for next year. Surajit is a seasoned APAC member. go-to-market leader who has spent over three decades in the region, most recently in long tenured executive roles for Zscaler, Dell, and NetApp. The opportunities in this region are significant, and we are now well positioned to take advantage of them. Big welcome to both Douglas and Surajit. Shifting to our consumer business, I am very proud of the delivery and execution of this team. Similar to our enterprise business, we have a world-class leadership team, we have in-source software development up and down the stack, and shifted away from reliance on outside partners, enabling us to drive a step change in innovation for this product portfolio.

The consumer market is obviously dynamic given the regulatory changes and supply chain. chain challenges. We believe these regulatory changes have the potential to create a significant tailwind for us in the medium term. Given of our primary competitors in this category, Eero continues to be the only other one to have received conditional approval from the Department of War to launch future consumer products. Additionally, we've done a great job managing the supply chain nuances in a difficult environment and we will continue to pull levers to protect the margin profile of this business going forward. Given the mid to long-term potential of this market and our leadership position, we're making prudent decisions to preserve the value creation optionality associated with our core consumer business, and we expect to remain well-positioned to capture the expanded market potential should the opportunity arise. In closing, transforming the culture and products of a company is not easy, but the team and I are now seeing the fruit of our efforts, and it's most notably showing itself in the pipeline of future opportunities. We're doubling down on the profitable growth driving the enterprise business while preserving optionality value creation associated with the consumer business the first half of 2026 reinforced that the transformation is delivering on our goal to execute on near-term imperatives while building a lean scalable organization we remain fully committed to the mid and long-term targets we shared at our investor day and will continue to make decisions that prioritize long-term shareholder value creation while recognizing that achieving our short-term goals is an important part of creating value.

We could not be more confident in the team or in the trajectory we're on, and we look forward to sharing further progress with you in the quarters ahead. With that, I'll turn it over to Brian.

Thank you, CJ, and thank you everyone for joining today's call. led once again by strength in our Pro AV Managed Switch products within our Enterprise segment, Enabled by continued progress in the second phase of our transformation, we deliver both revenue and non-GAAP operating margin above the high end of our guidance range. This reflects our team's strong execution in the face of supply headwinds, incremental benefit from service provider, and the outcomes of the memory cost mitigation efforts that are ongoing. For the quarter ended June 28, 2026, revenue was $168.6 million. down 1.2% year over year, and up 6.1% on a sequential basis. The second quarter's performance was driven by continued strength in enterprise, We saw year-over-year growth in end-user demand in the Americas and EMEA regions, and double-digit year-over-year growth in end-user demand for our ProAV Managed Switch products. We delivered $89 million of revenue in the enterprise segment for the second quarter. 6.1% sequentially and up 7.7% year over year. Encouragingly, the revenue mix of our products from the higher margin enterprise segment improved over 400 basis points year over year to approximately 53% of total revenue. remained steady sequentially. And user demand for ManageSwitch products grew double digits, both sequentially and year over year. despite lower than expected production stemming from operational executional challenges from our manufacturing partner for these products.

The strength of our leading higher margin ProAV line of managed switch products in the second quarter, along with improvements from a license acquisition for the OS that powers these switches, the driving force that led to record enterprise gross margin and the strong consolidated gross margin in the quarter. As a reminder, since Q4, we have been reporting two business segments. with the reporting of our mobile products being included in our consumer business. We will continue to supplement reporting of service provider revenue, which includes sales of our cable, modem, and gateway products sold in retail, in addition to the mobile products sold to operators. This revenue callout will allow investors to isolate these declining businesses in their assessment of NICUIR and our transformation. In Q2, the consumer business delivered net revenue of $79.6 million. down 9.4% on a year-over-year basis, and up 6.1% sequentially. As we shared last quarter, given the memory shortage and related cost increase of various components, We are optimizing this business for gross profit. Domestically, the US retail market continue to experience aggressive promotional activity from some competitors.

But we were aided by strong performance of our U.S. direct-to-consumer channel, which grew over 20% year-over-year. We also saw positive benefits of our good, better, best Wi-Fi 7 lineup and continued growth in our recurring revenue services, which grew both sequentially and year over year. Sales to service providers and associated products were buoyed by a reduced focus in the retail channel by our primary competitor in the U.S. cable category. And one of our service provider partners wanting to buffer their inventory due to concerns of rising component costs. but still down approximately 13% year over year as we harvest this portion of the business. Now, moving on to an update on a recurring subscriber base. We continue to believe that focusing on increasing our recurring subscriber base is the right strategy to add higher margin revenue to both business segments while differentiating our offerings in the market. And to that end, a plethora of value-added improvements are currently in development and slated for launch in the coming year.

We are also making great strides with our non-device revenue initiatives in the enterprise segment, with the successful launch of our new Insight solution receiving positive initial feedback. Across the business, we grew our ARR by 15% year over year. reaching $41.6 million in the quarter. We remain confident we can grow our highly profitable ARR over time, pleased to share that we exited Q2 with 558,000 recurring subscribers. 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. Our non-GAAP gross margin came in at 41.4% in the second quarter of 2026, buoyed by a strong mix of our enterprise products along with the expanded profitability within the segment. This quarter's gross margin was roughly flat sequentially, and a 360 basis point increase compared to 37.8% in the prior year comparable period.

Relative to the year-ago period, a gross margin in the current period benefited from an improved mix of our higher margin enterprise business. including benefits from a license acquisition in the fourth quarter. As a reminder, we entered into a strategic agreement to acquire a perpetual license for the operating system that powers our AV line of managed switches. overall gross margins by roughly 150 basis points in the second quarter as compared to the year ago period. But more importantly, it continues to up-level our ability to bring greater value to the AB ecosystem faster than we could have otherwise. Rolling down to the profitability of our two business segments, our enterprise segment improved in profitability on both the gross margin and contribution margin basis. Enterprise gross margin achieved an all-time high in both percentage and dollar terms, coming in at 54.1% of 740 basis points year-over-year. This result was driven again by solid demand for our pro AV managed switches, an improved regional mix, and aided by the aforementioned license acquisition. Contribution margin expanded by 200 basis points sequentially, and 660 basis points as compared to the year-ago period. the highest since Q1 of 2019.

On the consumer side, while we experienced rising memory costs and some demand softness in an extremely aggressive pricing environment, Growth of our domestic direct-to-consumer channel helped to partially offset these factors. In addition, ongoing operational discipline and focus on prioritizing margin over top line help these pressures, enabling the consumer segment to end the quarter with gross margin of 27.3% for a year-over-year decline of 210 basis points. The memory headwind flowed through the profitability of this segment in Q2, although we are continuing to work with consumer business channel partners to meet this expected increasing effect in the back half of the year. Total Q2 non-GAAP operating expenses came in at $65.8 million. Flat year over year and up 1.9% sequentially. Our headcount was 822 at the end of the quarter, up from 786 in Q1. We remain dedicated to the development and expansion of Netgear talent. with the aim of supporting our enterprise business through the insourcing of software development and enhancing our go-to-market capabilities.

Our non-GAAP R&D expense for the second quarter was 12.2% of net revenue, as compared to 11.6% of net revenue in the prior year comparable period. and 12.8% of net revenue in the first quarter. To continue our technology and product leadership, we are committed to significant yet cost-effective investment in R&D. while also balancing hiring with capitalizing on the efficiency gains from AI within software development. Overall, the strong performance of our enterprise gross margins, combined with slightly stronger revenue than originally anticipated within the consumer business, enabled us to again deliver non-GAAP operating margin above the high end of our guidance range. Our Q2 non-GAAP operating income was $4 million. in a non-GAAP operating margin of 2.4% for an improvement of 310 basis points compared to the year-ago period and an improvement of 140 basis points sequentially. Our non-GAAP tax expense was approximately $1.4 million in the second quarter of 2026. Looking at the bottom line for Q2, we reported non-GAAP net income of approximately $4.4 million, resulting in non-GAAP income of $0.16 per share. During the quarter, $10.2 million of cash was used by operations. which brings our total cash provided by operations over the 12 months to $235,000.

We used $1.5 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 $20.9 million. Turning to the balance sheet, we ended the second quarter of 2026 with $267.9 million in cash and short-term investments. down $28.6 million from the prior quarter, partly due to our $12.9 million in discretionary stock repurchases due to changes in working capital. In Q2, we repurchased approximately 560,000 shares of NICU common stock at an average price of $23.04. Since the beginning of 2024, we have re-virtuased over $116 million of our stock. we have approximately $75 million remaining in our authorization. And our fully diluted share count is approximately 27.9 million shares as of the end of the second quarter. We're committed to returning capital to our shareholders and plan to continue to opportunistically repurchase shares in future periods. Overall, we are pleased with the performance in closing out the first half of 2026.

We exceeded expectations on both the top and bottom line, improved our revenue mix towards higher margin portions of the business, and maintain strong operational discipline while executing on our mitigation strategies to counter rising memory costs. We remain focused on executing on our strategy to drive profitable growth and enterprise. in the consumer business, we are focused on optimizing for gross profit and contribution margin. I'll now cover our outlook for the third quarter of 2026. Within enterprise, we expect continued growth led by the strong demand for our Pro AV line of managed switches. On the consumer side, while we have our broader product portfolio to address the market, we will continue to prioritize gross profit over revenue with the rising cost for memory. For service provider and related products, we expect revenue to be around $22 million, which would be a decline of approximately 19% as compared to the third quarter of 2025. Accordingly, we expect third quarter net revenue to be in the range of $165 million to $175 We continue to have visibility to cost impacts for the balance of the year due to the great progress in accessing component supply directly from memory manufacturers.

In the third quarter, we expect the memory impact to continue to be nominal for our enterprise business, given the relatively higher ASPs and margins. offset from our recent price increases. On the consumer side, we expect increased impact from these headwinds, despite mitigation from actions being taken with our channel partners. The memory cost challenge is expanding to other parts of the bomb, and we are also experiencing modest production delays given the tightening environment. Altogether, we are continuing to expect approximately 200 basis point headwind to our combined gross margin in the second half compared to the first half. the impact skewed to Q3 due to near-term supply constraints. Accordingly, We expect our third quarter gap operating margin to be in the range of negative 12% to negative 9% and non-gap operating margin to be in the range of negative 3% to 0%. Our gap tax expense is expected to be in the range of half a million dollars to 1.5 million dollars. or non-GAAP tax expense is expected to be in the range of $1 million to $2 million for the third quarter of 2026.

And with that, we can now open up for questions. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Logan Katzman with Raymond James. Please.

go ahead your line is now open. Yes, hi, this is Logan on for Adam. Thanks for taking our question and nice results. First, could you maybe double click on the strength you guys saw in enterprise? Looks like it was above seasonal and maybe could you touch on you know some of the drivers there? Maybe double click on pro AV and you one-time benefits or anything from maybe the world cup or anything this quarter. Yes. Anything around that. Thank you.

Hey, Logan, great question. I'll start and then maybe if I miss anything, Brian can jump in. So, enterprise continues to be our stable, profitable growth engine, as you saw. The one maybe thing we can double click on is just the regional growth. If you go to our queue, you'll see that in the Americas, we grew 15% year over year. I'm talking about revenue now. In EMEA, we're just shy of 10%, but 9%, and APAC was down 16%. Obviously we call out APAC specifically because we're intentionally transforming our go to market there. We mentioned the hiring of Surogy, which we're super excited about and we expect APAC to start growing sequentially.

In Q4, but you can see the strength of the growth that we're seeing across the other regions for that business. Just to specifically answer your question about FIFA World Cup, there's no, I'm not aware of any kind of one-time blips associated with that or any other big event. Anything to add, Brian? No, I think you covered it.

Awesome, thank you. And then could you actually maybe double click on the the changes going on in APAC. Can you maybe talk about some of the changes you are implementing besides bringing in a new leader to that business. And then maybe also kind of what happened in that market to have you guys implement these changes.

Yes, good question. Well, I think it's a core part of our transformation is just how we go to market in enterprise. In NIC years, we just had our 30 year anniversary. So a lot of kind of legacy channel models, a lot of layered distribution partnerships and in order to address that, we needed to take a step back and make decisions for the long-term health of the region. And so, as part of that effort, there's, as you restructure the channel, In addition to bringing in the new leadership, we talked about some new partners, fewer distribution layers, implementing some of the transformational efforts that we've implemented in the other regions. So the good news is we have a playbook. It's working in the Americas and EMEA, and we're just bringing it over to APAC and the, you know, the near-term headwinds are unfortunate, but over the longterm, this is going to pay dividends. As we said on the call, like APAC has the potential to be our fastest growing region, so we're excited about it and excited to see surrogates impact.

Awesome. That's super helpful. Thank you. It sounds like the acquisitions you guys have made, they're going pretty well. I was just curious, do they have any material impact in the quarter? And then maybe more broadly, can you guys just touch on any updates to the capital allocation or just touch on your strategy there?.

Yes. Let me take those one at a time and then Brian can fill in any gaps. The non-device revenue tied to the Xeom acquisition, all of the changes that the new software team is driving in Insight, we're seeing really good progress there. you know, the non-device revenue for the corridor grew significantly. We're not going to throw out big growth numbers at this stage because it's still off a small base. But with the progress we've made on security, on insight, on support, on professional services and how that's being supported by our partner program. We're feeling really good about, we're setting up the right infrastructure, product services for delivering long-term growth there. So no specific numbers to share other than to say, we set some pretty ambitious midterm and long-term targets in our in our investor day around percent of revenue from non-device revenue sources and we stand behind those. We feel really good about our trajectory against those.

As it relates to capital allocation, no change to the strategy. We've been really consistent there. We're funding the internal investments, that are focused on the enterprise side of the business. So that's our organic growth lever. M&A continues to be a priority. The three categories of opportunities we're looking at are product adjacencies, new capabilities. So product was XCN and security capabilities was VOG and the source code that we brought in for our pro AB managed switches and then we've looked at a number of opportunities to bring scale to the business, but we're being really disciplined and so we're going to. We're going to wait for the right opportunity if one comes along, and if not, you know we're going to continue to drive And then, of course, we're focused on returning capital to shareholders.

That's a key part of our ongoing strategy. Since I've joined, I believe we've repurchased a total of $160 million worth of shares, $13 million last quarter. We still have a $75 million authorization. capital allocation strategy remains consistent. And yes, I think that answers both your questions.

Awesome. Yes, no, it does. Super helpful. Thank you. And the last question for me on profitability here. First of all, the profitability on enterprises is extremely strong. So I was just kind of curious, how do you think about total gross margins maybe for the back half Yes, I understand the consumer dynamic. So I wanted to get your guys' thoughts there. And then moving down the income statement, it looks like 3Q Guide is a little sub-seasonal on the operating income, and actually 2Q is a little above seasonal. anything maybe like pushed from an expense standpoint from like 2Q to 3Q or just any like thoughts on profitability in 3Q?.

I think as we've been saying consistently throughout the year, the big profitability mover is the memory situation and our response and mitigating efforts to combat that. I will say, looking at the back half of the year, we feel good about the estimates that are out there for revenue for the whole second half. If I were to look out to Q4, so we did mention on the call that we are facing about a 200 basis point headwind to the second half for gross margins coming from the memory elevated costs. If I were to look specifically at Q4, we gave the guidance for Q3, but for Q4, we would expect about a 400 basis point improvement sequentially from Q3, if you take the midpoint of the guidance range that we put out there. to our non-GAAP operating margin. And that's really driven by two things. One would be the sequential projected increase in revenues in Q4, some of that coming from seasonal lift. And then the other thing we did note on the call that while we're seeing 200 basis point headwind to gross margin in the second half, it's a little more acute in Q3 because some of the near term supply challenges were supplementing with air freight.

So if you factor all of those things in and factor in the Q2 performance that we just delivered, it should take the estimates out there for the full fiscal year up on both measures revenue and non-GAAP operating margin.

Great. Thank you both. Your next question is from Tor Svahnberg with Stifel.

Please go ahead. Your line is open. Yes. This is Cam Tierney on for Torres-Von Berg with Stifel. Congrats on the progress here and thanks for taking my questions. I wanted to ask, like, just sort of broadly, can you elaborate a little bit on the supply chain environment that you're facing? And like specifically, can you help us characterize your pro AV supply situation? I know in the past, a little bit supply side challenge. And maybe if there's any backlog there, could you help us, you know,.

some guardrails around how to think about that. Thank you. Yes, hey Ken, thanks for joining. Yes, so as I'm sure you're aware, it's a pretty dynamic supply environment, whether it's memory, broader components, cost, just supply availability. You also have ODM capacity issues, lead times, and then distractions from tariffs and other regulatory shifts. So it's a pretty wild time from a supply perspective. The way that impacts Netgear um you know this is where 30 years of uh building uh resilient supply chain really pays off we've got great partnerships we've built a lot of goodwill and you know we're just really proud of the execution of our team it's like we've secured memory through the first half now of 2027 we're shipping our new products we're holding the line on gross margin impact for the second half of the year. As we've said, in a longer term enterprise, we've got pricing leverage and we've already made a small move on prices.

There's more room there. Just really, really proud of our efforts there. The pro AB supply, There's some history to that. We were short in supply kind of late last year. And then we caught up and frankly, there was a blip this past quarter, just an execution factory move issue with our partner. And that caused us to, and continues to cause us to lean into more air freight, which is costly and impacts gross margin. And that's all reflected in our guidance. The good news is there, we're back on track and we're expecting to get, you know, to the targeted volumes this quarter.

So I would describe it as nothing like the prior Shortage we had, which is largely tied to more demand than we had planned. This was there was an execution issue that's been addressed and we're driving volume back up to where we need to be.

Awesome. Thank you. And for my follow-up, I'm just kind of curious, like, can you provide any color on fiscal 27 and how that might be shaping up?.

Yes, Kim, thanks for joining. I'll touch on that and CJ can chime in if you'd like to as well here. We're not going to provide any guidance for 2027, but what we can say is that for the enterprise business, we do expect next year that revenue growth will outpace OPEX investment and growth, which is what we shared at the investor day. last November. We feel very good about that. What we're already seeing here in 2026, and CJ just touched on it, that we do feel strongly that our pricing leverage in the enterprise business will combat and offset the cost pressures that we're seeing from the supply chain. So combination of both those factors, we would expect expanded profitability within the enterprise business. On the consumer side, as we've been saying, it's a much more dynamic environment. We've got supply chain challenges with the memory situation, we got regulatory, Momentum potentially there, the competitive environments, very challenged.

But the goal remains the same. We're going to look to keep contribution profit neutral on that business. as we continue to innovate and we're looking to expand on the partnerships that we're developing there and preparing for the next Wi-Fi standard to launch out probably sometime next year. I think that kind of frames 2027 a little bit. Obviously, it's not specific guidance per se, but I think those are the things that we could steer you to at this point. Yes, very helpful. Thank you guys. Appreciate it.

There are no further questions at this time. CJ, I turn the call back over to you. Please.

Yes, two quick points to wrap up. Just another big welcome to Douglas Murray joining our board. Super excited to have him. And then lastly, as I said in my script, transformations are really hard, but The good news is this one's working, and that wouldn't be possible without the resilient and incredible effort from the whole NICU team across both businesses. So a big shout out and thank you to them.

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

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Ladies and gentlemen, thank you for standing by. [Operator Instructions]

I would now like to turn the conference over to Mr. Erik Bylin. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to NETGEAR's First Quarter of 2026 Financial Results Conference Call. Joining us from the company are Mr. CJ Prober, CEO; and Mr. Bryan Murray, CFO. The format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the first quarter and guidance for the second quarter provided by Bryan. We'll then have time for any questions. If you have not received a copy of today's release, please visit NETGEAR's Investor Relations website at www.netgear.com.

Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, gross and operating margins, expenses, tax expense, 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 on NETGEAR's periodic filings with the SEC, including the most recent Form 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these statements as a result of new information or future events, except as required by law.

In addition, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website.

At this time, I would now like to turn the call over to CJ.

Thanks, Erik, and thank you all for joining our call. We started 2026 with a solid quarter, and I'm pleased to share that our transformation continues to gain meaningful momentum. Today, I'll cover 3 topics: first, a recap of our Q1 performance; second, the macroeconomic factors shaping our environment; third, an update on our transformation. Let's get into it.

Q1 was another strong example of the streamlined execution we've worked hard to build. We delivered solid revenue, while outperforming profitability expectations. Enterprise performed well and saw strong double-digit end user demand growth in the U.S. and EMEA. For Consumer, while our newly launched good-better-best WiFi 7 lineup continues to perform well. As noted on our prior call, we're actively optimizing this business for gross profit, given the memory challenges, and continue to harvest our service provider business. These 2 intentional strategies are constraining the growth of our overall Consumer top line. Nonetheless, revenue for our core Consumer products grew 3% year-over-year.

We also achieved another quarter of record non-GAAP gross margin, driven by sustainable trends within our business, specifically, the strengthening of our enterprise mix, efficiencies gained through our acquisition of the ProAV managed switch OS, and tighter, more disciplined supply chain execution.

From an OpEx perspective, we remain disciplined as well. In Q1, we executed on a restructuring, impacting roughly 5% of our employees, to help accelerate our transformation. While at the same time remaining strategic with our spend, we continue to invest in the transformational initiatives that will drive our long-term profitable growth.

Our efforts continue to translate to the bottom line. Our expanding gross margin, combined with our OpEx discipline, allowed us to outperform our earnings expectations and improve non-GAAP profitability year-over-year. I'm proud of what the team has accomplished and the momentum that continues to build behind our transformation.

Turning to the broader environment. There are 3 macro dynamics we want to address directly: supply chain, AI and the evolving regulatory landscape. We're pleased to share that our team has secured sufficient memory supply for virtually all of our 2026 production plans, a testament to the operational capabilities we've built and the strength of our supply chain execution. While pricing for some of this memory may still fluctuate, we now have a good sense for the full year impact of the memory shortage.

As a reminder, the impact on our Enterprise business is expected to be nominal, given its relatively higher ASPs and margins and our various mitigation strategies. We will see most of the impact from the memory shortage in our Consumer business, given the competitive dynamic of that market. Bryan will share the expected impact from memory in his remarks, so I'll state here that we're thrilled with the progress of our team's ongoing mitigation efforts.

I want to spend a moment on AI because we believe it's one of the most important themes shaping our outlook, and frankly, one that positions NETGEAR particularly well. We view AI as a significant and growing tailwind for our business, and we see several distinct areas where NETGEAR will benefit. First, this is a remarkable time to be a hardware company that's actively expanding its value through software. The barriers to build and deliver great software experiences are decreasing significantly. And the combination of a strong and differentiated hardware foundation with rapidly improving software capabilities is a powerful one.

Unlike more established companies that are burdened by legacy systems, entrenched processes and technical [ bet ], we can redesign our processes more freely because we're already in the midst of a significant transformation. We're building our software capability from the ground up at exactly the moment when AI is making it faster and more efficient to do so than ever before. We intend to take full advantage of this opportunity to maximize our competitive differentiation.

Second, we're improving operational efficiency more broadly. We're laser-focused on implementing AI efficiency initiatives across the entire organization and capitalizing on this tailwind to deliver shareholder value. The fact that NETGEAR is driving a transformation, where our #1 value as a team is Dare to Transform, enables us to reimagine how we work in a revolutionary, not evolutionary way. And this transformational mindset embedded within our team will strengthen our competitive advantage over time.

To give a specific example of our momentum in this area, we recently completed a company-wide AI-themed hackathon that resulted in 125 submissions, ranging from potential new product features to efficiency initiatives in G&A and operations. Many of these ideas are now in the process of being implemented.

Third is how we deliver our customer experience. There's a significant amount of low-hanging fruit in how we serve our customers today, support being a prime example. And AI gives us the tools to address that quickly and at scale. Improving the customer experience is not just the right thing to do. It directly supports retention, drives our recurring revenue and strengthens NETGEAR's reputation as the most trusted brand in our space. We have a lot of opportunity here and are moving with urgency.

Fourth is on product performance and new use cases. Over the long term, we expect compute to increasingly shift to the edge, and our products sit right at the edge. That creates a significant opportunity to enable use cases that simply weren't possible before AI. We're in the early innings of understanding the full scope of what that means for our product road map. But our conviction is high, and our teams are actively exploring what the future looks like for our customers.

And finally, in our Enterprise business, our dedication to the ProAV market sets us apart. As others in the industry turn their attention to data center opportunities, driven by AI adoption, we continue to listen closely to AV integrators and end users, delivering the products and support that this market truly needs. So to put it simply, AI is not a threat to what we are building. It's an accelerant, and our journey is just beginning.

Moving on to the regulatory environment. In March 2026, the FCC called for stronger safety and security standards for consumer routers, based on a federal government risk assessment. We quickly became the first retail company to receive conditional approval under the new regulations. We're proud that our status as an independent U.S.-based public company continues to position us as a highly trusted brand in this space and that our efforts in connection with the security and integrity of our supply chain are paying dividends.

Under this conditional approval, we can launch new consumer routers and provide software updates to existing devices. While we received this approval quickly, we have already seen a competitor also receive approval, and it's expected that others will follow. And even with that conditional approval, competitors are not restricted from selling existing foreign-produced products in the market. As such, we continue to expect normal competitive activity in our Consumer business in the near term, but also see an increased focus on security, supply chain integrity and trusted brands as a medium- and long-term tailwind for our Consumer business.

And now, I'll share an update on our transformation, starting with our Enterprise segment. We want to highlight 3 areas of progress that we're particularly excited about. First, our expansion to the broadcast vertical for ProAV continues to build momentum. Our manufacturing partner ecosystem grew by over 50 partners in the quarter, bringing our global total to 577. New and expanded broadcast partnerships with leading players, including Clear-Com, Riedel, EVS, Ross Video, Grass Valley and Lawo, to name a few, further validates our position in this space and is a strong reflection of the industry's confidence in NETGEAR as a foundational platform for next-generation broadcast infrastructure.

We're seeing growing interest in our ST 2110-enabled audio and video switching solutions as broadcasters transition from legacy SDI to IP-based workflows. Adoption is accelerating as customers increasingly recognize NETGEAR as uniquely focused on solving their AD challenges. We're seeing this translate to solid wins across live production, corporate studios and mid-tier broadcast environments where our ease of deployment and reliability are key differentiators. Our competitive position is strong and only strengthening with our planned road map and as the shift to IP-based video studio infrastructures continue to accelerate.

Second is the transformation of our enterprise go-to-market capabilities. The leadership team we've assembled is truly world-class. We've hired sales, marketing and support leadership with expertise from Cisco, Juniper, HPE, Microsoft and Ruckus, to name a few companies, that contribute to our team's pedigree. New sales leadership for EMEA was hired in the second half of last year, and he is having a significant impact driving growth for that region. In the last few months alone, we've also hired new sales leaders for our enterprise networking and security businesses in the Americas and our first-ever sales leader for LatAm. We also just recently added our first-ever marketing leader for our Enterprise business, and she is having a tremendous impact building our marketing capabilities for this business.

In addition to the excitement of bringing this new team together, the validation of our strategy and market opportunity that comes from recruiting such a talented group is energizing. With key leaders now in place in the Americas and EMEA, the focus is shifting to building a similar capability in APAC, where we recently executed on a leadership change and plan to restructure the channel for this market. While we implement our transformation playbook for this region, we don't expect our APAC business, which represents less than 20% of our enterprise business top line, to contribute to our growth for the first few quarters of the year. We see a ton of potential in this region, and we're excited to make the changes needed to get this region back on an accelerated growth trajectory.

On the partner front, the momentum behind our partner success program is real. We now have over 150 active go-to-market partners registered in our partner portal. We launched our MDF and VIP benefit modules in Q1, giving our most committed partners the tools, incentives and engagement [ beginning ] to grow with NETGEAR. Partner recruitment remains a top priority. We're actively expanding our APEX tier and driving compliance and enablement across the network with over 1,000 certifications completed to date. This is still early innings, but the foundation is in place, and the trajectory is encouraging.

Third is the momentum that's building behind our Enterprise nondevice revenue initiatives. As you'll recall from our Investor Day in November, we set mid- and long-range targets to significantly expand the percentage of nondevice revenue for our businesses. We have many sources of opportunity for delivering on these targets, including expanding our insight, security, support and professional services businesses. While we're starting from a small base in Enterprise, the progress we are making is exciting, and we're more confident than ever in delivering on those medium- and long-range targets.

Recently, we made great progress expanding the value proposition of our Insight cloud management solution, launching Insight 10.0 to empower our customers to manage their network infrastructure smarter and more efficiently than ever. This release was truly in the vein of NETGEAR delivering solutions that help our partners and customers succeed, enabling enterprise customers to reduce setup time, simplify navigation and scale with confidence, all while maintaining the privacy and safety of their connected devices. In the quarter, we also made great strides in building out our support and professional services offering by launching a structured portfolio of paid support and professional services with clear SLAs, guaranteed response times and direct access to senior engineering expertise.

The opportunity to expand our value proposition, add higher-margin revenue streams and improve the customer experience is more compelling than ever, and it positions NETGEAR as an industry player with all the tools to help customers succeed. Our acquisitions of VAAG and Exium are proving to be essential elements of our transformation strategy, and I'm confident we'll continue to see momentum here.

Shifting over to our Consumer business, we're executing on 3 primary growth initiatives. First, we're embarking on an important product innovation cycle, which includes the upcoming release of several new products over the course of the year. As we shared previously, as a first step in our commitment to the smart home, we're working with Google to implement the Google Home Runtime in upcoming new product releases. What this means is that users will be able to control [indiscernible] WiFi devices from their Google Home app, all enabled by NETGEAR. And this is the first step in many we will take to better enable the smart home.

Second, we're enhancing our recurring services platform in several ways to increase attach rates, drive renewals and expand ARPU. As we mentioned at our Investor Day, we expect recurring revenue to exceed 25% of total Consumer revenue in the long term. Third, we're leveraging our in-source software development capabilities and unique data insights into consumer network performance to develop a range of AI-enabled solutions that we believe will transform the user experience and make home networks more intelligent, adaptable and resilient.

With FCC conditional approval secured and our core products demonstrating positive year-over-year growth, we're seeing positive tailwinds in our Consumer business despite the need to navigate near-term memory headwinds.

In closing, Q1 was a strong start to what we expect to be a pivotal year for our transformation. We're executing with greater discipline, investing in the right areas and seeing those investments begin to deliver in our margins, in our enterprise momentum and in the growing recognition of NETGEAR as a trusted differentiated partner across the industries we serve. The transformation is working, and the opportunities in front of us are larger than ever. I've never been more confident in our team or our trajectory, and I look forward to sharing more progress with you throughout the year.

With that, I'll turn it over to Bryan.

Thank you, CJ, and thank you, everyone, for joining today's call. Led by strength in our ProAV managed switch products within our Enterprise segment, we delivered revenue at the high end of our guidance range. In tandem with ongoing disciplined operational execution, we drove non-GAAP gross margin of 41.7%, yet another all-time high for NETGEAR. And I'm thrilled to share that this marks the eighth consecutive quarter where non-GAAP operating margin exceeded the high end of our guidance range, reflecting continued progress in our transformational efforts. For the quarter ended March 29, 2026, revenue was $158.8 million, down 2% year-over-year and down 13% on a sequential basis due to seasonality in our Consumer business and the current period [ ending ] nearly a week shorter than Q4.

The first quarter's performance was driven by continued strength in Enterprise, where we saw year-over-year growth in end user demand of double digits in the Americas and EMEA regions and year-over-year growth in both ASPs and units of ProAV managed switch products. We also saw 3% year-over-year growth in our core portion of our Consumer business, while the service provider portion of this business declined 32%.

As a reminder, beginning in Q4, we are reporting 2 business segments with the reporting of our mobile products being included in our Consumer business. We will continue to supplement reporting of service provider revenue, which also includes sales of our cable modem and gateway products sold in retail, which enable services offered by cable operators. This revenue call-out will allow investors to isolate these declining businesses in their assessment of NETGEAR and our transformation.

We delivered $83.8 million of revenue in the Enterprise segment for the first quarter, down 6.2% sequentially and up 5.8% year-over-year. Thanks to the excellent execution of our team and collaboration with key supply chain partners, we made further progress in the quarter on mitigating the supply constraints around certain managed switch products. Consequently, the revenue mix of our products from the higher-margin Enterprise segment grew once again, coming in at 53% of total revenue, an improvement of 390 basis points year-over-year. Taking in conjunction with improvements from the license acquisition of the OS that powers our ProAV line of managed switch products, this was the driving force that led to the record consolidated gross margin in the quarter and helped drive our operating margin outperformance.

In Q1, the Consumer business delivered net revenue of $75 million, down 9.5% on a year-over-year basis and down 19.4% sequentially. Given the memory shortage and related cost increases of various components, we are optimizing this business for gross profit. Domestically, we saw softness in the U.S. retail market, in part due to aggressive promotional activity from some of our competitors. We saw positive benefits of our good-better-best WiFi 7 lineup and continued growth in our recurring revenue services, which drove growth of approximately 3% in the core consumer portion of the business as compared to the prior year period. Sales to service providers and associated products were down approximately 32% as we harvest this portion of the business.

Now, moving on to an update on our recurring subscriber base. The team has made progress with our strategy to transform these offerings by developing a plethora of value-add improvements slated for launch in the coming year. We continue to believe that focusing on increasing our recurring subscriber base is the right strategy to add high-margin revenue to both business segments, while differentiating our offerings in the market. As CJ mentioned, we are also making great strides with our nondevice revenue initiatives in the Enterprise segment.

On the Consumer side, we made another incremental improvement to our conversion rate, while seeing ASPs and renewals rise. These factors were strong contributors to growing our ARR by 12% year-over-year, reaching $39.7 million in the quarter. We remain confident we can grow our highly profitable ARR over time, and I'm pleased to share that we exited the quarter with 559,000 recurring subscribers.

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.

Our gross margin, supported by a favorable mix shift towards Enterprise, came in at 41.7% in the first quarter of 2026, once again, an all-time high and the seventh consecutive quarter of sequential gross margin expansion. This marked a 670 basis point increase compared to 35% in the prior year comparable period and a 50 basis point increase compared to 41.2% in the fourth quarter of 2025. Relative to the year-ago period, our gross margin in the current period benefited from an improved mix of our higher-margin Enterprise business, an increased mix of WiFi 7 products and improved returns experience within the Consumer business.

As a reminder, in the fourth quarter, we entered into a strategic agreement to acquire a perpetual license for the operating system that powers our AV line of managed switches. Acquiring this technology improved our overall gross margins by roughly 150 basis points in the first quarter, as compared to the year-ago period. But more importantly, it continues to up-level our ability to bring greater value to the AV ecosystem faster than we could have otherwise.

Drilling down to the profitability of our 2 business segments, our Enterprise segment remained quite profitable on a contribution margin basis, expanding margins by 100 basis points sequentially and 160 basis points as compared to the year-ago period. Enterprise gross margin reached another record in the quarter at 52.7%, up 640 basis points year-over-year, driven again by strong demand for our ProAV managed switches, an improved regional mix and aided by the aforementioned license acquisition.

On the Consumer side, while we experienced some demand softness in an extremely aggressive pricing environment, improved mix and operational discipline, along with a focus on prioritizing margin over top line, helped offset these pressures. The Consumer segment ended the quarter with gross margin of 29.4% for a year-over-year improvement of 520 basis points. The profitability was once again aided by an improved mix of WiFi 7 products, along with a lower service provider mix and improved returns experience with some offset from increased memory costs. We were able to improve contribution margin within the Consumer business by 160 basis points year-over-year due to the improved gross margin, coupled with thoughtful expense management, which enabled us to maintain our margin expansion trajectory year-over-year despite mounting impact from rising memory costs.

Total Q1 non-GAAP operating expenses came in at $64.6 million, up 8.8% year-over-year and down 6.7% sequentially. Our headcount was 786 at the end of the quarter, up from 784 in Q4, but lower than we had targeted due to the timing of hiring. We remain dedicated to the development and expansion of NETGEAR talent with the aim of supporting our Enterprise business through the in-sourcing of software development and enhancing our go-to-market capabilities.

Our non-GAAP R&D expense for the first quarter was 12.8% of net revenue as compared to 10.9% of net revenue in the prior year comparable period and 11.9% of net revenue in the fourth quarter of 2025. To continue our technology and product leadership, we are committed to significant but cost-effective investment in R&D, while balancing hiring with capitalizing on the efficiency gains from AI within software development.

Overall, the combination of better-than-expected revenue and disciplined cost control enabled us to again deliver non-GAAP operating margin above the high end of our guidance range. Our Q1 non-GAAP operating income was $1.7 million, resulting in non-GAAP operating margin of 1% for an improvement of 260 basis points compared to the year-ago period and a decline of 230 basis points sequentially. Our non-GAAP tax expense was approximately $1.4 million in the first quarter of 2026. Looking at the bottom line for Q1, we reported non-GAAP net income of approximately $1.9 million, resulting in a non-GAAP income of $0.06 per share.

During the quarter, $1.6 million of cash was provided by operations, which brings our total cash provided by operations over the trailing 12 months to $12 million. We used $3.8 million in purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $22.9 million, which was elevated from our normalized levels due to improvements on our new corporate headquarters.

Turning to the balance sheet. We ended the first quarter of 2026 with $296.5 million in cash and short-term investments, down $26.5 million from the prior quarter, primarily due to $20 million in discretionary stock repurchases. In Q1, we repurchased approximately 929,000 shares of NETGEAR common stock at an average price of $21.53. With an additional $75 million just added to our repurchase authorization by our Board of Directors, inclusive of the amount carried over from our previous authorization, we have approximately $89 million reserved on our updated authorization. And our fully diluted share count is approximately 28.7 million shares as of the end of the first quarter. We're committed to returning capital to our shareholders and plan to continue to opportunistically repurchase shares in future periods.

Overall, we are pleased with our start to 2026. We exceeded expectations on the bottom line, improved our revenue mix towards higher-margin portions of the business and maintained strong operational discipline.

We remain focused on executing our strategy to drive profitable growth in enterprise. In Consumer, we are focused on driving growth in our core product lines, executing on our road map, including the upcoming anticipated release of the Orbi smart home hub and further penetrating our installed base with higher-margin recurring revenue services.

Before I get into our Q2 outlook, I would like to take a moment to touch on the memory situation, how it may affect us in the year ahead. I'm pleased to share that the nimbleness and true operational acumen of our team have enabled us to secure sufficient DDR4 memory supply for nearly all of our 2026 planned production. We have recently increased pricing on a broad portion of our Enterprise business product portfolio, which is expected to mitigate the margin impact to this business. We have also worked with Consumer business channel partners to offset some of the memory cost headwinds in the back half of the year. However, while we have secured supply, we are still expecting increased pricing for supply in the back half to have an outsized effect on our Consumer business.

The impact to our combined Q1 gross margin was approximately 100 basis points, and we believe that our mitigation efforts that begin to kick in during the second quarter will neutralize the impact of the incremental costs in Q2. While the cost trajectory will continue upwards in the second half, we expect our mitigation strategies will help neutralize a meaningful portion of the incremental impact to our profitability. And we are currently expecting a net further 200 basis point impact to our margins.

I'll now cover our outlook for the second quarter of 2026. Within Enterprise, end user demand for our ProAV line of managed switches is expected to remain strong. We expect the memory impact to be nominal for our Enterprise business, given the relatively higher ASPs and margins and offset coming from our recent price increases. On the Consumer side, while we have a broader product portfolio to address the market, we will continue to prioritize gross profit over revenue with the rising cost of memory, which we expect to build throughout the year. For service provider and related products, we expect revenue to be around $18 million, which would be a decline of approximately 33% as compared to the second quarter of 2025. Accordingly, we expect second quarter net revenue to be in the range of $150 million to $165 million.

In the second quarter, we expect our mitigation efforts with greater benefit to the Enterprise business, to counter the rising cost of memory. Accordingly, we expect our second quarter GAAP operating margin to be in the range of negative 8.4% to negative 5.4% and non-GAAP operating margin to be in the range of negative 1% to 2%. Our GAAP tax expense is expected to be in the range of $800,000 to $1.8 million, and our non-GAAP tax expense is expected to be in the range of $500,000 to $1.5 million for the second quarter of 2026.

And with that, we can now open it up for questions.

[Operator Instructions] The first question is from Tore Svanberg from Stifel.

Congratulations on the continuous progress here. I guess, my first question is on the top line guidance for Q2. It's a pretty wide range. I assume that obviously has something to do with the portfolio mix management here. But could you help us understand a little bit what the strategy is going to be with that range? I mean, you gave us guidance for the service provider revenue, but I assume the non-service provider revenue in Consumer will still be down with the Enterprise business continuing to grow sequentially. I think I have that right, but if you could add any color, that would be great.

Yes. Tore, I can start. Thank you for the question. The range that we're giving is pretty consistent with what we have been providing, about a $15 million range on the top line. Maybe just to add some additional context and color, as you noted, we did call out specifically the service provider portion of the business, which we said we are harvesting. $18 million is the expectation for Q2, which is down a couple of million dollars from the Q1 period.

I would say we would expect total Consumer to be roughly in line with the levels that we saw in Q1, which would imply that the core portion would actually be up sequentially. So obviously, we are optimizing that business for gross profit at the moment, just given the memory situation. But I would call out that Prime Day, in most years, you would see some revenue lift in the second quarter. Those offerings would typically happen at the very beginning of July, but you would see the revenue lift for the manufacturer shipping in, in the Q2 period. This year, we are hearing that the event actually may start at the tail end of our Q2 period, but that will be the driver for the sequential lift there. And then, depending on kind of where you come out in terms of the range that we provided, the balance would be on the Enterprise side.

We've been pretty thoughtful in our guidance. As I mentioned, we have implemented price increases broadly across the enterprise portfolio in the neighborhood of 5% to 6%. And we're cautiously expecting a little bit of volume offset to that. We could get surprised on the upside. Obviously, we touched on this before that broadly speaking, in the markets that we play in on the Enterprise side, it is pretty common for manufacturers to be increasing their pricing. And thus far, it looks very promising that the market is digesting those. But that's kind of the thoughts that went into providing that top line guidance.

Yes. That's really helpful. And as my follow-up, for you, CJ, in your preamble, you talked quite a bit about how you're leveraging AI throughout this transformation. And I know it's going to be very difficult for you to share how that impacts you financially. But is there any metrics you can share with us as far as how much more would it cost you to develop software faster? Could you potentially get to the recurring software revenue targets faster with the use of AI? I mean, anything that you could share with us financially when it comes to those initiatives that you are doing internally now with AI tools?

Yes. Tore, it sounds good. We are furthest ahead on the software development side. As I said in my prepared remarks, we're kind of in a unique position there. We're in-sourcing software. We're building our capability at a time when these capabilities are coming online. So it gives us a real advantage. We're not having to change like legacy process as much as you would if you were more established in that regard. And so, since we've been leaning into the AI adoption, first of all, across our engineering team, it's been adopted 100%. So there's no outliers.

Everybody is using AI in their development. Of course, that varies a little bit by team. But our estimate is so far that we're seeing 40% to 50% productivity gains. We measure all sorts of stuff to come to that conclusion, times from code to deploy, pull request velocity, things like that. And for now, our focus has been on taking advantage of those efficiencies to accelerate the work that we're doing across our businesses. So where we have a leadership position like AV, we want to strengthen and expand on that. And of course, on the embedded software side, there, we recently acquired the OS for our ProAV, and that's another area where we get a real benefit from AI, as we onboard that capability and the teams that are responsible for that.

And so, we're not right now -- of course, we're being very disciplined from an OpEx perspective, but we're not looking to bank those savings per se. We're looking to accelerate our road map, extend our leadership, like I said, in AV and in other areas where we're transforming like on the enterprise networking and security side. It just allows us to catch up and eventually surpass competition. We expect it to allow us to do that. And we're being very focused and customer-centric in our development. And so, again, we're just -- it's like a fascinating time to be a hardware company that's building this muscle, and we're very fortunate from a timing perspective.

Up next is Adam Tindle from Raymond James.

CJ, I just wanted to start on the recent regulatory environment, and maybe I'll set the context that I think investors had thought about an opportunity for the broader market, for the consumer market leader there to potentially be banned that would unlock somewhere in the neighborhood of $300 million or $400 million of incremental potential revenue for the remaining competitors, obviously, NETGEAR potentially being in the pole position to capitalize on that opportunity. Maybe if you could just take a second to summarize what we've learned in the recent regulatory environment? What else we still may hear in the timeline for that? And how you're thinking about the opportunity for NETGEAR's Consumer business now?

Yes. Great question, Adam. So, the first thing I'd say is, we're quite supportive of and happy to see the new FCC regulations. Reading between the lines, the primary motivation of the administration does seem to be around securing our supply chain, national security. And if you look at what's specifically required to get conditional approval, which is what allows you to launch new products into the market, which is what allows you to update the software on your existing products, there's 3 requirements. The first 2 are very much about your leadership team, your corporate structure, your affiliations with government entities, et cetera, et cetera.

And so, I think if you -- what we've been saying all along about NETGEAR and our trusted position as a U.S.-based public company that's very focused on security, and we've taken very decisive measures to secure our supply chain, I think that's why we received conditional approval first and so quickly because it's very easy for us to answer those questions.

So in the near term, it's hard to predict who receives conditional approval. So, so far -- we compete against a number of companies. So far, us and eero on the retail consumer side have received approval. I haven't seen anybody else receive approval yet. And we don't have a crystal ball to predict who will get that permission. So, in the near term, because companies that don't have approval, despite the fact that you have the software update restriction that kicks in, in March 2027, they can continue to sell their existing products.

So in the near term, we don't see a huge tailwind from this. But in the medium and longer term, depending on where conditional approval lands, right, there's a lot of long-tail competition from foreign countries as well that would be impacted by this. We think this is a pretty significant tailwind for a trusted company like NETGEAR. And so, we're excited about it. And hopefully, that answers your questions. Let me know if you have any follow-ups.

No, that's helpful. I guess, maybe the follow-up would be for Bryan, and I wanted to go back to the topic of memory and costs. Obviously, you guys did a nice job of securing the memory through 2026. You gave some comments -- and I know it's helpful kind of like by quarter, but maybe -- I don't know if it's maybe a simpler way for us to think about some sort of sensitivity analysis on the rising costs, meaning like if we -- if you had not secured memory throughout 2026, what would the P&L look like, or what would margins look like? Let's say, this doesn't recur in 2027 and memory costs stay exactly where they're at. Just so we can kind of level set the level of sensitivity on cost, anything to dimensionalize that would be helpful.

Yes. Let me start, I guess, by just rehashing kind of what the impact -- our view at this point, what we think the impact is going throughout the year by quarter. As I said, about 100 basis point impact to our gross margins in the first quarter. The impact on a gross basis is ramping as the year progresses. We do believe that our mitigation efforts that are kicking in, in the second quarter will pretty much neutralize any additional impact in the second quarter.

And then, as we look to the back half of the year, based on what we see today, we think there's probably a further headwind of about 200 basis points to gross and operating margins as a result of the ramping memory cost. We do think -- I would just point out that I think most of the models out there from the Street are reflecting this, and we tried to get in front of this in January. We obviously have better information today, especially as it relates to securing supply. But overall, we think the estimates that are out there for the most part in the second half address this.

What it would have been otherwise, I would just echo, again, the execution of the team here was phenomenal, developing these direct relationships we've touched on before. Our historical model, we would have outsourced and leveraged our ODM partners to procure memory and have those relationships, which didn't service in this environment. We've been able to develop great relationships with key partners here very quickly. And as a result, we are getting a high percentage of our memory via direct OEM purchases.

If we were subject to being in the spot market, it would be significantly more. Hard to quantify what the impact would be. Obviously, the cost of memory would be higher. Whether or not we could actually get access to the level of supply to meet our current demand outlook and what the impact on top line, I would be guessing at this point. I would just say that we're very pleased that we're in a position to sit here and say that we think we've got the planned production covered for '26, and supply access will not be an impact to our top line. And the pricing, again, is something that we're navigating here. And because of these direct relationships, I think we're faring much better than we could have otherwise.

And it sounds like you're obviously successfully mitigating the Enterprise side through price increases, which is understandable. And I think when you quantified the price increase, 5% or so, I think you said, just correct me if I'm wrong, that's a lot lower than what we're hearing from other vendors across enterprise hardware in particular. Some are magnitudes greater than that. I guess, the question might be for CJ. Do you see kind of further opportunity? I know it's early. You kind of are just implementing the first price increase. But do you see further opportunity for price increases beyond this in Enterprise? How are you thinking about that?

Yes. Good question, Adam. We would concur that we are on the lower end of that. Part of that ties to our value proposition and the work that we're doing to -- especially on the enterprise networking and security side, build momentum there, build share. And we would fully acknowledge that there likely is future opportunity. However, we're balancing that out with building momentum back into some of these businesses that we're transforming.

We'll go back to Tore Svanberg from Stifel.

I just had some clarification questions on the 200 basis points impact in the second half. So Bryan, we should assume that -- that 200 basis points assumes that the mix stays constant because obviously, if the mix of Enterprise is higher than 52%, 53%, the impact will be lower. And then, second of all, the starting point for that 200 basis points, that would be -- would that be as of Q1 of this year? Or would it be as of Q4 of last year? Because obviously, you talked about the 100 basis points additional and then another 200 basis points, so I just wanted to clarify that.

Yes. I would say, the relative basis should be to Q1 of this year. I think as we just guided -- even as I addressed your question with regards to the mix and the top line movements in the guidance for Q2, that was largely [ steering ] -- at the midpoint, it would be a very similar mix of Enterprise that we would have experienced in Q1. And I did say that we would neutralize any additional memory impact in the second quarter. So the 200 basis points for the second half is relative to what you're seeing in the first half.

Yes. The first part of your question was?

Yes. I mean, I was just asking about it in the context of mix, right? Because as you said, you are managing the Consumer revenue to optimize profitability. So, that 200 basis point comment for the second half of the year, that assumes that the mix between Enterprise and Consumer stays relatively constant versus the first half. I guess, that was my main question.

I would say it this way. It is factoring in anticipated mix changes. Typically, you would see Consumer elevated in the second half of the year just from a seasonality standpoint. That may be more muted at this point, just given that we're optimizing for gross profit. But my steer of the second half of the 200 basis points is net of everything. We talked briefly about the Consumer mitigation efforts will start to kick in, in the second half of the year. But the 200 basis points includes all of those factors on a consolidated basis.

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

Just thanks again for joining the call, and a big thank you to the global NETGEAR team for delivering another great quarter.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.

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

Thank you, operator. Good afternoon, and welcome to NETGEAR's Fourth Quarter and Full Year 2025 Financial Results Conference Call. Joining us from the company are Mr. C.J. Prober, CEO; and Mr. Bryan Murray, CFO. The format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the fourth quarter and full year and guidance for the first quarter of 2026 provided by Bryan. We'll then have time for any questions.

If you have not received a copy of today's release, please visit NETGEAR's Investor Relations website at www.netgear.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, gross and operating margins, expenses, tax expense and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10-Q.

Any forward-looking statements that we make on this call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these statements as a result of new information or future events, except as required by law. In addition, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website. At this time, I would now like to turn the call over to CJ.

Thanks, Erik, and thank you all for joining us today. I have just completed my second year with NETGEAR, and I am exceedingly proud of the team and the results that we've delivered. After years of declining revenue, NETGEAR turned the corner in 2025 and delivered the first year of revenue growth since 2020 and record gross margins on top of that, leading to full year non-GAAP profitability. This turnaround comes at a time when NETGEAR is celebrating its 30-year anniversary with much promise for the years ahead, given our core strengths and the macro tailwinds that we outlined during our Investor Day in November.

Today, I'll cover a review of our 2025 accomplishments and give some color on our expectations for the year ahead. I am extremely pleased with what we accomplished last year and want to remind everyone that the groundwork for our 2025 performance began in 2024. Our objective during my first year was to correct foundational operational challenges NETGEAR faced, and we dug deep into the blocking and tackling of the organization to align a team that could deliver on the revenue opportunities while heeding the cost constraints required to turn NETGEAR's trajectory.

As we move into 2025, the emphasis turned back to the transition to growth as we work to improve the margin profile of each business and translate that to improved profitability. Nowhere is our success and progress clearer than our full year financial performance. The momentum building behind NETGEAR's transformation clearly took off in 2025. Given our goal of entering the year and the results we're sharing today, I'm proud to say that 2025 was a financial and operational success. I want to wholeheartedly thank the team here for their dedication and diligence that's been the engine of this achievement.

We began 2025 with the restructuring that honed investments in the business to ensure the spend was properly aligned with the greatest opportunities for growth and profitability. This included the strategic investment in our highest growth opportunities and defined a framework to build our organization throughout the year that not only filled out our ability to capitalize on our opportunities, but also improved our execution. As we began the year, our initial goal was to reverse the trajectory of our financials. We came into 2025 committing to investors that we would grow revenue, gross margins and reduce our loss position while not quite expecting to be profitable.

With the diligent effort of the team throughout the year, we were able to dramatically outperform our goals while navigating supply constraints and a substantially leaner channel. Full year revenue grew by more than $25 million, and we also expanded our non-GAAP gross margin significantly across each part of the business, resulting in a 920 basis point improvement for the year. These gains in our top line and operating leverage translated to an improvement of $1.35 in non-GAAP EPS, including delivering non-GAAP net profit in each quarter. Importantly, this performance proves that we've placed our bets in the right places and are firmly on the right path. While delivering stellar financial performance, we were able to drive forward many growth and operational initiatives to improve our outlook for the years to come.

I'll now cover a couple of our most important achievements for each business segment in the last year. A big part of why I joined NETGEAR is that I see an incredible opportunity to differentiate our traditional hardware products by adding substantial value through software. To accelerate this effort in our enterprise business, we successfully acquired 2 software teams, VAAG and Exium, which are now the foundation of our in-house software capabilities for enterprise. With these acquisitions, we accelerated in-sourcing of our software development and have made great strides in leveraging AI to fast track our road map execution.

We also acquired the software stack that powers our ProAV solutions, and we're building an internal team that can drive faster innovation and more customer value than our prior partner-dependent development model. The second big opportunity for NETGEAR is to leverage these software investments to expand our subscription and services revenue. To further this, we launched our ProAV full services team last year. Our new team is helping our customers drive speed to value by providing dedicated best-in-class support to ensure seamless AV solution deployments.

This is just the beginning of our efforts to expand our value proposition, improve customer experiences and drive higher-margin revenue streams. We also made significant strides in making NETGEAR the preferred vendor to work with across our enterprise AV partner ecosystem. A key point of emphasis for the team was to add AV ecosystem partners throughout the year, and I'm thrilled to share we grew our partner total to 524 by year-end, an increase of more than 150 partners in the year.

In addition to the software-led product innovation and nondevice revenue initiatives, our enterprise go-to-market transformation made incredible strides in 2025. We evolved our leadership, organization structure and incentive plans, launched our partner program, revamped our website and partner portal and changed our pricing, all with the goal of delivering on our promise to customers of being a partner that's easy to do business with. For consumer, in 2025, we again proved NETGEAR's technical leadership by delivering a slate of innovative, highly loaded new products during the year.

While largely a strategic course correction to fill out our offerings in routers and mesh systems, these new products were met with strong market adoption and importantly, stand as a cornerstone to help us expand our share position across the low and medium tiers of the market, while further opening the funnel to our subscription services. And NETGEAR's offerings continue to stand out to consumers and professional reviewers alike, collecting a multitude of awards and accolades throughout the year. Given all the progress, we remain extremely well positioned to capitalize on potential federal and state actions that could materially change the market dynamics in this space.

We also made great strides in-sourcing our software development capabilities on the consumer side of the business. Our newly formed software teams delivered a great new mobile app that launched with our new M7 mobile hotspot. This software platform is the go-forward foundation of our customer experience for our consumer products. We also capped off the year by growing our ARR in Q4 by 18% as compared to the prior year period, allowing us to end the year with over $40 million in ARR. And with the launch of our new M7 mobile hotspot, we have added eSIM monetization to the mix of our subscription and services revenue.

From a financial results perspective, I'm thrilled to share that we capped off 2025 on a high note, delivering a fourth quarter that marked another tremendous proof point of the momentum we are building. With enterprise demand again growing double digits year-over-year and strong work by the supply chain team navigating ProAV supply challenges, we were able to come in near the high end of our revenue guidance and exceed the high end of our non-GAAP operating margin for the seventh quarter in a row. Non-GAAP gross margin grew 750 basis points year-over-year in both enterprise and consumer, resulting in record quarterly non-GAAP gross margin of 41.2%.

This flowed through to the bottom line, translating to non-GAAP EPS of $0.26, up 117% sequentially. For the year, we improved our non-GAAP EPS by $1.35, an incredible validation of how the operational changes in 2024 flowed through to improved results in 2025. We also bought back roughly $15 million in shares in the fourth quarter with total repurchases in 2025 of approximately $50 million. With all we accomplished in 2025, we're entering into 2026 with great momentum. Our philosophy continues to be to aggressively drive our transformation and embrace the inevitable changes that come with this.

As such, this week, we executed a small restructuring impacting approximately 5% of our employees, including several senior leaders. Unlike in 2025, where we're looking to shift investments to our highest growth opportunities, this restructuring is driven by the opportunity to enable improved business unit empowerment, streamline execution and ensure we have capacity to onboard the capabilities needed to drive our growth in the years to come. We remain committed to investing in our transformational initiatives, and these changes have the added benefit of making additional room for those investments.

One macro factor impacting our industry is the memory shortage caused by the unprecedented AI data center build-out. We've had success mitigating the situation to date and expect to have a limited gross margin impact in the first half of this year. That said, the memory challenges are escalating quickly and the impact in the second half of the year is uncertain, but rest assured, we're continuing to do everything we can to mitigate these challenges.

For our enterprise business, the situation is manageable. Memory is a small percentage of our bill of materials, and we have products that are more expensive with better margins. Also, we've seen and expect to see further industry-wide price increases by many of our competitors. We will follow suit while remaining extremely competitive from a value and price perspective. For consumer, the situation is more challenging given memory represents a higher percentage of the bill of materials and the products have lower gross margins.

We have multiple streams of mitigation efforts underway, which include negotiating ongoing cost sharing with our supply chain and channel partners, adjusting our procurement strategy, reducing promotions and constraining OpEx for this business. We remain committed to minimizing the financial impact on operating income from our consumer business. While our efforts have successfully minimized impact to the first half, our ability to navigate the second half is uncertain at this point. And therefore, we may be challenged in delivering on our 2026 goals of growing revenue, margin and profitability despite our best efforts to mitigate the memory situation. That said, our objective remains to hold the line on these high-level goals for this year.

In closing, NETGEAR remains on a great trajectory as we delivered revenue growth, record gross margins and profitability in 2025. We remain committed to our transformation and the mid- and long-term targets we shared at Investor Day, and we will continue to make decisions aligned with our philosophy of driving long-term value for shareholders. With that, I'll now turn it over to Bryan.

Thank you, CJ, and thank you, everyone, for joining today's call. We closed out 2025 with a strong finish, building momentum throughout the year. Propelled by continued strength in our enterprise business, we delivered revenue at the high end of our guidance range. Coupled with disciplined operational execution, we delivered non-GAAP gross margin of 41.2%, yet another all-time high for NETGEAR.

I'm pleased to share that this marks the seventh consecutive quarter where non-GAAP operating margin exceeded the high end of our guidance range. These impressive results serve as further proof of our progress as NETGEAR continues to drive towards expanding long-term growth and profitability. We exited the year with DSOs at 73 days, a 10-year low and another testament to the operational efficiency and agility of our new restructured organization. For the quarter ended December 31, 2025, revenue was near the high end of the guidance range, coming in at $182.5 million, down 1.1% on a sequential basis and flat year-over-year.

The fourth quarter's performance was driven by continued strength in enterprise, where ASP and units each grew year-over-year in our ProAV managed switch products. Impressively, we again saw double-digit growth year-over-year in end-user demand and reached a record high level for this category. We also saw both of our businesses deliver strong year-over-year contribution margin expansion of at least 320 basis points. In Q4, we repurchased $15 million of our shares and ended the quarter with $323 million in cash and short-term investments.

Our balance sheet remains strong and our capital allocation strategy is working. We delivered $89.4 million of revenue in the Enterprise segment for the fourth quarter, down 1.6% sequentially and up 10.6% year-over-year. We made further progress in the quarter on mitigating supply constraints around certain managed switch products, working with key supply chain partners and thanks to the excellent execution of our team. Consequently, the revenue mix of our products from the higher-margin enterprise segment remains strong, coming in at 49%, an improvement of 470 basis points year-over-year.

Taken in conjunction with the significant reduction in costs across our supply chain, this led to the record consolidated gross margin in the quarter and helped drive our operating margin outperformance. While we experienced supply constraints of certain of our managed switch products, the situation is dramatically improving, and we are slightly ahead of schedule. To fully capitalize on the substantial and growing demand, our team is rigorously working to increase our supply chain agility, and we continue to expect to be back into a healthy supply position this quarter.

As a reminder, beginning in Q4, we are reporting 2 business segments with the reporting of our current mobile products being included in our consumer business. We will continue to supplement reporting revenue for products sold to service providers and plan to add our cable modem and gateway business sold in retail, which enables services offered by cable operators. This revenue call out will allow investors to isolate these declining businesses in their assessment of NETGEAR and our transformation.

In Q4, the consumer business delivered net revenue of $93.1 million, down 8.4% on a year-over-year basis and down 0.7% sequentially. Domestically, we saw sequential growth in Wi-Fi systems, and we're able to modestly gain share sequentially in the U.S. retail market. We are currently operating with lower cost inventory and continue to benefit from an improved product mix of Wi-Fi 7 offerings, coupled with streamlined channel execution, which is driving our strong margin expansion, leading to our highest gross margin performance for this business since Q1 of 2021. Sales to service providers and associated products were down approximately 30% as compared to the prior year, while the core consumer business increased 1.6% as compared to the prior year period.

Now moving on to an update on our recurring subscriber base. The team has made progress with our initiative to transform these offerings, and we have additional improvements slated for the coming year. We continue to believe that focusing on increasing our recurring subscriber base is the optimal strategy to add high-margin revenue throughout our business while differentiating our offerings. In fact, we have been successful in incrementally improving our conversion rate and our push to move customers to our higher ASP Armor Plus offering was once again a strong contributor to growing our ARR at 18% year-over-year, reaching $40.4 million in the quarter. We remain confident we can grow our highly profitable ARR over time, and I'm pleased to share that we exited Q4 with 558,000 recurring subscribers.

For the full year 2025, NETGEAR net revenues were $699.6 million, up 3.8% compared to the prior year ending December 31, 2024. This was led by an impressive 18.8% growth in our enterprise business top line. This was partially offset by a decline in our consumer business revenues of 7.3% due to a 23.3% decline in sales to service providers and associated products, which was partially offset by an increase of 1.7% in the core consumer business.

The proactive restructuring actions we took at the beginning of 2025 sets the foundation for our success in the year, enabling us to make important investments for long-term growth, mostly within our enterprise business. As a result, we had a full year non-GAAP operating profit of $5.9 million, resulting in non-GAAP operating margin of 0.8%, marking a return to non-GAAP operating profit on a full year basis for the first time since 2021.

From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in the earnings release distributed earlier today. Gross margin came in at 41.2% in the fourth quarter of 2025, once again, an all-time high and the sixth consecutive quarter of sequential gross margin expansion. This marked an 840 basis point increase compared to 32.8% in the prior year comparable period and a 160 basis point increase compared to 39.6% in the third quarter of 2025.

Our gross margin in the current period benefited from an improved mix of our higher-margin enterprise business and Wi-Fi 7 products within the consumer business and improvements from a license acquisition relative to the year ago period. In the fourth quarter, we entered into a strategic agreement to acquire a perpetual license for the operating system that powers our AV line managed switches.

Acquiring this technology improved our overall gross margins by roughly 100 basis points in the quarter. But more importantly, it will unlock our ability to bring greater value to the AV ecosystem faster than we could have otherwise. Drilling down to the profitability of our 2 business segments, both segments were profitable on a contribution margin basis for the third quarter in a row. Additionally, each grew their contribution margin by at least 320 basis points year-over-year, enabled by the operational discipline we've instilled across both business segments.

Enterprise gross margin was 51.4%, a record for this business and up 750 basis points year-over-year, driven again by strong demand for our ProAV managed switches and aided by the aforementioned license acquisition. The Consumer segment was once again aided by our improved mix of Wi-Fi 7 products and strength in our higher-margin direct-to-consumer channel, which came in at approximately 15% of retail sales, improving our gross margin for this business by 750 basis points year-over-year to 31.4%.

Total Q4 non-GAAP operating expenses came in at $59.2 million, up 8.3% year-over-year and flat sequentially. Our headcount was 784 at the end of the quarter, up from 753 in Q3 as we continue to reinvest the savings from our January 2025 reorganization in the areas of the business that we expect will deliver the best growth and profitability. This is reflected in the sequential headcount increase as we develop and expand NETGEAR talent with a focus on in-sourcing software development capabilities and enhancing the go-to-market capabilities supporting our enterprise business.

Our non-GAAP R&D expense for the fourth quarter was 11.9% of net revenue as compared to 10.5% of net revenue in the prior year comparable period and 11.7% of net revenue in the third quarter of 2025. To continue our technology and product leadership, we are committed to significant but cost-effective investment in R&D. I'm pleased that we delivered non-GAAP profitability above the high end of our guidance range, enabled by our strong gross margin performance. Our Q4 non-GAAP operating income was $5.9 million, resulting in non-GAAP operating margin of 3.3% for an improvement of 560 basis points compared to the year ago period and an improvement of 120 basis points compared to the prior quarter.

Our non-GAAP tax expense was approximately $350,000 in the fourth quarter of 2025. Looking at the bottom line for Q4, we reported non-GAAP net income of approximately $7.7 million, resulting in a non-GAAP income of $0.26 per share. For the full year 2025, we delivered non-GAAP net income of $13.3 million or $0.44 per share.

Turning to the balance sheet. We ended the fourth quarter of 2025 with $323 million in cash and short-term investments, down $3.3 million from the prior quarter, with strong free cash flow largely offsetting $15 million in stock repurchases. During the quarter, $19.5 million of cash was provided by operations, which brings our total cash provided by operations over the trailing 12 months to $1.6 million. We used $5.9 million in purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $20.5 million.

In Q4, we spent $15 million to repurchase approximately 539,000 shares of NETGEAR common stock. We have approximately 1.5 million shares reserved in our current authorization and our fully diluted share count is approximately 29.5 million shares as of the end of the fourth quarter. We're committed to returning capital to our shareholders and plan to continue to opportunistically repurchase shares in future periods.

Before I get into our Q1 outlook, I would like to take a moment to touch on the memory situation and how it may affect us in the year ahead. To date and for the first half of 2026, we have been able to and expect to largely mitigate the impact of the increasing supply constraints of DDR4 memory and the resulting increase in memory pricing. However, as we plan out the rest of 2026 with our suppliers, we believe we may see an escalating impact on the cost to produce certain products through the coming quarters with potentially an outsized effect on our consumer business in the second half.

We are undertaking a number of mitigation strategies, some of which look promising, but wanted to bring this issue to light as it could have a meaningful impact on our consumer business starting in the back half of the year if our mitigation efforts do not substantially counteract the headwind.

I'll now cover our outlook for the first quarter of 2026. Within enterprise, end-user demand for our ProAV line of managed switches is expected to remain strong, and we have made progress on improving our supply position for these products. On the consumer side, while we have a broader product portfolio to address the market, we are seeing softening market demand to start the quarter, which could be attributable to broader pricing pressures from electronic makers dealing with the rising cost of memory.

For service provider and related products, we expect revenue to be around $20 million, in part tied to the latest government shutdown, which would be a decline of approximately 35% as compared to the first quarter of 2025. Accordingly, we expect first quarter net revenue to be in the range of $145 million to $160 million. In the first quarter, we expect our operating expenses to be slightly reduced from the prior quarter, aided by a small transformation-driven restructuring with the savings being redeployed to further accelerate our transformation later in the year.

Additionally, we expect a slight headwind to our gross margin of around 100 basis points, mainly relating to the rising cost of memory. Accordingly, we expect our first quarter GAAP operating margin to be in the range of negative 16.3% to negative 13.3% and non-GAAP operating margin to be in the range of negative 6% to negative 3%. Our GAAP tax expense is expected to be in the range of $1 million to $2 million. And our non-GAAP tax expense is expected to be in the range of $300,000 to $1.3 million for the first quarter of 2026. And with that, we can now open it up for questions.

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

Congrats on a strong finish to 2025 on profitability. I just wanted to -- obviously, you've been very clear on the memory situation, which I understand is out of your control and mainly affecting the consumer side of the business, which is a helpful distinction. But I wonder if you might just put a little bit more of a fine point on the potential scenarios here.

So for example, if we were to hold memory prices constant from here and we look at the back half of the year, is there a way to maybe just ballpark the potential impact so investors can set proper expectations on that? I understand there's going to be changes in the pricing from here, and we don't know what's going to happen in the back half. But just so we can run sort of a baseline analysis, we hold things constant, we enter the back half, what does that do to the business?

Adam, it's CJ. Good question. I'll start and then Bryan can maybe fill in. A lot of our mitigation efforts make it hard to answer that question because they range from designing in new memory sources, despecking memory where it doesn't impact performance, cost sharing with our supply chain and channel partners. And so -- but to paint the scenario that's possible on consumer is, we could look to pull back on promotions, performance media so that we can maintain a higher level of gross profit at a lower unit volume because that helps mitigate the memory impact.

And on the enterprise side of things, right, as we mentioned on the call, it's full steam ahead, like we're driving the transformation. We're -- nothing's really changed from our plans before this escalation. We are going to do a price increase to help mitigate it. We've got air cover on that because a lot of our competition is doing the same. But you should think about enterprise is like full steam ahead, and we're going to fairly easily manage through the memory situation there.

But to put it because I think we talked about just super candidly, you're going to ask that exact question and you have a model to update after the call. So we took a look at consensus, and we said, okay, if we're looking at consensus with the results we delivered in '25, obviously, there's a lot of upside there, right? If you look at the gross margin impact that we've delivered, the profitability shift that we've made, then you factor in the potential risk around memory in the back half and like, maybe consensus -- don't take this as guidance. This is based on what we know today. It's like maybe consensus is actually not too unreasonable.

And so that's just to give you some framing because we did look at the numbers, we look at your model, and we did want to be responsive to that question. It's just very unpredictable. We have a lot of really good, like I said, on the consumer side, mitigation efforts. We've done great to date. Our partners are being supportive. So that's kind of like the high-level framing we would give you on kind of the full year consensus when we do the puts and takes. Bryan, do you have anything to add to that?

No, I think you've covered most of it. Yes, I think you've covered most of it. I just would stress that the first half, we feel pretty solid about that visibility. We have roughly 4.5 months of inventory, which gives us that level of confidence. But I think the way you framed it is appropriate.

Got it. Okay. That's helpful. And I wanted to ask on sort of pricing and competitive environment. It kind of ties in into this thought. But it sounds like kind of really 2 different stories here. In enterprise, as you mentioned, competitors are raising prices, which is understandable and certainly rational given the input costs are rising here. It doesn't sound like that's happening as much in the consumer side, if at all.

So I wonder if you might just kind of talk about the competitive dynamics and pricing in consumer. Is there a potential for that to follow enterprise? Is it just a couple of bad actors, right? And this will be the second part of the question. I assume some of those bad actors may ultimately potentially exit the market, whether willingly or unwillingly, any update on sort of the competitive environment and the potential for some of those competitors to be forced to exit?

Yes. Good question. I'll start and then Bryan can fill in if I miss anything. You have the nail on the head, the way you described it, right, enterprise across the board, we're seeing price increases. We haven't -- in our checks, we haven't seen any kind of macro impact to demand on that side of the business. The market dynamics -- consumer are trickier. We have seen some behavior change from some players in the space and not others.

And so there -- it's -- not all competition is created equal. I will say, I think you were basically asking like what's the latest update on the regulatory front. And as we've been consistent in saying throughout these calls, like we're just kind of reading the same stuff that you are. But of course, we're prepared to talk about some of the latest developments we've read in the news. So basically, since our last discussion at your conference in early December, December 4, there was a Bloomberg report that the FTC is examining whether TP-Link may have deceived customers by allegedly concealing its connections to China.

Some of these are connected, as you'll see. On January 26, so just recently, Texas -- Governor of Texas announced it was banning TP-Link, along with a bunch of other companies from use by Texas state employees and they cited there's some cybersecurity risks. And then I think the most important update, and it's a little bit nuanced, but I'll try and explain it as simply as I can, is the FCC passed a rule that requires companies that have FCC licenses in our space to certify whether they're owned by, controlled by or subject to the jurisdiction of a foreign adversary that, of course, includes China.

And those who say yes would be subject to a national security review. Those that say no or don't respond can have their license revoked. And it was interesting, I think in the actual rule making, it was noted that TP-Link objected publicly to this specific rule. So obviously, even putting TP-Link aside, there's a lot of competition in the long tail from foreign adversary. So this is a welcome rule. It hasn't been implemented yet, and I don't have the timing on that. But the momentum here continues to build, and so we remain confident as ever that there's going to be more to come.

And maybe, Adam, I'll go back to the first part of your question just in terms of the consumer market and trends and maybe try and relate it to the guidance that we provided to make sure it's clear. We have seen a softer start to the year on the consumer side. Typically, the market would be down off this holiday period, about 15%. What we're seeing is probably more around 20%, low 20-ish percent range. And there's plenty of market data out there talking about consumer sentiment.

I think we have heard of other consumer products where prices are on the rise. We've not seen that in our space. And maybe just kind of touching on the other pieces of the Q1 guidance, just reminding folks that we're calling out the service provider revenue, which now includes the cable products that enable cable operator services. And the guide that we provided there is projecting out what would be about a 35% decline compared to the Q1 '25 period. This portion of the business is in harvest mode, which we talked about at Investor Day.

Probably less obvious is that Q1 is a relatively shorter quarter for us, just the way our fiscal calendar operates coming off Q4. It's down about 7.5%, which is pretty impactful on the enterprise side of the business where now that we've gotten to a healthier place on supply and managed switch, POS is really driving the replenishment back into the channel, it's pretty well matched. So that would have an impact on that business.

And maybe just to give a little bit of a context of Q2, what I was just saying with regards to the duration of Q1, Q2 returns to a normal quarter. That would be up about 4.5% off of Q1, which will certainly benefit the enterprise business. CJ touched on earlier, anticipated price increases on our enterprise products that would start to kick in during that period. And then the consumer market is typically flat in Q2 off of Q1.

So if you put all that together, like our best guess would be Q2 would probably be about a sequential increase in the 5% range, which would have helped on the operating margin, too, going into Q2, just from the incremental gross profit from that extra top line, that's probably net-net of everything, maybe a couple of hundred basis point improvement from an operating margin standpoint. So just wanted to bridge all that because there is a lot of stuff going on and calling out specifically that Q1 is a shorter period for us.

Yes. And Adam, just to make sure you're -- that 7.5%, that basically means that Q4 is a week shorter than -- I'm sorry, Q1 is a week shorter than Q4 and even a couple of days shorter than the same quarter last year.

Got it, really helpful.

Yes, a non-obvious point.

Your next question comes from the line of Solomon Wang with Stifel.

Congratulations on a solid quarter, guys. So just any color on the current health of channel inventory. Are you seeing retail partners holding lean inventory levels in anticipation of a broader Wi-Fi 7 rollout? Or is there still some legacy Wi-Fi 6 inventory to be clear?

Yes. I would say it's not uncommon on the retail side going into Q1, coming off the holidays where you'll see them tighten up inventory in the middle of the quarter. Many of them have January 31 year ends. And so I'd say that activity is pretty in line with what we would expect. Obviously, with the softer sell-through that will dictate, but I wouldn't say we've heard or seen any wholesale resets of optimal weeks of supply that retailers would carry, it will just map back into the velocity of POS that they're seeing today.

Okay. Great. And kind of on a follow-up, last quarter, you kind of previously mentioned establishing more of a safety stock and reaching an optimal inventory level position for ProAV managed switches by this -- by 1Q of '26. So any color you can provide on whether there has been any successful clearing up of the sales backlog? And are you now in a position to ship more of an unconstrained end market demand for 2026?

I can start with that one, Solomon, and Bryan can weigh in as well. So we're actually, right, where we said we would be, great execution by the team. We've burned down most of our buffer stock. And so by the end of this quarter, we should be in a safety stock position. And just as a reminder, to tie this into kind of just the health of the enterprise business, if you look at Q1 and Q2 last year, managed switch revenue would be constrained because we didn't have stock to sell as we burn down the backlog, that increases revenue.

And then if you look at it on a year-over-year basis, we had the big channel reset the prior year, so it's a bit noisy. But just to put it into context, like the sell-through of our ProAV solutions last year was over -- we're not going to give a specific growth number, but it was over 25%. So very healthy sell-through growth, and we will now be matching sell-in and sell-through since we've caught up on supply.

Yes. And I would just add, as I said earlier on the call that the managed switch portion of our portfolio reached an all-time high in terms of end-user sales. So we're happy to see the trajectory, Solomon. And in terms of our inventory position, you would have seen us increase inventory quarter-on-quarter about $10 million, and that is largely attributable to getting into a better place on the managed switch.

Yes, not to overly pile on, but we were talking about some customer wins on the ProAV side with our team yesterday. And Topgolf -- Bryan and I are both golfers, so it was a fun one to talk about. Topgolf is actually across the board, all of their location is powered by ProAV, so like the core of their product experience, which obviously has zero room for any type of performance issues. So kind of really strong validation, another point of validation.

And then in terms of like the trusted nature of our brand, we've deployed last quarter in the International Criminal Court in Benelux. We've deployed with NATO. And so we love sharing kind of the customer wins on this side of the business because they're big, high visibility, high-performance requirements kind of deployments.

Your next question comes from the line of Jay Goldberg with Seaport Research.

First off, I want to just look at sort of the structural change in the business. Looking at my numbers relative to where you guys delivered, revenue was a small beat, but the EPS was a pretty big beat. That seems to imply a fairly high degree of operating leverage built into the model. And I know in the near term, we have all these memory problems sort of weighing things down. But I was just hoping you could speak to how you're going to build that operating leverage, over what trajectory? Like how does that look going forward? And how are we going to get the business to that more higher operating margin level?

Yes. I mean maybe I'll just -- I'll start off here. I mean, as we talked about in Investor Day, we are still investing in the business that's largely going into the enterprise side. We did say that we would outpace revenue -- sorry, outpace growth ahead of revenue growth in '26 to really fund those long-term benefits that we see. We did say that would subside in '27 and would get back in line with revenue trajectory.

In reference to kind of what you were expecting for Q4, obviously, the record high gross margin over 41% was the major driver there, one of the driving forces there. And we did mention this at Investor Day, but was not necessarily factored into our guidance that we provided earlier than that was this acquisition of the perpetual license that is the operating system that powers our AV product portfolio, which is a huge benefit.

On a full quarter basis, that will yield about 150 basis points of gross margin expansion. We did get a portion of that in Q4, which is about 100 basis points, as I mentioned. So those things are what's going to really drive leverage in our model. And again, another point we touched on at Investor Day, we are expecting over the long term to get the enterprise portion of the business up to about 65% of our overall business based on what we see today, and that certainly will bode well in terms of margin expansion.

Yes, Jay, the 2 things I would add are, right, if you take that ProAV sell-through growth, it wasn't a growth number. I said it was bigger than 25% and you apply that to the enterprise business, we've been clear about this. That means the rest of the business has declined, and that is because it's been in transformation mode. So a lot of the -- we have high conviction in the potential of our enterprise networking and security business.

We're making the investments needed to get that. This is on the right trajectory. We've got validation from customers and channel partners that we are addressing a significant gap in the market. So we're excited about that, and we're excited to planning for building momentum in that business this year. So that's one point. The second point is as we transform our go-to-market team on the enterprise side, and this benefits both ProAV and the enterprise networking and security business.

Those upfront investments take time to pay back, right? It takes time for salespeople to build their partner portfolio. We've even changed incentive structures to ensure that, that's happening this year. And so that's part of the equation around the operating leverage on the enterprise side of the business.

So it sounds like a lot of those drivers are still intact. And so maybe they get disrupted later in this year, a bit by gross margins in memory, but that shouldn't change the underlying trajectory. Is that safe to say?

Yes. On enterprise, that's correct. Consumer, we've got -- like I was saying, we've got the incremental cost and it has a bigger impact there and then some of the mitigation stuff we might do. But we also have an OpEx lever to pull there. And we remain committed to, one, we're very optimistic and bullish about the long-term opportunity in consumer.

So Jonathan's strategy, he shared at Investor Day, every day that passes, we feel stronger and stronger that we're heading down the right path with our Google partnership, with what we're doing in Wi-Fi 8, we're really excited about that, not just in terms of the new technology that, that brings to market, but also that's the opportunity for us to reset our portfolio.

So I don't want to sound -- this memory thing is transitory and that it's not a transitory in like a 1 or 2 quarter, as you know very well. It's going to -- we're going to have to work our way through 2026. But at the end of the day, we remain very bullish.

But we do have the lever to slow our OpEx investment on that side of the business, and we really do want to stand by our commitment of limiting the dilution to operating income from consumer while we go through that transformation. So that's the exercise that we're going to go through this year as we mitigate memory, but super excited about the long-term vision that we shared at Investor Day.

That's very helpful. And just a quick housekeeping question. Bryan, could you repeat the numbers for ARR and users, subscribers?

Yes. In Q4, ARR was just over $40 million, and the recurring subscribers was 558,000.

There are no further questions at this time. Mr. CJ, I turn the call back over to you.

Yes. I'd like to just close by making a couple of points that may come up in our call back. So I want to share them here so that we have the ability to talk about them candidly. One is around buybacks. So we announced -- or we disclosed that we repurchased in Q4, $15 million of shares, that's 1-5, which equates to $50 million for the year, $84 million in the last 7 quarters or so. And if you look at the -- if you do the math on the -- what we spent and the number of shares we got, it becomes clear that we've been out of the market for several weeks, and we've been restricted from purchasing for the last several weeks.

So a couple of days from now, we have earnings behind us, we expect to be unrestricted for the purpose of implementing a plan or resuming buybacks. And so I just wanted to share that. We view the current price as attractive and wanted to just be able to share here that returning capital to shareholders remains a priority. And then the last point I want to make is around AI because there's just -- obviously, everybody who's following the market, small developments from some of the AI leaders are leading to a lot of FUD for software companies and other companies.

And I wanted to make very clear, I don't think we've been impacted by that, but I wanted to make very clear that we view AI as a long-term tailwind and the fact that we have a device capability is a huge competitive advantage. And we're in-sourcing software at a time when we can leverage AI to do that very efficiently and very quickly. And furthermore, we envision a number of different opportunities to integrate AI into our products, not just for enabling better performance, but enabling new use cases.

And so overall, we're quite excited about what's happening and taking advantage of that to the max in all of those areas, not to mention driving operational efficiency at NETGEAR. So with that, I just want to reiterate my thanks to the NETGEAR team for delivering an incredible Q4 in 2025, and thank you all again for joining.

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

Thank you. All right. We are going to get started. Welcome, and I want to start by thanking everybody for being here, both in person and online. For those of you who are in person, many of you traveled from a long way, and I really appreciate that. We really appreciate that. It's not a trivial time to be doing across the coast trips. So thanks for being here.

Today is an awesome milestone for NETGEAR. We've been largely under the radar, transforming the business. And today, we get to share our plans for scaling the business and some midterm, long-term goals that we're going after. So it's a big, big milestone for us. I want to start by thanking Crestron for hosting us today. So for those of you who are joining online, we're doing this Investor Day from Crestron Experience Center in New York. And we have Crestron, EVP of Marketing here, Brad Hintze.

And in addition to this being a great venue, the price being right, thank you, Brad. This whole experience center is powered by NETGEAR. Our enterprise -- or our NETGEAR enterprise solutions, both on the AV side and on the WiFi side. So as you all know, we've been doing -- working hard to bring more visibility to the work that we're doing on the enterprise side. We figured what better way to do that than to host an Investor Day that's powered by NETGEAR Enterprise.

Here's the plan for today. I'm going to kick things off talking about our transformation, really the foundation that we've built that will allow us to scale. Pramod Badjate, who leads NETGEAR Enterprise, he's going to share his vision and strategy for that business. Jonathan Oakes, who leads NETGEAR Consumer is going to do the same for our Consumer business. Bryan is going to share some info on our financial goals, a little bit about 2026, some midterm goals, some long-term goals. I'll wrap things up briefly after Bryan, and then we're going to go into a Q&A. We have about 90 minutes of presentation planned. So buckle up, we've got a lot to share, and we're planning for about 30 minutes of Q&A. And for those of you who are in person, we're planning for a small reception. We've got some great demos to share as well.

It wouldn't be an Investor Day without a safe harbor. We'll obviously be sharing stuff about the future that are subject to risks and uncertainties that we talk about those things in our SEC filings, so we'll direct you to those.

So I strategized about how to get off this slide as quickly as possible. And so instead of giving any type of background about myself, I'm going to direct you all to my LinkedIn, and you can look at my career and accomplishments there. And instead, I'm going to jump right in to talk about why I joined NETGEAR, and why we're so excited about the opportunity ahead. There's 4 main points I want to share here. First is, we have a number of tailwinds working in our favor, whether it's the transition to IP-based AV, the growing complexity and importance of connectivity in the home, the scrutiny that's being faced by China-based or China affiliated companies. We just have a lot of macro factors working in our favor.

Second, NETGEAR has incredibly strong bones. So we've got great brands, global distribution and supply chain. We are very early to exit China a long time ago, that predates me and a very strong balance sheet. So really, we're really well positioned for a significant transformation. Third, kind of as I alluded to at the outset, we have a real opportunity to unlock our enterprise business. That business has been on a great trajectory despite the fact that it's been built in the context of a company that's largely been consumer focused from a leadership and strategy perspective. And then relatedly, after 30 years of kind of operations under the same CEO, same -- most of the same leadership team, we have a lot of opportunity to modernize our operations, change how we do things and unlock value in the process. So I'm about 20 months in, and I'm very happy to say that like my thesis for NETGEAR and the reasons for joining feeling very good about all of those.

I wanted to make the point that our aspirations for unlocking the opportunity at NETGEAR are really significant. So we're not here as a leadership team, as a broader team to optimize the dials on some existing businesses. We're truly focused on transforming NETGEAR to deliver long-term value to shareholders. And a good proxy for what we're looking to achieve is what we achieved [indiscernible].

When we transition that business from a packaged goods, retail business, transactional business model to a digital services business. In doing so, we unlocked billions of dollars of shareholder value by growing our margin, growing our profitability. Another one that's maybe a little closer to home to NETGEAR because it's a device business, is Logitech. Bracken Darrell led an 11-year transformation of Logitech as CEO there. And again, in both of these examples, a ton of profit and gross margin expansion and a ton of value creation for shareholders. So those are our aspirations, and we're confident in our ability to deliver that.

So how do we do it? We've developed and are following a 3-phase transformation approach. Phase 1 is all about building the foundation. That's largely what I'm going to talk about. That will allow us to scale. We're largely exiting this phase now. So I'll be looking back at what we've set up for NETGEAR. Phase 2 will largely be what you'll hear from Pramod and Jonathan. This is all about strengthening our core businesses so we can build value back into NETGEAR. That's our -- the phase that we're just entering. And then once we've done that, that will give -- that will put us in a position to be more aggressive in accelerating the growth of our business, particularly on the inorganic side of things.

So in terms of Phase 1, we structured our transformation initiatives in three buckets: strategic, organizational and operational, and we really couldn't be more proud of what we've accomplished in each of those areas. So I'll talk about each of those now. So first and foremost, for us to be successful in delivering on our long-term value creation goals and aspirations, we really had to reset our company's North Star, and the expectations that we set for ourselves on what we plan to deliver for our customers.

And our new purpose as a company, really captures this at the most fundamental level. Going forward, NETGEAR exists to power extraordinary experiences. So whether it's powering edge share in concerts, protecting your business, truly solving connectivity in the home, our new purpose sets the bar for what we're seeking to enable for our customers. Similarly, we redefined our mission. This is really the how and what we do behind our purpose. And every word of this mission was chosen with care, but I'll just elaborate on a few.

Intelligent solutions is a nod to the fact that we'll leverage AI and other technologies to deliver innovative software experiences, the power the extraordinary. And Protect is there because delighting customers with exceptional software experience isn't enough in today's cyber landscape. Security, privacy, peace of mind that comes with that are paramount to winning the hearts and minds of customers. So our new purpose and mission are being integrated into the DNA of the company. There's themes you're going to hear more about today and in the years to come.

We also translated this North Star into a set of specific long-term business outcomes that we're pursuing. Bryan is going to talk a lot more about these, but let me elaborate a little bit. From a market perspective, we're focused on investing in markets that are big, growing and profitable. From a product perspective, NETGEAR is known for incredible hardware, the reliability, the quality, the performance. We are going to combine that with Intelligent Solutions that delight and protect great software experiences the power of the extraordinary. That will open the door to growing our subscription and services businesses. And when you combine those three things, big markets that are growing and profitable, software differentiation, subscription and services, that will allow us to continue to expand gross margins on the long term. We've done a great job of that over the last couple of years, but this remains a long-term focus for us.

Much of my career has been driving transformations from transactional businesses to services businesses. I mentioned EA upfront. We have conviction that, that opportunity exists for us here at NETGEAR. And the reason for it is a little bit different when you look at enterprise and consumer. On the enterprise side, that business today for us is nascent. And we actually lag competition and customers are asking us for these services. We launched professional services a couple of quarters ago. That was at the behest of our customers and our partners. So we have a lot of catching up to do, and we see a ton of opportunity on the enterprise side. Pramod will talk more about that.

In consumer, we actually have a $35 million AR business today that's growing double digits despite the fact that we've created a top-of-funnel problem for ourselves, and we haven't historically been good at subscription fundamentals. So when we address those two things and then add value into our subscription service, Jonathan will talk about that, that will allow us to accelerate the growth of our ARR on the consumer side. Now we couldn't do any of that without the right organization structure, the right team and the right set of values. So from an organizational structure perspective, the biggest shift that we've made is to really elevate our enterprise team so that it's equal weighted to our consumer team, which is, on a legacy basis, been the focus of NETGEAR.

If anything, we're maybe overcorrecting a little bit, to make up for that on the enterprise side. So we now have two true business units that are fully -- have fully integrated product development and go-to-market capabilities, that are driving those businesses forward. And that's really why today, Pramod and Jonathan are kind of the stars of our Investor Day. Their business units are supported by lean central teams so that we can get scale from those investments, whether we're talking about central technology, G&A, operations, central marketing, it allows us to get leverage from those lean teams that are supporting the business unit structure.

The organizational shifts have been combined with a significant leadership team reset. So this is our executive team today. The top row of folks have joined us over the last 18 months. You can see the BU structure reflected here with Pramod leading enterprise with his commercial leader, Eric Law; Jonathan leading consumer with his commercial leader, Kristin. These are folks as this will become obvious when you hear from them, folks that have a deep pedigree in the businesses that they're driving. But it's not just about the new leaders. NETGEAR has an incredible existing team. And we saw an opportunity to elevate a number of those up-and-coming leaders from the existing team. And those people that really share the passion and the same vision and conviction in our opportunity ahead.

I'm also happy to report that as part of our transformation, we've really restructured performance compensation really across the whole company. As it relates to the executive team, we've increased the number of executives who, as part of their equity allotment received PSUs. This whole group gets PSUs. We've increased the percentage mix of PSUs and then we've tied our PSU structure to shareholder value creation, which wasn't historically the case. So this team is aligned with shareholders on growing value -- the value of NETGEAR. That leadership team partnered with the rest of the organization to redefine our values. We're incredibly proud of these. These are the behaviors and mindsets that are really needed to accomplish our long-term goals.

They're now embedded across everything we do, whether it's hiring, performance management, compensation, these are part of our daily conversation. I won't describe all of them. Some of them are pretty well understood by their names, my favorite is, of course, dare to transform. We also have a great Board with a strong mix of consumer and enterprise and public company experience. After I joined, two of our longest tenured Board members chose to retire, that gave us an opportunity to recruit Laura Orvidas to the Board. She's a 20-year Amazon veteran and is now CEO of a prominent consumer app-based subscription company. We also wanted to keep the Board lean and mean. So we've built an advisory board and added strategic capabilities and experience for areas that are important to our transformation.

Some of you will recognize some of these names. But just to call it Michael Marcellin, we've historically not been strong as an enterprise marketing company. Michael was the former longtime CMO of Juniper. Software. This is a critical part of our transformation. When I joined, we pretty much had exclusively outsourced software developers. This presents a major challenge for powering extraordinary experiences. But I'm happy to report we've made great progress in in-sourcing this capability. Over the last 18 months, we've onboarded about 100 badge software developers. And the best part of all of this is it's cost neutral. But at the same time, these internal teams are going to be able to deliver higher quality experiences more efficiently for our customers and what better time to be building this capability from scratch with all of the progress that we're seeing in AI tools and capabilities that can help us accelerate.

So the last pillar of the Phase 1 transformation is really on the operational front. And as you can imagine, with a number one value of dare to transform. We've changed a lot of stuff, too many things really to highlight, though, we're very happy with the results and the predictability that we're bringing to the business. I have a group of CEOs that I look to for inspiration and advice from time to time. I mentioned Logitech upfront and the transformation that Bracken drove there over 11 years. I believe during his tenure there, he missed guidance once. So we're looking to model our value creation, our predictability off of examples like Logitech and what Bracken accomplish there.

AI, I mentioned, is obviously a hot topic, and we've really resisted the temptation to put AI in front of everything. That said, if you look under the hood, we're being very aggressive at adopting AI, really three key areas: one, to improve our product performance, things like self-healing networks, another to improve the customer experience. There's a bunch of areas where we can actually dramatically improve the customer experience while driving cost down a huge win-win. And then third is just on the operational efficiency side of things. Given the extent of the transformation at NETGEAR, it just gives us an opportunity as we're making all of these changes to ensure that we're being ultra-aggressive at building AI into our processes and workflows.

So we're thrilled with the impact we've had on the financial side of things. We're just getting started. But the foundational financial profile that we're building from is obviously much stronger. We're back on a growth trajectory. We've expanded gross margin. We've expanded profitability, and we've grown our cash balance despite the fact that we've been repurchasing shares. A lot of this is tied to the work that we've done to really reduce our working capital, inventory, in particular. But the most exciting thing is we've implemented philosophies and processes that will allow us to ensure we keep this in check going forward, whether it's matching selling with sell-through. We're going to chase supply versus chasing demand. And all of that's allowed us to be smart and responsible allocators of capital.

We've made some really smart acquisitions. I mentioned the stock buybacks. We've -- I don't know if anybody is keeping score, but we've repurchased about just under $70 million worth of shares at under $20 a share over the last 18 months or so, and we plan to continue to return capital to shareholders. Bryan will cover our capital allocation strategy in his section. And so before turning it over to Pramod and Jonathan to talk about Phase II strengthening our core businesses, I just wanted to touch on and tee up for them kind of the priorities you're going to hear.

For Pramod, it's really about maximizing our opportunity on the AV side of things. We have a strong moat, strong momentum. That's our #1 priority. Then also growing our share in enterprise networking and security to very significant markets. For Jonathan, what you'll hear, it's all about solving connectivity in a differentiated way in the home and then also on the go. And for both of them, it's about delivering intelligent solutions that delight and protect, differentiated software experiences and expanding our services and subscription and services revenue.

So with that, I will hand it over to Pramod.

Thank you, CJ. Hello, everyone. So I joined NETGEAR last year, and I come from an enterprise networking background. I was with the start-up building WiFi products got acquired by Cisco, saw that huge growth within Cisco. After that, I was with Ruckus. I was running that business before it got acquired. And then I was with Arista or a little bit running their campus business. So you can see all enterprise networking businesses. So when I engaged with CJ and the Board initially about the opportunity here, my initial reaction was like, wow, NETGEAR is a great consumer brand, but I'm not sure there's anything for me to offer. But as I engage with CJ and learnt more about the business here, I was really excited about the opportunity really in the B2B side of things. So my goal today is to hopefully share with you why I got excited about the opportunity here at NETGEAR.

So I really have two pillars of my business, and I'll be talking about both of them in detail. One is NETGEAR AV, which is our AV line of business. The other is NETGEAR Enterprise, which is building -- we are building a solution for small and medium enterprises for both networking and security.

Let's start with AV. What is AV, I think, you all know. AV is audiovisual. In a room like this, you have cameras and microphones, which are sources for audio video. We have destinations like these LED screens or speakers, and what an AV solution does is get the signals from the source to the destination. Now it's not as simple as it sounds because there's a lot of timing, latency, precision that is involved in sort of enabling these solutions. And I'll share with you sort of why we are differentiated in terms of the solution we offer here.

In fact, if you take this room as an example, there are over 100 AV end points that are connected with over 14 NETGEAR AV switches, managed by NETGEAR AV operating system that makes it so that the network doesn't get overwhelmed with all this audiovisual traffic. And we also have engaged software that helps the people managing this to be able to set this up.

Let me go through some examples of end user applications where NETGEAR AV is deployed. So you get a sense of what this means in terms of the opportunity itself. So let's start with live events. For those of you from New York, if you attended a broadway show or if you attended concerts from Taylor Swift or Dua Lipa, my daughter took me to these concerts, and I realized that there's actually NETGEAR behind it. Or if you watch the latest Pope's inauguration live, that was over a NETGEAR AV switch itself. So we are considered as a leader in this space. And when it comes to any experiences like this, when it comes to live events, there's more often than not in NETGEAR AV solution behind it.

Conference rooms like this is another example with the post-COVID hybrid work and the return to work, there has been an increase in upgrade to conference rooms to be able to set up -- set them up for those multisite conferencing, if you will, which requires multiple microphones in the ceiling, multiple cameras and so on and so forth. So we play a role there. In fact, one of the largest retailers in the world is in the process of upgrading thousands of their conference rooms, and they're planning to use NETGEAR AV behind it. So again, a huge opportunity. Another example to illustrate the mission-critical nature of this. The recent G7 Summit that happened in Canada, that was powered by NETGEAR AV solution as well. So hopefully, that gives you an example.

Digital signage and video wall is another good example. From those of you from New York, you probably heard of the new JPMorgan Chase building on 270 Park. That building has a huge video wall inside. I haven't seen it myself. I'm planning to go there tomorrow, very excited about it. But that video wall is again powered through our partner, and there's a NETGEAR AV solution behind it. Broadcast is an example when it comes to studios, whether it's private enterprises that have studios to create content, there's a NETGEAR AV solution behind it. An example here in New York is a NASDAQ where they use it for broadcasting their new listings, live events and speaker engagements and so on. So hopefully, all of that gives you an example of how wide sort of AV is not simple AV. All of these experiences I'm talking about is not just like concerts. It's not just audio anymore. These are all digital experiences with huge video walls, synchronized lighting and video and audio, and it requires the precision timing that requires specialized hardware beyond regular networking switches.

So moving on to the portfolio. This is the NETGEAR portfolio that powers it all. We have a very extensive line of switches. That's obviously is the heart of that AV fabric. It's running AV OS that optimizes that network and makes it plug and play. We also have software, and you'll see a demo later on, Engage, which really makes it and brings it all together to make the lives of installers easy. And we have WiFi, which is increasingly used in live events to power network.

If you go to any of these trade shows, and I have attended three big trade shows since I've joined, we usually walk away with the best of show category award in each of these. And the awards you see at the bottom are just a subset of the awards that we won. So let's look at what are the market drivers driving this business or driving this segment overall. First of all, all those examples that I talked to you about, there is an increase in adoption. We try to call something like the number of pixels being deployed, right? When people move from 4K to 8K when they deploy more digital screens, all of that is powered by greater capacity. So you increase the capacity of video and audio, you require greater capacity of AV switches behind it.

The other trend in this space is the move from sort of matrix connections for connecting this audio/video signals to their destinations to an AV over IP network. The reason that transition is happening is because AV over IP is more scalable, it's more flexible, and it's more cost effective. Because when you transfer the signal to over IP, it allows you to do a lot of processing in software. So when you look at the type of deployments, which were enabling these in the older days versus now with AV over IP you have a much simpler deployment. So that's what is driving the transition. And the third thing which is true about this segment is the AV installers who are responsible for putting these networks together. Unfortunately, they are not networking experts, right?

So when initially, the move happened to AV over IP. People realized the flexibility and the importance of this transition, but there were a lot of challenges really putting it together because these installers took a lot of time, and many of these networks were not prepared for that multicast traffic, which sort of overrun the network. And this is where NETGEAR has been uniquely focused over the last many years in learning from this market and tailoring a solution, which uniquely solves the problems of this segment. So I'm going to explain to you how.

But first, let's look at the market size itself. The broader AV market is about $332 billion, a fairly large market. It includes the endpoints like microphones and TV screens and all of that, so not the market we play in. What is more relevant for us is that $7 billion AV signal and routing space, and within that, about roughly, we estimate 38% of that, $2.7 billion is that AV over IP market where we offer the solution. And if you look at the CAGR growth of this market itself, the broader market is growing at a 4% CAGR. But if you see that AV over IP market, that's growing at 14% CAGR according to what we have seen in the industry.

At NETGEAR Solution, NETGEAR AV has grown at much faster than that over the last few years, and we expect to continue to grow at a faster pace than the industry and grow share. And I'll explain to you why. So here -- this slide, I'll spend some time trying to capture what is truly differentiated about what we are doing in this space. First of all, as I said, we really invested in this to make this solution plug and play to help those AV installers like when they go in and try to put together a network, they're not experts in IP, but they understand the AV terminology. So we make sure that our interfaces were geared towards that segment. We have innovations in our OS so that when you install an AV network, it doesn't overwhelm your IT network. That was a challenge before. There's something called IGMP Plus that we invested in that makes it so that you install a network, and you don't have to worry about overwhelming your IT network.

We have, by the way, demos for all of this later on. So for those of you sticking around, you should experience that. The second thing, as important as our investment in products is we have over 500 partnerships with AV manufacturers. What happened in the space is there are unique idiosyncrasies of each of these AV manufacturers. And so we stepped in to make sure that we exchange products with these manufacturers. We test it. We make sure that we address any unique challenges that we have, making these run over our network. And then we have created simpler profile so that when somebody tries to set up that network, like a Crestron network as an example, if you have a Crestron endpoint, all you do in our switch or in our software is just pick that hey, I have got a Crestron at the other end. And everything that is required to make that work flawlessly is taken care of. And we have done this over the last many years with over 500 different manufacturers.

And then lastly, we have some of the best AV over IP expertise in my team. If you have a complex setup, if it's mission-critical, like a G7 summit and things are not going right, you can rely on the experts and my team. If they can't solve it, probably no one else in the world can, right? And all of these things, the product, the partnerships, the support, all of this has resulted in a level of loyalty and preference for our products, which, frankly, have not seen with any of the product or solution in my career. I'm proud of a lot of things I've built, but this type of loyalty that I hear from our partners is just amazing in what the team has accomplished.

In fact, when I visit -- like I said before, I visited this AV trade shows, what I noticed there in some of the larger trade shows like NAB and InfoComm is you go to booth after booth, and you'll have these AV manufacturer displaying their next-gen solution, and they have a sign in each of these booths powered by NETGEAR AV. And when they see me come in and they see, I'm at NETGEAR, they actually reach out to me and actually thank me saying, "You guys are awesome. We love you because you have enabled this industry, you made our jobs easier." So what we did is we captured the video in the voice of these partners. So hopefully, you get a sense of what we hear at this show.

[Presentation]

So hopefully, you get a sense. That's just a subset of the partners. Like I said, we have 500 partnerships where we have enabled a lot of work involved in testing with them, making sure that the solution works flawlessly. So let's shift gear a little bit and talk about the software behind it. So like I said before, key parts of the solution is the hardware. The hardware is purpose built because it requires some precise timing. There is operating system on top of that. We call it AV US, which makes sure that this system is plug-and-play. But there's also the software called Engage, which makes it all come together like a system. So if you're deploying a live event and you have switches, the installer needs to go and plug in the audio video sources to destinations they want to set up a WiFi for live event. We make it all so that you can do it literally within minutes -- and we are even investing in this further to make sure that we continue using AI and other technologies to make it so that you don't even need to go on-site to configure it.

You can preconfigure these things, you show up on site. You have color coded and you'll see this from Laurent, you just plug in the cables and the system should be up and running. Another area where we have really helped this industry transform. Like I said, there was a dearth of knowledge and AV over IP. So we came up with training courses to train AV professionals in this space. And we have become the go-to destination when it comes to AV over IP training. We have trained over 30,000 users, over 10,000 installers. In fact, some of our partners drive their end customers to our platforms for training. And that's very helpful because these people who are getting trained are getting trained on our software, our technologies, and that's very helpful to our plans.

So let me walk you what is the end result of all of this in terms of how do our partners and customers see the value that we have created. And I'll walk you through a few examples in terms of customer testimonials. The first one is from Eric Snider, who is the CTO of CTI, one of the fastest-growing AV integrators worldwide, probably amongst the top 3 or 4 in the world. So Eric decided to transition to NETGEAR AV few years back. And he had data with him to really analyze how many labor arts and how long it took to set up these networks when they did it before they were -- they had NETGEAR in their system solution versus afterwards.

And this is based on his calculations that he saw over 90% reduction in average configuration time. And for these installers, that savings directly translates into their OpEx savings. And in many cases, the savings that they realize is more than probably the cost of what they're spending with NETGEAR AV. So this is huge. And this is something we are continuing to be focused on in terms of differentiating our solutions with. L'Oreal is another customer. They were deploying an internal AV solution. They decided to go with NETGEAR AV because they were really concerned about overwhelming their IT network with AV, so they wanted to prevent this bottleneck. And because of that innovation in our software that I talked about, they were able to deploy it flawlessly without any concerns.

And then lastly, as I said earlier, G7 Summit, this was a partner who got this project to deploy a multisite deployment of over 40 switches. In their own words, it was like an impossible time line. They deployed using NETGEAR AV, and they were able to deploy it fairly quickly because of all of those integrations that I talked about earlier. So -- how do we continue to grow in AV? I think I talked about all the things that we have done in products and innovations, but we're not stopping there. And here are some things that we'll continue to invest in, where we have opportunities that we see to realize in this space. First, -- we believe we can grow in broadcast as well as residential spaces.

In broadcast, while we serve sort of the lower end of that market in terms of audio and small- to medium-sized broadcast houses, -- we are going to be launching products next year that allow us to address a larger portion of that market. And this is based on feedback that we directly heard from our partners. The second thing we are doing is we are continuing to enhance that plug-and-play nature of our software -- so we're going to come out with an edge device, which will run that Engage software, but it will also run our security software that we acquired last year, and I'm going to talk about it later, because many of our partners are worried about security when it comes to AV network.

So we'll have an edge platform that runs our Engage software that runs the AV -- the security software -- and we'll also allow running third-party software, creating like a platform play, for instance, for edge, AV networks. Very excited about the opportunities there. Third, we're going to be investing in professional services and support so that we can continue to offer as we go upstream, as we are reaching more mission-critical networks, we are being asked for professional services. We are being asked for SLAs. And so we're going to be offering these over the coming months as well.

So to wrap it all up on the AV side of things, I'm really proud about what the team has created. It's truly differentiated. It's very transformation. It's very heartening to see what we hear in terms of the feedback from our customers and very excited about the opportunities that we still have ahead of us. So I'm going to shift gear now and talk about the second pillar that I talked about, which is networking and security for small and medium enterprises. What do I mean by small and medium enterprise. Let's go through some examples of the type of customers I'm talking about where we are actually deployed today.

Education. These are private schools, K-12 schools. Hospitality and multi-dwelling units, apartments, student housing, senior living, distributed enterprises, distributed franchises. This could be a dentist office, lawyers office, burger chains were deployed in some of those. So anywhere where you really have many, many sites and think of it as 500 users or less. We call that a small and medium enterprise.

And the portfolio that sort of powers all of that is a very comprehensive set of WiFi APs. We have various form factors of APs. We have a fairly rich portfolio of switches for previous form factors. We have routing. We have even mobile hotspot, which serves consumers, but many of our partners actually use mobile hotspot as the redundant WAN link or for failover. So it serves that need. And all of this is managed in the cloud by NETGEAR Insight, a cloud-based management solution. And all of it is secured in the cloud by solution NETGEAR XCM, which I'll talk about later. So as you can see, for this segment, -- and I've been in this space for some time, as I said earlier, this set of wide portfolio, both on the software as well as the hardware side, especially for this SME segment, it's fairly unique.

So let's talk about what are the dynamics of this market. When I talk about small and medium enterprise, there are some things which are true for this space. One, they have the same need of reliability as a large enterprise. Their businesses depend on this. It might be the point-of-sale terminals. It might be that application in the cloud. If they can't reach that, they can't run their business. So they have the same need for reliability. They have limited IT. Often, their networks are managed by MSPs instead of being managed by them directly. They are probably even more vulnerable when it comes to security as compared to larger enterprises because they're vulnerable to the same. You probably you all have heard about ransomware and malware and all of that, and they have limited IT so they're more vulnerable than others.

And they have a tighter budget, so they're looking to spend and get their money to go further. We believe that this market has not served well today, and this set of customers and partners are faced with 2 suboptimal choices. Choice number 1 is if they really care about reliability they go with a solution from a larger enterprise, 1 of the top 3 vendors. And I built this product before in my past life, really proud of what we built before, but I know that what we built was targeted for larger enterprises. It is targeted for what we call as a muscular IT. It was not targeted for an MSP driven organization.

So what ends up happening is these customers end up paying for complexity for features that they don't need. The second suboptimal choice before them is then to either take and do-it-yourself networks, patch together solutions with either something which is not reliable, something which is not backed by support when they need it or it's not integrated enough to end up playing in sort of the paying in terms of the total cost of ownership.

So I'm going to share with you sort of what we are doing to be uniquely addressing this market. But first, look at the total market size of the opportunity itself. I'm sure you all know wireless LAN switching, security in terms of on-prem and SASE security. These are huge markets. But the portion of it, when it comes to small and medium enterprise is still fairly big anywhere from 30% to 50%, depending on the category you look at, -- and we believe this market is right for transition and right for disruption. Let's look at how we do that.

What I look at is my mission in this space and the team's mission is to really deliver a solution which is purposeful for MSPs, which is purpose-built for SMEs, which provides enterprise level reliability, which provides enterprise-level support, yet with SME level simplicity and price right, so the customers don't end up paying for the complexity they don't need. And it has to be a solution which has to be servable by MSP. So it has to be integrated into their platforms because again, it's not the end customer who is often managing their network. It's the partners who are managing their networks on behalf of their customers.

Let me walk you through a few examples of our existing customers and the value they see in our solution to hopefully illustrate this. SIMATS is a medical institute. It's an institute in India that deployed a campus-wide network, both wireless and switching using NETGEAR APs and switches as well as cloud management, the Insight management I talked about earlier. They were looking for something which is simple to manage. They had a constrained IT organization, so they're looking for somebody else to manage it for them and yet they did not want to compromise on reliability. So they went with us and very happy with a fairly large network with us.

The second example is here in the U.S., Northwest Ohio School District. And it's a very interesting example. They actually were a customer of 1 of the top 3 vendors for that entire school district. And during the post-COVID years, I'm sure many of you remember about the supply chain crisis that we had. They were looking to upgrade 1 of their schools who are desperate to get gear, but they couldn't find gear because it was just not available from the existing suppliers. So they turned to NETGEAR and said, "You know what, I'll try you in this classroom. What the heck. If it doesn't work out, it's just 1 classroom, but I need to do it now." Fast forward now, they realized that our solution was as reliable and was as performant as others. And they didn't need the other features that they were looking for from larger enterprises. So they've since then upgraded 25 schools with us and are continuing to expand with us.

So hopefully, this gives you an example of the type of customers and the type of value prop they see with that solution that I talked about earlier. Switching gear a little bit. Let me talk about now the software investments we are making in terms of how we are differentiating and adding this value prop that I talked about. So first one is NETGEAR Insight. It's our cloud management platform. It -- all those devices that I talked about, when they are plugged in, they reach into the cloud, they get discovered in the NETGEAR Insight and then you start managing it from there. It's fairly rich. It's built in automations for integrations with MSPs -- you can see a demo later today with how we use AI to help MSPs quickly troubleshoot issues. So it's differentiated in terms of having the right features, and we are in the process of revamping completely the user experience. The new version of this is going to be launched -- we are ready for beta trials in the next few weeks, and then it's going to be launched early next year.

It's also going to be integrated with security. So when I talked about that XCM, very, very unique in this space. We're going to take that MSP platform for security and integrate it with management so that MSPs have one stop for their switching, for their routing, for their security and even their cellular failure. All of that managed in one place. The second area where we are investing is XCM. This is our security solution. This is a company we acquired earlier this year. XCM was built specifically with MSPs in mind and specifically for small and medium enterprises. And they're unique in that. They offer both a SASE solution, so that if you have a hybrid workforce, you can secure them, no matter where they are, but they also have an next-gen firewall, which allows protecting the workspace like your IoT devices and so on.

What we are doing uniquely is we are taking the firewall and integrating with our routing so that when you deploy a networking solution, you have a security built in that you need for those small enterprises, and you just need to turn on the license to be able to realize that. The second thing we're doing is that Insight cloud management, I talked about earlier, that and XCM's cloud management portal, those get integrated. So you have 1 single pane of glass. You don't have to log in into 2 places. If you're managing networking, you can also see what the situation is on the security side of things.

So on the portfolio side, I also want to talk about NETGEAR Essentials is also a part of my portfolio. This is a line of switches, which are primarily sold through retail and e-com channels, it's a cost-effective way. Many of our enterprise customers also use. It allows them to extend their existing networks, if you will. It's a brand which is very well recognized for hardware reliability for flexibility that is built in, in terms of power options. And it's also a trusted brand when it comes to security. So -- so let me now shift gear from products and solutions to our go-to-market. So when I joined -- and we looked at what will be required in growing this business. We realize that it's not just about product and solutions. We also had to focus on go to market. Part of that was building a team.

A lot of my senior team, as CJ said earlier, came from other companies where they've been leaders in this space. They have sold through this channel. After building the team, we set a goal for ourselves that we really wanted to be the company that is seen as amongst the easiest to do business with because frankly, NETGEAR was not, right? Because we were I think, in terms of how we interacted with our partners, how we reached our partners. There's a lot of opportunity to do things better. So we started taking steps towards that. One of that is simplifying our pricing so that when our partners quote something to their end customers, it doesn't require to many back and forth, right? So we just did that a few months back, great results and great feedback.

The other thing we did is launch a new partner program, so that it's easy for us to engage with our partners, and I'll talk about that later. We're also investing in technologies, AI and others so that we can just use that both internally in our own sales team in terms of tracking progress towards our reach to customers, but also in terms of being able to interact with our partners. So let's talk about the partnership program. We just launched this earlier this month. And the partner program is very competitive to the industry. It has tiers of various tiers for the partners, depending on the amount of business they do, depending on the amount of certification they have with our products. But we also invested in a portal which makes it very easy for us to reach these partners. If they want to get certified, if they want to get trained, if they want new collateral from NETGEAR, if they want to do bring a deal and register that deal with us, -- all of that has been greatly simplified.

And again, it's -- we just launched it earlier this month with great feedback from the partners who have tried it. So CJ called out earlier that one of the goals for NETGEAR overall is growing our subscription and services revenue, and that applies to my businesses as well. So here are the things that we believe will help us grow subscription and services revenue in general first. As I talked about that NETGEAR Insight platform, the cloud management platform, we're going to be revamping the subscription for that, including support as part of it. And as we add more value to it in terms of the use cases that it enables in terms of integration with security, we believe we'll be driving a greater attach of that product as we grow the NETGEAR Enterprise business.

And so that's one area where we'll grow subscriptions, security stand-alone itself. SASE, these are all well-known markets. Customers know to pay for these through subscriptions. So as we grow it, that will naturally result in growing our subscription revenue. Second, on the AV side, we will offer differentiated support because, again, many of our customers are asking us for specific SLAs when it comes to support, our customers are asking us for next business day, replacement of hardware. So we're going to be packaging all of this in terms of offering a premium support service, and we expect a greater attach, especially as we go upstream to larger accounts. And then lastly, as CJ called out earlier, we launched Professional Services, but there are greater opportunities there not just in terms of professional services, but in terms of validating a design instead of -- in terms of monitoring it later on because we are going into more mission-critical networks, and these customers want someone from the vendor side to be present there. So we feel that there's an opportunity for us to grow this business as well.

So to sum it all up, this is my last slide. Very excited about the opportunities before us. If I wear sort of the lens of long term, what does it look like beyond 2030, I'm confident we can grow our top line double digits. I believe with all of the services that I talked about that will grow the subscription and services revenue at a faster clip, and it will be greater than 20% of our business. And I think our gross margins will be north of 55%. I think when it comes to gross margins, what we are focused on right now is, like I said, there's an opportunity we see for a player that offers solutions which are right-priced, but yet offer a great value compared to the larger enterprises, if you will, -- so our goal is to be able to offer this in a way such that we can grow our market share and yet being accretive to our gross margins overall. But the priority, obviously, is to make sure that we can continue to gain share there.

So with that, thank you for listening. Hopefully, I was able to convey a little bit about what I'm excited about in terms of the opportunities here.

And with that, I'll turn it over to Jonathan to talk about the consumer business.

[Audio Gap] consumer devices and services space for 20-plus years. And a couple of highlights along the way. I ran product management for the Kindle products at Amazon. So I oversaw the paper white and the fire tablets. And I also led product in UX at Fitbit for 7.5 years. 3.5 years of that at Google, where I oversaw the Pixel watch, all of the Fitbit devices as well as the Google Fit app, the Fitbit app, and I grew our premium subscription service from the ground up to an over $100 million business during that time.

So CJ talked about our purpose to power extraordinary experiences for our customers. And what we know is that our products are essential sit on the couch to watch a favorite TV show, a movie, the network has to be there for them. It has to work perfectly. 68% of families say that, that TV time is something that really brings them closer together. So there's a lot of meaning and powering that experience. We know how important hybrid work is that majority of them, 75% say that their network connectivity directly impacts their productivity and their professional image. So we know how important our work is here.

We know how important the smart home has become. This isn't a gadget world. This is really how you get into your home. It's how you unlock your garage door. It's how you know your family made it home safely. 70% of consumers consider their smart home devices essential for their safety, their security and their comfort. Gaming has exploded. We know that 25% of households have a modern game console. And so there it's putting a lot of stress on their network. 35% of those gamers are live streaming their game content. So gaming is an essential experience that we power.

And we also know that customers want to take those experiences, that connectivity on the go with them, whether it's a business trip or a family vacation, 70% of travelers actually rate WiFi as their #1 travel amenity. But public hotspots are notoriously insecure and kludgy. So we build our mobile hotspots to solve this solution for our customers. And so I'm proud of the portfolio we've built. Behind this portfolio is a team at NETGEAR who's committed to solving these customer problems. We're customer obsessed. We go through those use cases. We try to figure out all the intricacies of what customers might see across our product line.

We have our Nighthawk routers, our Orbi mesh systems, our cable business. We have our range extenders, our mobile hotspots, and we thread all of it together with our mobile apps and our services. We're moving our portfolio towards a good, better, best lineup. CJ talked about that. We, as a business, previously had focused much more on the high end of the market, on the premium segment in home networking. And we've made a shift to bring in lower ASP products to both expand to new segments, but also to create a top of funnel for our subscription services. So we're excited about the focus that we're starting to see in our product lineup.

At the top of the line is our Orbi 970 series. And this product, if you read the reviews, you'll see that they say over and over again that this is an industry leader as a product line. And there's a lot of engineering behind the Orbi 970. It's unique in providing a dedicated backhaul, that connection between satellites and routers so that, that communication isn't interfering with that movie night or game play, et cetera. And another product that I'll celebrate across our product line is the Orbi 370. This product launched over the summer, and we were able to take a lot of that engineering that went into the 970 and really pioneering mesh systems and bring it into a lower ASP product in the 370. So our goal was to make something much more affordable, much more accessible in the mesh space.

I'll talk a little bit about our mobile hotspots. With the M6 Pro and the M7 Pro. We have created the most powerful no compromises set of specs and performance in mobile hotspots today. But in keeping with the strategy to expand our product lineup, I'm super excited to announce and you may have seen the press release this morning that we have a new product in our lineup. This is the Nighthawk 5G M7. And so our goal here is to help you stay connected on the go with secure portable WiFi powered by 5G. So this is a super powerful product. It supports 3.6 gigabit per second connectivity and can connect 32 devices simultaneously.

But we brought this out at an affordable price point. It's launching at $499. It will be available in January of next year of 2026. And one of the great design elements of this product is that it's pocketable. So we've designed it to fit right into a bag, right into a front pocket while still having 10 hours of battery life. Another great part of the M7 is that it will launch with a new NETGEAR mobile app that will come with an eSIM marketplace. So with the eSIM marketplace, consumers can choose the data package that's right for them when they're traveling. And so they'll have the choice. They could use a physical SIM, they'll be able to bring their own eSIM or they'll be able to just go into the NETGEAR app and shop for the data package that's right for them. So very excited about this product, and I'll show you a little video, so you get a better feel for it.

[Presentation]

Great. So excited to see this one launch, a great product development effort by our team to pull this together, and you'll get to see it early next year. So as excited as I am about the products we have today, and I'm really excited about the vision for the future and where we're going. We want to be the trusted partner for connectivity wherever you are as a business unit. And so as I talk about the future, maybe think back 10 years and think about what your home network was like. This was the early days of Nest that you might have been an early adopter and had a Nest thermostat 4K TVs were really at their beginning. Even though Netflix had started streaming 4K, not a lot of homes could actually consume that content.

So fast forward to today, think about what your homes like, the number of devices you have, the number of streaming services coming in at 4K. There is penetration of over 60% of 4K televisions. AK is just starting to take hold. So then fast forward into the future. Think about what 10 years from now is going to be like with immersive virtual reality content will have personalized AI-powered gaming. And then all of those devices in your home are going to be higher bandwidth and even more demanding because of AI and their need to connect have a robust connection to the cloud. And so we see ourselves building this foundation for the future by solving these hard problems of the network of today, but also the network of the future. And I'll talk about how we'll do that.

First off, let's take a look at the market that we're in today. We largely are in the home and on-the-go networking segment, which is the combination of the home networking, retail space, the ISP consumer premise equipment space plus mobile hotspots. And -- but -- we see ourselves having an opportunity to expand here. And that's because we're really focused on the hardest problem. The hardest problem is that last mile, that last 100 yards, the intricacies of the home and getting a network to work and work the right way in the complex environment and unique environment of each home.

We also have the opportunity to play in these two adjacent spaces, the smart home space and the consumer cybersecurity space, both of which are growing at a 10% plus CAGR. So I'll talk about our vision for growing in these segments. So first, let's start off with connectivity. And this is really our heritage. This is what we're known for. We've been building connectivity solutions for 30 years as a business. One of the reasons I joined NETGEAR is because it has such a heritage, such an amazing brand and such a history of building connected products. And standing behind that are millions of customers who trust us and trust us to deliver these products for them. We have an IP portfolio of over 150 patents, and we have an engineering capability behind all this. That brought solutions like the 970 that I talked about earlier.

And so all of this gives us a lot of confidence that we have a strong foundation that we can build our connectivity road map on. Behind this, we also have two really amazing consumer brands, the Nighthawk brand and the Orbi brand. And Nighthawk is the brand we use for our routers and mobile hotspots. And it's meant to be a tech-forward brand with a tech-forward design to match. And our goal with the design is to signify technological mastery in our products. And we also have the Orbi line and Orbi is focused on the advanced home user. And Orbi solves as a mesh system, those complex home problems that I talked about. We give you a lot of flexibility to put satellites in different parts of your home to use wired or wireless connections between them. And there's a lot of sophistication under the hood of Orbi, but we've built a design that is really elegant, that's refined and that is ultimately very minimalist. Orbi is designed to fit on any bookshelf, any end table in any home as a design.

So where is this going? What's coming is WiFi 8? And WiFi 8 is going to intersect with an AI era for home connectivity. So if you think about the progression of WiFi. It's really gone from a numbers game, number of devices, bandwidth, speeds, adding more bands, and we're moving towards the reliability era with WiFi 8. So what we expect to see in WiFi 8 is 2x lower latency and 10x higher reliability. That's driven largely by the WiFi 8 standard, which focuses on more intelligent coordination across the network, batching out bandwidth to the right device at the right time. A better experience moving between routers and satellites so that you can roam about the house and then enhanced performance at the edge of the network so that when you get to that fringe of your network, you'll be able to stay connected more consistently.

But the timing is really set up well to align with the future of AI. And that's both cloud-based AI models and operating at the edge. And so what we'll be able to do in this next generation is build proactive fixes for your network. We'll be able to build models that identify anomalies that identify problems and fix those problems before the customer sees them. When customers do have issues, we'll have ways for them to get more proactive support, and we'll be able to build tools with AI to give them proactive help and self-help. So we're excited for what this is going to mean for the customer experience in the future. And to sum it up, where we see this networking of the next generation going is more predictive networks the more personalized networks that can really understand the uniqueness of your environment, ultimately giving you a higher performance product.

So I'll shift gears and talk about how we'll grow in the smart home. So I talked about this proliferation of smart home devices and the sheer number of devices in the home and that the increase we've seen. That's only going to increase and the capability and expectations for those devices are only going to increase. And we also know that most homes are not single ecosystem. They actually operate across multiple ecosystems, whether that's Alexa, Google Home, Apple but also dozens of other major players who build smart home solutions. And so we see an opportunity to connect these ecosystems together to be the company that can be multi-platform, that can be multi ecosystem and really support every kind of device on the network.

And as a part of this, we're excited to be partnering with Google. We are taking this first big step in our move towards the smart home and announcing that we're working with Google to implement the Google Home run time in upcoming and existing Orbi products. So this is something you'll see rolling out over the course of 2026, but wanted to share this partnership with you today. And as I said, this is the first step of many as we move towards our vision of being the trusted smart home of the future. And so that means our ability to connect, to orchestrate these devices and keep them secure. So if you think about NETGEAR, we're in a pretty unique position here. We are an independent company. We don't have a different business. We're not a subsidiary of some other business that has other goals and motivations. Our motivation is very simple. That's to help make your home network work really well.

We are conforming and a part of driving standards in this space. And are -- we're a U.S.-based company that's focused on your safety, your security and your privacy as a core value of our business. We think that gives us an advantage in the smart home space in the future. And so now I'm going to talk about cybersecurity, and where we see this going. We know just how great the threats are to homes today. And the new frontline is the smart home, the same way that you wouldn't leave your physical front door unlocked, you shouldn't leave your digital front door unlocked. And so we're doing a lot of work to protect the home with 29 attacks on home networks every 24 hours. That's staggering.

So we protect your home and your data in three ways. The first is with our physical devices. So we use standards like WPA 3. We do a lot of third-party testing of our products before they ever leave. We do regular firmware updates that we push out to our devices in the field to make sure they have the latest and greatest security fixes. But then we know that there are emerging threats that happen in real time. So we have something called advanced router protection. This is a dynamic AI-powered system that looks for and identifies new threats, whether those are brute force attacks, denial of service attacks, and we're able to push out a capability to block those attacks in near real time to our routers and mesh systems that are out in the field.

We're also excited to have this advanced router protection capability, launching with the new M7 that I announced earlier. So you're really bringing a secured network with you wherever you go. The third plank of our cyber strategy is Armor. Armor is our subscription service, and it delivers you a powerful suite of tools to keep you safe when you're online. We have a trial that we include with our routers when you purchase and then convert to a paid service thereafter. And our goal with Armor is to protect you from scams, from viruses, from malware and not just those devices in your home, but also you can take that protection with you on the go on your phone, your laptop, as well.

So Armor is the tent pole. It's really the starting point of our recurring revenue and subscription service. Our goal as a business unit is to move more and more of our revenue into services into more predictable recurring revenue streams. But to do that, we have to build a foundation. The first piece of that is building a world-class mobile app architecture. So we have that underway. You'll see the first instantiation of that when we launched the M7. We're hardening our subscription and payments capability, and we're also building affordances in our product to support new revenue models that M7s eSIM marketplace is just one example of that.

And so then as we look out at our subscription revenue strategy, we have three major appliance to that. The first is strengthen our current service. And there's a lot of low-hanging fruit here for us to just optimize what we have today with Armor through better conversion, retention and those kinds of tools. Second, we're going to add more intellectual property to our services. We see our hardware really as a catalyst as a flywheel to drive new types of service. that we'll see coming out with AI, with some of the self-healing capabilities that we'll have. And finally, we see the smart home as a great launching point for new service types for us as well. So with all of that in mind, as we look at this consumer business and the beyond 2030 time frame, we anticipate a single-digit growth in our top line but we'll start moving more of our revenue to subscription and recurring revenue, 25% plus. And we will expand our gross margins to greater than 35% as a part of this transition.

And so with that, I'm going to hand it over to Bryan, our CFO. Thanks a lot for your time.

Thank you, Jonathan. Good afternoon, everyone. Very excited to be here today to share with you all how our efforts to transform the business have already started to bear fruit in terms of financial performance and some of the strategies you've heard today and how those will impact us in the future. I wanted to start with looking at what we said at the start of 2025, and how we thought the year would play out, starting with our top line where we said we expect it to grow. Happy to report that we're up 5% year-to-date. This has been driven by the AV business thus far, which has propelled the enterprise revenues to be up 20% year-on-year.

We also said we'd expand our gross margin performance. We're up 900 basis points year-to-date. And lastly, we said we would not be profitable, but we expect to improve our performance off of 2024. And while this one we're not really delivering on, I think we're quite pleased to be reporting positive non-GAAP EPS of $0.19 year-to-date. Our objective is long-term value creation. And to deliver on this, we've got some planning philosophies that are really important to guide us as we go. So the first is we're going to invest in the portions of the business that we think have the highest opportunity for long-term revenue -- profitable revenue growth.

We're also going to fund the competencies that we think are required to deliver on the transformation. These would include software development being in-sourced and the go-to-market resources that Pramod touched on earlier. We're also going to continue to look and scrutinize the slower-performing portions of our business and look to optimize costs there to help fund our investments. And lastly, we're going to balance near-term profitability with long-term value creation.

As I said earlier, we've made tremendous progress thus far in terms of expanding our non-GAAP gross margin. We're up 900 basis points year-to-date at 37.5%, which is great, but we think there's a lot of opportunity to expand further. And so we're going to drive towards our long-term target of 50%. And there are three key pillars to help us deliver on that. The first being increasing our mix of enterprise revenues, growing our recurring revenue streams and driving operational efficiencies. Led by the momentum of the AV business, we've been able to expand the mix of our revenues coming from the enterprise business from 40% just 2 years ago to 49% this year.

And with the investments that we're making and continue -- we'll continue to make in the enterprise business, we expect this can grow to 65% or higher. And with the gross margin of enterprise at about 48% year-to-date, Obviously, this will be a major contributor to expanding our total company gross margin performance. As you heard from Pramod and Jonathan common to both of our businesses, we have a strategy to expand our subscription and service revenue base.

While consumers further ahead today with the Armor offering and with the M7 launch, expected early next year, we'll have mobile services, Pramod laid out the opportunities that we have on the enterprise side with the cloud management platform Insights as well as security with XCM. So today, we're sitting about 5% of our revenue is coming from recurring services. And we think over the long term, we can grow this to 20% or even higher.

NETGEAR has a diverse supply chain. Today, we're manufacturing in Vietnam, Thailand and Indonesia. Not only are we not manufacturing in China, we are not sourcing any connected components from China. We've been participants in the CVPs, CTP program for over 18 years, which I think speaks to our commitment to a resilient and secure supply chain. With the strength of our relationships with the supply chain, we think we can extract further cost efficiencies in our business. One such example is that as we recently signed a perpetual license for our managed switch OS that will not only allow us to execute faster and deliver on the capabilities that our customers are demanding in that space, but it's also going to provide P&L benefits.

We expect to continue to be good stewards of capital. We have a three-pronged approach. One is to invest in the organic business, capitalize on those opportunities. We're going to continue to look at strategic M&A opportunities that can accelerate our plans. And lastly, returning capital to shareholders.

To capitalize on the opportunities that Pramod and Jonathan has spoken about today, we're going to have to make further investments. Enterprise, the focus will continue to be on in-sourcing software and go-to-market capabilities. On the consumer side, we're going to be more measured, and we're going to minimally run that business to be contribution profit breakeven or slightly better. And while the service provider and cable revenue stream within the consumer business is declining, it's down about 20% year-to-date, and we expect it to decline at a rate of about high single digits to low double digits in the future years. We do think that we're going to be able to harvest those profits to allow us to make the investments required to expand the core business and really drive the subscription business.

Of course, we'll look at operational efficiencies, leveraging heavily on AI. And while for 2026, we expect to grow our OpEx at a rate slightly higher than revenue, we do think in 2027 and years beyond that will normalize. There are really three key areas that we're looking at in terms of M&A. One is capabilities, the VaaG transaction from earlier this year provided the foundation for our software resource center in Chennai, India.

We're also looking at product adjacencies, so XCM is security platform. When we did our enterprise business strategy, the first iteration of that security was the top of the list. And obviously, given that both businesses individually are subscale today, anything that we think can create further scale in our business is something that we'll look at. And of course, we're going to maintain a very high bar when we're evaluating these potential targets. We view share repurchase as an efficient way to return capital to shareholders.

From 2024 -- start of 2024, we repurchased 3.4 million shares, $69 million, at $19.99 per share. We expect to continue to buy stock, and we will at least offset dilution as we look forward, and there's 2 million shares remaining on the current authorization. While we're not providing very specific guidance for 2026, we did want to give some directional indication of where we think the business is going to go. We do expect to grow our top line. AV will still be the driving force, but we do expect to finish the trajectory of the enterprise networking business. We expect to further expand our gross margins, which after we've made these incremental investments will still allow us to improve our profitability year-over-year.

As CJ said at the onset, we wanted to provide kind of a medium-term and a long-term target. I'd frame the medium term to be a few years out, 2028, and how we think these businesses will be performing and what the combined impact would be. Starting with revenue growth. We think enterprise will continue to grow at a double-digit rate. On the consumer side, we expect if you exclude the service provider and cable business, that business will be growing at a low to mid-single-digit rate. Combined, this would be -- net year in total would be high single digit to low double-digit revenue growth. With the efforts of both businesses focusing on subscription revenue streams, we think we can grow the combined mix of our overall revenues coming from these services to 5% to 10%. The enterprise gross margin is expected to be in the range of 50% to 53%. And we think consumer can be at 30% or higher, and the blend of this would be in the 40% to 43% range.

Contribution margin for enterprise, we think would operate at 24% to 27%. And on the consumer side, we think we'll be breakeven to 3%. The combined non-GAAP operating margin performance of the combined business would be expected to be in the range of 5% to 8%.

Looking to long term, again, 2030 or beyond. We think the growth profiles of the top line would be double digit for enterprise. Single digits for the consumer, excluding service provider and cable and combined net year would be double digits. We think enterprise can grow its revenue mix to about 20% coming from subscription and services, and on the consumer side, 25% or higher. This would blend to about 20% or higher on the combined business. Gross margin for Enterprise will be 55% or higher and 35% are higher on the consumer side, lending to total net year gross margins at 50% or higher. And then lastly, contribution margins will be about 30% or higher for Enterprise and double digits on the consumer side, driving total combined non-GAAP operating margins in the range of 15% to 20%.

And with that, I'm going to pass it back to CJ for some closing remarks.

We're going to shift to Q&A in a minute, but I wanted to make sure just to sum up kind of the key things I hope you all -- or we hope you all took away from this. I guess it's not on the slide, but hopefully, you recognize that we're pretty excited about the opportunity ahead. And then I guess moving to kind of the six things we wanted to specifically highlight is achieving that opportunity, we really feel like we've set the right foundation. We've got a different financial profile from a couple of years ago. So we're really well positioned and on a strong trajectory forward. Second, Pramod spent a good bit of time talking about AV. That's our #1 priority. We've got a strong moat, got momentum. I want to build off of that.

Third, in terms of how we think about investing in other opportunities, we're focused on large, growing, more profitable markets. Fourth, whether it's consumer or enterprise, it's all about software differentiation that enables recurring revenue growth. Fifth, we plan to continue to be responsible allocators of capital. So for enterprise, we plan to expand profitability while we invest back into that business. For consumer over the next few years, we plan to keep that business, as Bryan said, roughly contribution margin neutral to enable us to transform it. But overall, we're committed to steadily increasing profitability and continuing to return capital to shareholders. And then finally, if you think about 2026, as Bryan said, we plan to continue to grow revenue, continue to expand margin, expand profitability. And then when you reflect on those mid- and long-term targets, we're just excited about getting on that path of long-term value creation for shareholders.

So with that, I think we need 2 minutes to just set up for Q&A, and then we'll get right into it. I think we're going to move these chairs to the front.

Maximizing the opportunity, building on the momentum. Can you just take a step back a little bit? Because obviously, when you came in, you saw that business, you saw the opportunity. How far along are we in maximize that momentum. I mean, because it's been a strong business in the last two years. I just want to understand a little bit how much longer you can have that very unique momentum to continue on the side?

Yes. I can start and hand and Pramod, I'll hand to you. We think we're early based there. The whole transition is really just beginning. We've got markets that we haven't expanded fully into like broadcast. We're just launching services. So we're in the early days disrupting that market. And yes, so we're looking forward to the years ahead. Pramod, if you want to add?

Yes. I think CJ said it, there's AV over IP transition that is happening that is accelerating. It's not done yet. So the market itself is growing, We're still, from a market share perspective, our estimate is we are still a tinier portion compared to the big players in this space. So just in the existing place where we play in, and there is still a room for us to continue to grow, to capture share because of all the things I talked about earlier. And then there are net new markets like broadcast and others, where with the new products that we'll be launching next year, we'll have further opportunity to grow in there. So I think we still are, I would say, early in terms of being able to capture that entire share.

Great. And as my follow-up question, maybe for you, Bryan. So it sounds like you're going to grow OpEx a little bit faster than the top line growth next year, but because of the gross margin expansion you're still expecting profit growth. I guess as we look at 2027, would you say that some of that heavier lift on the OpEx side starts to come down so that beyond gross margin leverage, the actual operating leverage starts to kick in.

Yes, that's right. Yes. As you said, we're going to invest in 2026. Really, we're focused on the long-term value creation. So '26 will be ahead of revenue pace. '27, I would expect to be growing in line with revenues. And then from there, I think we will get some additional scale.

This is Logan on for Adam, we're at Raymond James. Our first question was just wanted to ask about the decision to run consumer contribution margin at 0 to 3% in the near term. Maybe what different scenarios were considered? Any more color on where those investments are going? And any mechanisms you're using to monitor ROI on those investments?

Yes. Great question. I'm happy to start. The -- I guess the foundational premise there is that we see a really significant long-term opportunity in consumer, but a lot of what's put us here is a mix of some self-inflicted decision-making, combined with some natural market forces. So we're quite bullish about the long-term opportunity there.

Now in the short term, that business could obviously change significantly if there is a -- we've talked a lot about potential action on TP-Link. But even irrespective of that, if you -- hopefully, it's hard to convey some of what Jonathan shared in earnings releases, right? We are quite bullish about being able to disrupt regain our leadership position in that market, independent of that, but we do think that headwind's coming -- that tailwind is coming anyway, so...

Yes. I would just say we know how long it takes to get these -- the subscription business to really take off, and we have to invest in the tools and the foundation that get us there. At the same time, we need to expand the top of funnel part of that portfolio with our hardware. So we're doing those things, and we're, I'd say, responsibly allocating capital to those infrastructure, those foundational projects that we think will bear the most return in the long run for us.

Yes. Maybe the one other thing I'll add that it would be hard for Jonathan to say it, so -- but I can say it. When we launched the search for Jonathan's role, there is a lot of interest for that position. And Jonathan was our first choice because he brings a very deep product capability to the table.

And when you think about products in this space, like solving connectivity in the home is just ripe for disruption. Everybody knows it. We all have homes, we all struggle with that, right? So having a product-oriented leader really with -- especially with all of the technology shifts that are happening. I mean, Jonathan is a perfect person to lead us through this.

That's helpful. My follow-up question is the medium long-term targets you provided, and you kind of touched on it with the potential TP-Link band. How would those be impacted if that does happen? And any color that you guys want to provide potentially there?

Maybe I can start and then Bryan can add in. So those assume status quo. The businesses that where we compete heavily with TP-Link is obviously on the home networking side. But then also Pramod ended his presentation with NETGEAR Essentials. So that's a fairly sizable business for Pramod. In those two areas we're head-to-head with TP-Link. Do you want to add?

I think the obvious is that it would get us some scale much earlier in the trajectory that we showed here today that would help.

Tim Savajo at Northland. I want to try and get a little more detail on the Pro AV stuff, given it is the top priority. And that is just to draw out a few deals there, various metric counts. Are these million dollar deals, $100,000 type deals? If you can attach a dollar value to the -- I know it's probably tough to do that difficultly, but I'd love to get a sense of kind of what we're talking about there. And then higher level, can you talk in more detail about the competitive environment? So who specifically are we talking about here? And how would you break it down? I know you think you have a small share, but any more detail would be appreciated there, too.

You want to take it?

Yes. So the way the market is today, when it comes to live events and stuff like that, there's a lot of small deals as well. So it's actually -- I look at it as a positive, it's very well-diversified business. But we do have some of those, which I talked about, the G7 Summit. I talked about the largest retailer in the world, thousands of conference rooms. Boeing is another one, which is deploying thousands of conference rooms. So these are all million dollar deals, right?

So we are beginning to see -- the positive thing is, we are beginning to see those larger deals. When it comes to competition, many of the networking switch vendors compete in this space. When it comes to broadcast, the big players, obviously, there are Cisco and Arista. But specifically on the AV side, what we did in terms of our partnerships, the 500 partnerships that I talked about earlier, competition probably has badly to, right?

So I think the differentiation in the product, the differentiation in partnership, making it simple. And frankly, this is an area that the team here uniquely focused on solving, right? I mean it's other companies, there are other places they are focused on, not on the AV side of things. So I think those are the differentiations, if you will.

The one thing which I didn't mention earlier is I talked about Boeing and the largest retailer. Unified communications is also a place where we're beginning to see increasing traction -- it used to not be before it was more AV. But now when it comes to conferencing, when people are deploying and upgrading their rooms, they're often going with seeing the value of putting a NETGEAR AV switch in there.

Yes. The one thing I would add we've consistently reported on the number of AV partners we have. We're over 500 now. I want to make sure it's clear that's not like we sign a 1-page deal, and you can like co-market with logos. Like we're actually taking equipment into our lab. We're testing it. We're ensuring that the protocols of one of those partners is integrated into our software. So when a system integrator goes to deploy an AV solution, it's a button click versus command line interface coating. So 500 partners is a really, really big deal. And [indiscernible], who's here, a product leader for that, just demo how simplistic we have made the deployments by virtue of that upfront work of partnership in lab and integrating their code into our software experience.

I just had one quick follow-up, if I could. Any meaningful difference within enterprise between Pro AV margins and the rest of the business, or really, you could expand that to all three of your segments if you can.

There's a greater subscription attached to the enterprise side because that's how the market is. We're not the only ones. Others offering that solution also offers subscription services. And as I said during my presentation, we are sort of making sure that we are priced right to capture market share in that space because we are establishing our presence compared to a relatively small base right now. But as on the Pro AV side, we are already sees the leader. So hopefully, that helps.

Scott Roll with ROTH. Maybe sort of on the home side of the business consumer side, I wonder if you could calibrate us in terms of subscription attach rates right now when I think about Armor being attached to home network deployments, kind of where are we? Where do you think that gets to and very much in terms of the core skill set of the company is networking and connectivity. But there are a lot of adjacencies then that start to come along with that, that you're thinking about. I wonder if you could expand a little bit about that in the home and monetization opportunities and strategies because there are different applications, there's different other content that you get on kind of how you see the evolution of NETGEAR over the next couple of years?

Yes. I'll talk about where we're going in the future. And if you want to share more on the attach rates. I would say, first off, on the attach rate, there's a lot of optimization that can happen in the onboarding experience so that customers understand why Armor is valuable, what it does for them, why they should subscribe. So there's a lot to still be unlocked there that I would just call -- we call it the low-hanging fruit of the -- of that subscription space.

As we look out on the horizon, we know that we're going to be able to solve more and more problems. Some of those are cloud-based AI applications. Those cost money. There are tokens that are behind those. And so we're going to design the business models around it so that there is a service component. That's just the nature of those kind of solutions.

So yes, I think what we'll be able to build models that look at what's unique about a network to do so in a privacy safe way, create the model in a way that is -- where in the customers control and be able to apply that as a service. So that's sort of the core vision, and we'll hopefully be able to share more product details down the road.

I'll just add to the attach rates. So we're not going to share specific percentages, though I will say we have a lot of headroom. So we're not attaching very well today. And this is when I said we weren't good at the subscription fundamentals. It's things like including a year for free of the subscription when somebody buys a product. So then they deploy the product. They don't realize that they're actually benefiting from a paid service. And then you asked them to make the purchase again a year later. Another example is like we look at the credit card upfront, right? So it's not like, oh, you're in for a year and then you've got to -- it just automatically rolls over. It's like, no, no, we have to resell you on the value of Armor. And so there's just -- another one is you go to pay with your credit card, your credit card doesn't pre-populate. Just a lot of basic stuff that we will get excellent at. And so that provides headroom on there, and that's beyond the top of the funnel expansion that's beyond adding value into the subscription.

And if I could, on the Enterprise side, I wonder if you could expand a little bit about I guess, monetization of XCM, right, in terms of attach rates there. Is that more explicit subscription going forward? And then as I think about the evolution on the Enterprise side, certainly, again, the enterprise in the world has been more WiFi centric in terms of connectivity, but private networks and cellular starting to find their way into the equation now. And I think, I guess, in your past life at Ruckus, there were some solutions that combine both WiFi and solar capabilities. So I'm kind of wondering where private networks on that side kind of fits in the evolution? Do you see participation there and other monetization opportunities?

Yes. So I'll answer your first question about security first. So security absolutely will be a new subscription opportunity in addition to the network. We offer security, offer it as a subscription. If they buy a routing product, and they want to add security in there as an edge firewall, then they buy a subscription for that, and they enable that.

We are in the process of sort of learning from our partners and integrating that. The first phase of integration is going to be coming out soon. So we are introducing and talking to our partners right now. There's a lot of excitement about that. So we expect that once we launch this integrated product that will drive increased attach and increased growth of the enterprise business.

On the cellular and private network side, let me talk about cellular first. So I went on a customer tour along with CJ, and we asked many of our partners, the opportunity they see on the cellular router side. So absolutely, customers see this as a redundant [indiscernible]. They already use our mobile hotspots. So we see an opportunity to potentially build cellular router type of product to enable this segment.

Private networking, we are watching. I mean, I've watched this, if you said in previous companies, and I know people in this industry, I feel like right now, this segment is going for certain segments like oil and gas, difficult to reach places, logistics, not exactly our initial focus area. But if we see this as developing, if you hear this from our partners, then we'll look at it more closely.

I don't know if you want to add anything?

No, you covered it well.

Given the importance of Pro AV and driving growth in the near term and longer term, how do you have conviction that, that engine will keep moving forward?

Yes. I think I talked about all the differentiation that Laurent and team have built over many years, right? These are not things that are just a feature that you go ahead and implement. It's not -- there are features that we've implemented, but on top of that, those partnerships, those learnings about making our solutions plug and play. That's truly differentiated.

The other thing unique about this is the relationship we have built with our partners, both on the integrator side as well as the manufacturers, that gives us leverage in terms of our go-to-market as well. Many of these deals that I talked about earlier, the smaller deals, our sales team is not even involved in that. We are influencing the integrator base, and when they have a project, an AV project that goes in, they basically just prefer and get AV switch, and we see the order for that. It's not somebody on my side who is selling that, right? So great leverage on that side. And so I'm very excited about some of the product road map items I won't share it here, but we have some exciting ideas about how we can be innovating in this space even further, so...

Great. And then a quick follow-up. On the other side of your business. How do you see 5G mobile hotspot products actually helping grow the enterprise side of the business?

I think I answered that question earlier for Scott, right? The mobile hotspot is -- the unique thing about what we do compared to any of the previous companies I worked at is that we supported mobile hotspot supported insight. So think of a partner who's deploying a small and medium branch, and they want redundancy. They want WAN to be cellular. So that in case the primary network goes down, the network trails over to cellular. Well, they can manage all of that using network NETGEAR Insight.

So that central manageability is important. Many customers already use it. And the opportunity with cellular router is, again, we can harden that mobile hotspot, integrate it better with our security solution. Now you have security, WAN, SD-WAN security, everything integrated, everything managed in the cloud, right? It's just beautiful. I don't think anybody has that type of solution.

Yes, I'd also just add that the carrier relationship that we have, and we've had for a long time are super strategic. And the way that we've worked with carriers, we expect to change going forward. So we've historically responded to RFPs when there's a device need for the carriers. But we're spending more time working with the carriers more strategic go-to-market partners so that we can capitalize on some of the opportunities that Pramod [indiscernible]

Tore from Stifel. I had two follow-ups. First one for you, Jonathan. So when you think about -- I think you mentioned the good, better, best where you're now starting to add the lower end to the portfolio to drive more subscriber and recurring revenue going forward. I mean that sounds a bit of a balancing act. Maybe I'm incorrect here, but would the lower-end products be lower gross margin? I mean, obviously, the recurring revenue will be higher gross margin. But to me, that sounds like a little bit of a balancing act. So will there be a significant lag time you think, with getting that actual services revenue up and running?

Yes. I think the -- that's obviously a balance that we have deployed. But I think if we're feeding that top of funnel, if we have a very rigorous front end for getting people into trial, doing all the things CJ mentioned before of getting those basics in place, that cycle from trial to that initial conversion can be much shorter. I think it's much more about also making sure that the service and the way we position it is going to appeal to that buyer. And if they came in, they're fully price conscious. Do they -- are they going to want a subscription? So we need to make sure it's really a compelling narrative for them also. So we're getting both a high attach rate and then a quick conversion cycle to see a turnaround and show up more quickly in the revenue.

Yes. The 2 things I would add is that there's real benefits to being up and down the market. One of those is that Amazon is a growing platform, an important go-to-market platform for us. If you're not in the volume part of the segment, it is very hard to get visibility and traction. And a lot of our consumers, the behaviors that we see as people step up, right? They want the best, but they discover us through our lower-end products.

The other thing, and this is relevant to me because I've got two college-age kids, is that's when they start to discover NETGEAR when they want better connectivity in their door rooms or their apartments. If you don't have those products, it's hard to build that relationship with customers. And we're going to do a better job when they become a NETGEAR customer of retaining them. That's not -- that hasn't been historically kind of a focus with our software in a relationship management piece. So that's why we've got to be in the good, better, best.

Yes. That's great perspective. And as my follow-up, you mentioned it very briefly at the beginning, CJ, you talked about some better inventory management. You didn't discuss supply a lot here today. We do know that you're catching up with some supply, especially on the enterprise side of your business. But we also know that semiconductor supply continues to be exceptionally tight if anything is probably getting even tighter. So what's the company? What are you putting in place to make sure that you don't go through these periods again where you don't have enough supply for your demand?

Yes. Great question. Do you want to take that?

Yes, let me start. One is we've revamped our S&OP process. So we're scrutinizing down to the product level. We're looking at much longer to get ahead of things. Certainly, we've made a lot of progress on the managed switch, which we were alluding to or every quarter, we've been able to improve that supply position and still remain very confident by the first quarter of next year that we'll be in a place where we'll have some buffer stock, which very important just given the growth profile of that business. Now there are things out there.

We've talked about the memory market, where there is obviously major suppliers that have exited a certain portion of that market that have created some pricing challenges, and that certainly is partly because of supply out there. But we're having conversations. I would say we punch above our weight with some of the chip suppliers where we have very strategic relationships and ongoing conversations where we're actively having -- giving them some visibility and have some flexibility to move things in.

And for Managed Switch, even is a good example, where stated lead times, it's the longest lead time component we have is 52 weeks. We've probably overachieved and gotten that down to -- in the low 40 weeks. So we are actively working with the entire supply chain. We touch probably 60% of the active BOM with the 40% is handled by the ODMs.

Yes. That's an area, actually, we're using AI quite aggressively, whether it's forecasting or how we present data, provide access to data. And Bryan mentioned the S&OP process, which is kind of the overlay of that and how the data gets presented. So it's an area that we're really -- we've really made a big shift over the last 18 months.

And actually 1 more question from the audience following up on the theme of AI. How do you see AI making it into your products?

Yes, there are some good demos actually that we'll be able to answer that directly. But why don't I -- I covered it a bit, do you want to -- each want to take a shot at how it is relevant to your business.

I think -- you'll see it in the demo where, one obvious use case of AI is to make it very easy for the end customer who's trying to troubleshoot things. And my view is all the interfaces in the world will move to a conversational UI, and that's what we are enabling. You'll just be able to us an AI agent behind software to do things. So that's something.

We also believe our managed switches, and I talked about this earlier, we've seen some of our customers use it in AI data centers and they use it because they find but they're deploying a data center switch, there is a part of it which is called management network, where you take the management boards and you manage that and switch that, and you need switches for that as well. It seems like an overkill to use sort of more expensive data center switches. So we've seen early deployments where customers use our switches for management network. And so that's something we're also going to explore and see how we can push that further. So lots of opportunities with AI.

Yes, we're starting to use it already for presales. These are places where language and language processing really matter, and that takes off a support call that would otherwise be an inbound cost for us that we can then direct into a sales flow. So that's one example with customer support we can do a lot of training of models to understand really common issues that customers face and either give those tools to CS agents or put those out as a chat interface that customers can interact with directly. And then some of the pieces that I talked about earlier, using AI models that can really understand what's unique about your network and model out solutions for you to identify problems that are really unique to your environment. Those are pieces that -- where we see opportunities with AI.

Yes. What may not be obvious to folks is that we get a lot of data relating to the performance of our products. So our experience is a perfect one to apply AI to. And again, I think you'll see it come out in the product demos that we're going to share, but there's a lot of opportunity for us in that regard.

I think Logan might have had another question.

This is Logan on for Adam again from Raymond James. The subscription side of the business is interesting. I guess, first, I was curious how you would stack rank the opportunities of your subscription offerings in the Enterprise and Consumer segment. And then I have a follow-up.

So is this a stack rank of Enterprise and -- or Consumer or more within each of those business units, the...

Let's do it combined, yes, if you can. If not, you can break it up into each segment.

No, no, it's okay. I mean the way to think about it is consumer, we have product market fit today, right, with the subscription service we have. We just have a lot of low-hanging fruit on the top of funnel on the subscription, just fundamentals. And then on top of that, there's going to be a ton of opportunity to add value to subscription over time.

So we've got a great starting point out of the gate with $35 million ARR.

On the -- in Pramod's business, the most logical place for services and subscriptions is on the networking side. I mean customers are accustomed to it, they pay for it. They've been pushing us for these services, which again, led to the professional services launch. And then even AV, we haven't talked about it much today, but AV, we see opportunities down the road as well. Today, that's not a recurring -- there's not a recurring revenue element to that business, but we do see opportunities for that in the future.

That's helpful. Maybe back to the consumer side of the business. I know you've had some subscription offerings for a few years now on that side of the business. I guess, how did you guys come to the determination that this was more of an execution issue versus demand issue on that side of the business? Maybe another way to phrase it is, is home networking in the right category for these subscriptions, or is that more just a onetime purchase and they just kind of leave it after that?

I mean, I might start off by saying, I think in the short-term execution in the long term, it's creating more value and capability in the subscriptions that we offer. So that the near-term piece, we can start addressing immediately. It's obvious if you've worked in subscription as CJ and I both worked on consumer subscriptions, the things that we can fix on the execution side.

Longer term is where we have a lot of ideas that will take some time to get out into the market that add a lot more value to customers, some spaces that go beyond cybersecurity as a core theme. And we do think there is obviously that initial post-purchase moment where we really have your attention. But as we add capability, we have an installed base that's very large that we can go out to and bring those people back and put offers in front of them, let them know about new capabilities we're building. So we see opportunities on both sides there.

I wanted to revisit an earlier question about TP-Link. Senator Ernst and 23 of her colleagues set a pretty strongly worded letter to Commerce last week. And so I wanted to see if you had any sort of broad update on what that process is looking like. And just hypothetically speaking, if TP-Link got shut off today, would you have the capacity to fill their -- fill that void?

We missed that. Why don't you prepare to cover the last piece of that, and I'll take the first piece. So based on a letter we got from TP-Link after our last earnings call, they don't like us reporting what's been reported in the news, but we're going to do it anyway. Yes, there's been a lot of activity. I mean it's just escalating the day after earnings, there was a WAPO article that said Commerce is recommending banning TP-Link. It's supported by six federal agencies. They're all the state activity.

There's the bipartisan support, the shutdowns coming through. And I mean, yes, it's hard to miss. And -- but like in a day like today, what we're most proud about, of course, is like what we're going to do to solve like a customer's problem. So while we love hearing that, like we're heads down delivering for the customer and Pramod's side of the business, we've been seeing already, well, both sides of the business, frankly, we're seeing tailwinds from just the fact that like we're focused on security, we're focused on privacy. We're a U.S.-based company. Jonathan said it, well, we have no other motors. But it really is hard. I mean, we read all the same things that you all do. We bring it up on earnings, TP-Link doesn't like that, but we'll keep doing it.

Yes. And on the inventory front, we've obviously been watching the press like everyone in here and having conversations with our supply chain partners and preparing and planning for a response. We've made some inventory investments already, but we've been characterizing the inventory investment to be in that $75 million range, and that clearly has not played out yet. So it really depends on the form of any potential action that's rolled out there in how much time that would take to where we need to be able to respond. And certainly, there will be near-term demand shifts, I would think if that were to happen. But it would depend on how quickly the retailers change their footprints.

You want to share your interest, JC, so you can get a letter to?

So another quick one from the audience. Can you tell us a little more about the AV software acquisition?

Who wants to do that?

I can take that. AV software acquisition that -- you want to take that to explain that, or do you want me to..

Sure. I mean, we've talked about Vogue and XCM. We haven't talked too much about this publicly, but we have acquired the operating system that powers our AV switches. And that's going to have a lot of different benefits. You referenced the financial benefits. You can come back to that. But the most important thing is it's just going to allow us to iterate more quickly. It's just like in-sourcing the software capability. We now have like a much stronger foundation to allow us to iterate more quickly. Now it hasn't held us back to date. But over the long term, it's going to pay big dividends. And then it does have a P&L impact. I don't know what you want to say about that.

Yes. I mean it's roughly 100 to 150 basis point impact to our overall gross margins.

Yes. I'll just add that. Laurent over that has a long list of innovations he has in mind. And having our own software engineering team and having access to being able to innovate on top of that software, we believe we'll be able to innovate and differentiate faster. Like in that case, I talked about broadcast to go into the higher-end broadcast space, requires addressing some features that are needed that allows us to do that faster.

Is that 100, 150 to the AV business, not the overall?

Overall.

Okay. Maybe one more on the partner front. Can you tell us a little more about the partnership with Google?

Sure. Well, I can tell you what I shared today. So -- but I would say it's exciting opportunity just for customers to make it easier for them to set up matter-based devices to make it very simple, if you have an Orbi system to use the Google Home app to set up those devices. So I would say, stay tuned and -- but that's the foundation for, I think, a longer view of where we can go in the smart home space.

Yes, I would add, we are limited what we can say there, but we're really excited about the partnership. And I think the bigger picture is if you think about what we've done in Pro AV to build an ecosystem of partners to solve a specific end customer issue, like that's the opportunity we have in the home, right? Like we're the only player that can do that. Everybody else has whether it's government security scrutiny or you're part of a bigger company that has its own kind of home agenda like we're the Switzerland of the home. And so it's the beginning of what we see as a big opportunity for us there.

Okay. One more. Obviously, the team has changed quite a bit in the 18 months you've been around, CJ. How is the team handling this? It sounds like there's a solid foundation, but do you feel like you're in good shape going forward, or is there some more transition there?

Yes. We're asking a lot of our team. People are fired up like the purpose, the mission, the values, people are excited. I will say we're driving more attrition than has historically been the case at NETGEAR. We've got a very thoughtful and new kind of performance management approach. And some folks that aren't -- and I say this directly to the team, and I'm sure many of them are listening, like transformations are hard and requires extra effort and extra commitment and conviction and some people just aren't up for that. And so we're really excited about the capabilities we have on the existing team. I mentioned the leaders -- existing leaders that have been elevated NETGEAR. And I think people are really excited about like the path that we're on.

Anything else from the audience?

Okay. Well, let me maybe just wrap. I think that's a great note to end on. Just thank you -- a big thank you to the NETGEAR team. I'm sure lots of folks are watching. We're just -- what I like to tell the team is we're just out of the starting blocks. We're just getting started on this transformation. Thank you for everybody who made the trip here, not trivial. I know the shutdowns in it, but it travels still not trivial. So thank you and many West Coast attendees in particular. And then I want to thank all the folks that made this possible and thank Crestron again. I think we've lost Brad, but his team, Jonathan, [indiscernible] -- oh, there's Brad, Jonathan, [indiscernible], Brad, Joanne, they've been great host. And again, remember, this is all powered by NETGEAR. Thank you.

Ladies and gentlemen, thank you for standing by. [Operator Instructions]

I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to NETGEAR's Third Quarter of 2025 Financial Results Conference Call.

Joining us for the company are Mr. CJ Prober, CEO; and Mr. Bryan Murray, CFO.

The format of the call will start with commentary on the business provided by CJ, followed by a review of the financials for the third quarter and guidance for the fourth quarter provided by Bryan. We'll then have time for any questions. If you've not received a copy of today's release, please visit NETGEAR's Investor Relations website at www.netgear.com.

Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, gross and operating margins, expenses, tax expenses and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these statements as a result of new information or future events, except as required by law. In addition, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website.

At this time, I would now like to turn the call over to CJ.

Thanks, Erik. We are pleased to share that our team delivered another really strong quarter. Over the past 1.5 years, NETGEAR has embarked on the first phase of a dramatic and comprehensive transformation and the results of everyone's efforts and diligence are coming to fruition.

While the seeds of our investment are only beginning to bear fruit in terms of top line expansion, our team's operational acumen is unlocking new ways for us to efficiently capitalize on the opportunities in front of us. We are sincerely excited about the foundation we've built and are confident that our transformation positions us exceedingly well to deliver long-term growth, profitability and shareholder value creation.

This quarter's results marked the sixth quarter in a row where NETGEAR has exceeded our revenue and non-GAAP operating margin guidance. The supply chain team kept the pedal to the floor to drive material improvement in our supply position for our managed switches, allowing us to grow revenue for our Enterprise segment almost 16% year-over-year.

As a great sign of our strength in this category, ProAV units and ASPs were each up materially year-over-year, contributing to a strong improvement in gross margin, operating margin and net profitability. We came into this year hoping to improve our gross margin from 2024 while sharing that we felt that achieving profitability for the year was unlikely. We're now thrilled to share that not only are we expecting to be non-GAAP profitable for the year, but we expect to deliver non-GAAP positive EPS in each quarter this year.

While our focus remains on making the investments needed to drive our transformation and enable long-term profitable growth, this near-term profitability milestone is a sign that our efforts are paying off.

In Q3, our profitability resulted from a big improvement in each segment. We once again delivered positive contribution margin and significantly improved gross margin for each business. An increased mix from enterprise, which delivered an all-time high segment gross margin of over 50% led to another record high non-GAAP gross margin for the company of 39.6%, surpassing the record from last quarter by 180 basis points. This enabled us to deliver positive non-GAAP operating income, well above guidance and non-GAAP EPS of $0.12.

We were also extremely successful on the capital allocation front, repurchasing $20 million of our common stock at an average price of $24.55 per share in the quarter. We plan to continue to opportunistically return capital to shareholders via share repurchases at a minimum to offset dilution.

Before moving on to updates for our business segments, we're excited to share a couple of important updates on our transformation that will allow us to continue to evolve how we position our products and services in the market.

First, we launched our new website yesterday, and we encourage you all to check that out. This has been in the works for over a year and reflects our new branding that will serve to more clearly distinguish our consumer and commercial businesses. A key part of this change involves renaming our commercial business from NETGEAR for Business to NETGEAR Enterprise. This is a reflection of the fact that, we are delivering reliable enterprise-grade solutions to large customers that include Fortune 500 companies and mission-critical events like the G7 Summit, not to mention many different global Tier 1 music and sporting events.

Second, starting in Q4, we will be reporting on 2 segments, NETGEAR Enterprise and NETGEAR Consumer. As we've shared over the past several quarters, our mobile products serve both of these end customers' and the go-forward product strategy is to drive stronger integration of our mobile products into our app and subscription service for consumers on the one hand and into our cloud management and security platform for our enterprise customers on the other. Mobile, of course, remains an important strategic capability that we will leverage to expand both our consumer and enterprise businesses. Brian will share more details on this in his section.

With that context, I'll move on to the business segment updates. Our Enterprise segment again led the way in driving our great results, and we continue to see double-digit demand growth for our best-in-class ProAV managed switches. The NETGEAR team successfully navigated supply chain headwinds to accelerate supply and start to lower our backlog, leading to outperformance in the quarter. While we still believe we'll return to an optimal inventory position in the first quarter, the 16% sequential growth of our managed switch revenue in Q3 reflects better supply and strong end-user demand for these products.

We're already a clear leader in the ProAV space and continue to expand our advantages and round out our value proposition by relentlessly growing our ecosystem, notably reaching 500 AV partners this quarter. Further, the AV professional services that launched in the second quarter have garnered positive early traction with blue-chip customers and will be an integral part of expanding our enterprise value proposition and nondevice revenue going forward.

Essential to achieving this goal is our constant drive to innovate in ways that will improve our differentiation across products, pricing and partners. Much of our headcount growth remains in enterprise as we're building out our software development capabilities. Our new team in Chennai, which is roughly cost neutral due to a simultaneous reduction in outsourced software development capacity, allows us to improve our efficiency, quality and competitive differentiation.

With this new and growing team, we're making great strides in improving our device firmware, cloud management and security software offerings. We're also in the process of greatly improving the user experience. And in the coming months, we will be integrating networking and security in a manner that will lead to a unique offering in the industry. We plan to offer networking and security with enterprise-grade reliability delivered by a simple user experience at an affordable price that will make this platform purpose-built for managed service providers and small to medium enterprises.

And as a first step to addressing cybersecurity in our target market, earlier this month, we announced a tailored security solution for SMEs based on technology obtained via the acquisition of Exium earlier this year. This exciting new unified solution is the industry's only all-in-one SASE and hybrid firewall platform designed specifically for SMEs and the MSPs that support them.

We can now secure remote workers as well as the on-premise networks and combine advanced threat protection, AI-powered Zero Trust network access, web gateway security, SD-WAN and firewall capabilities in a single user-friendly platform.

The investments we've made in the enterprise business are clearly beginning to deliver both financial and operational benefits. While we continue to have success in hiring key leaders for the enterprise sales team, we're starting to expand the list of marquee customers we serve. In the most recent quarter, we closed material deals with a Fortune 10 global retailer, Boeing, the South African Parliament, University of Wales and Fox Sports to name a few.

Moving on to home networking. While the retail market remains highly competitive, we're continuing to make inroads with our good, better, best strategy. Sequential top line growth came in at roughly 8%, and we once again delivered positive contribution margin in the quarter. Key enablers to this success are the broadening product portfolio, strength in our higher-margin D2C channel, leaner operational execution and growing annual recurring revenue, which reached $37.9 million in the quarter and grew 17.2% year-over-year.

Our Orbi 370 mesh product that launched in the quarter is gaining momentum in the market and outperformed our expectations. This is our most affordable WiFi 7 mesh system to date and offers high-end performance and security at an accessible price point, benefits that are clearly resonating with customers.

We remain confident in the long-term growth potential of the home networking business and notably saw share growth in WiFi 7 routers and mesh systems in Q3, pointing to NETGEAR's expanding sphere of influence in this part of the market.

The mobile segment delivered on our modest top line expectations and with strong demand for our high-end offering, we achieved record non-GAAP gross margins of 31% for this business. Although, the service provider channel remains highly competitive, we continue to add new channel partners.

For example, we'll be launching the M7 Pro with O2 in the U.K. this quarter. We also have exciting new products coming to market for this segment over the coming months that will expand our addressable market.

Over the long term, we expect our strategic capability in delivering mobile products to benefit our consumer and enterprise segments by offering differentiated experiences that are integrated closely with our broader solution for these end markets.

So in summary, this quarter was marked by solid execution, and these results underscore the impact of our strategic transformation in building a healthier, more resilient business for the long term. We remain well positioned to be the trusted domestic supplier across our range of products, a true differentiator in this market and remain almost completely exempt from tariffs.

We are focusing on the right areas, growing our higher-margin segments, driving operational efficiency and delivering value to our customers. And it's showing in our financial performance thus far, while setting the stage for renewed growth in 2026.

With that, I'll turn it over to Bryan.

Thank you, CJ, and thank you, everyone, for joining today's call. We entered the second half of the year, building on the solid momentum we established in the first half. And I'm pleased to share that this marks a sixth consecutive quarter where we exceeded the high end of our guidance ranges for revenue and non-GAAP operating margin.

Propelled by the strong demand for our managed switch products within our Enterprise business segment, and enabled by the ongoing operational excellence of our team, we drove sequential top line growth of more than 8%, while attaining non-GAAP gross margin of 39.6%, yet another new all-time high for NETGEAR. These impressive results are undeniable signs of progress as we continue to execute our long-term growth and profitability strategy.

For the quarter ended September 28, 2025, revenue was above the high end of our guidance range, coming in at $184.6 million, up 8.2% on a sequential basis and up 0.9% year-over-year. The third quarter's outperformance was once again a result of a strong showing by our higher-margin enterprise segment, benefiting from ASP and unit growth in ProAV managed switch products.

The team worked tirelessly to improve supply in the quarter, which enabled a 16% sequential revenue growth for these products and meaningful double-digit growth year-over-year in end-user demand. We also saw all 3 of our businesses delivered positive contribution income for the second consecutive quarter.

In Q3, we repurchased $20 million of our shares and ended the quarter with $326.4 million in cash and short-term investments. We delivered $90.8 million of revenue in the Enterprise segment for the third quarter, up 9.9% sequentially and up 15.7% year-over-year, above our expectations. Although, we continue to be challenged by supply constraints around certain managed switch products in the enterprise business, the team executed well and was once again able to outperform our forecast for the quarter by working closely with key vendors to navigate these headwinds.

Notably, in spite of these supply constraints, the revenue mix of our products from higher-margin enterprise segment continued to climb and grew both sequentially and year-over-year, adding to the corporate margin improvement. We continue to expect modest impact from the supply constraints in Q4 and expect to be back into a healthy supply position in Q1, so we can fully capitalize on the substantial and growing demand.

In Q3, the home networking business delivered net revenue of $72.6 million, down 6.6% on a year-over-year basis and up 7.6% sequentially. The U.S. retail market remained extremely competitive, but with the introduction of our entry point WiFi 7 mesh offering in the Orbi 370, we were able to gain share in the WiFi 7 mesh category, and we saw similar share gains in WiFi 7 routers.

We have moved past higher cost inventory and continue to benefit from an improved product mix of WiFi 7 offerings, coupled with streamlined channel execution. Revenue for the mobile business in Q3 was $21.1 million, down 20.7% year-over-year, but up 3.3% sequentially. Mobile benefited from an increased adoption of our high-end Nighthawk M7 Pro mobile hotspots in retail.

With additional products expected to launch in the coming months, we believe the full benefit of our good, better, best strategy will build over time. Our focus in mobile technology really straddles both consumer and enterprise customers.

As such, we will be reporting 2 business segments going forward with products and solutions built on mobile technology being in both businesses. Even though more than 50% of our mobile hotspot products sold through our service provider channel are to commercial end customers, the initial reporting of this revenue will remain in our Consumer business segment.

We will continue to supplement reporting of revenue from mobile products sold to service providers and plan to add our cable modem and gateway businesses to this reporting as well since these products also enable services offered by these operators. This revenue call out will allow investors to isolate these declining businesses in their assessment of NETGEAR and our transformation.

Now, moving on to an update on our recurring subscriber base. We continue to believe that focusing on increasing our recurring subscriber base is the optimal strategy to add high-margin revenue throughout our business while differentiating our offerings. We have made progress with our initiatives to transform these offerings, successfully moving more customers to our higher ASP Armor Plus offering, which was the driving force in growing our ARR by 17.2% year-over-year, reaching $37.9 million in the quarter.

We remain confident we can grow our highly profitable ARR over time, and I'm pleased to share that we exited Q3 with 560,000 recurring subscribers. 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 came in at 39.6% in the third quarter of 2025, once again a new record and the fifth consecutive quarter of sequential gross margin expansion. This marked an 850 basis point increase compared to 31.1% in the prior year comparable period and a 180 basis point increase compared to 37.8% in the second quarter of 2025.

Our gross margin in the current period benefited from an improved mix of our higher-margin enterprise business, success in moving past older, higher cost inventory, along with other benefits of operating with channel inventory at leaner levels relative to the year ago period.

Drilling down to the profitability of our 3 business segments, all 3 segments were profitable on a contribution margin basis for the second quarter in a row and each grew their contribution margin by at least 440 basis points year-over-year. This is the truest indicator of the operational changes we've made over the last 6 quarters and the stellar execution of the team.

Enterprise gross margin was 51%, up 630 basis points year-over-year, matching its highest level ever, led again by strong demand for our ProAV managed switches, driven by strong demand for our Nighthawk M7 Pro mobile hotspots, the mobile segment experienced the largest improvement in segment gross margin expansion year-over-year, growing 1,270 basis points to 31%.

The Home Networking segment was aided by our improved mix of WiFi 7 products, the move into lower-cost inventory, strength in our higher-margin direct-to-consumer channel, which grew to approximately 15% of sales, improving our gross margin for this business by 590 basis points year-over-year to 27.7%.

Total Q3 non-GAAP operating expenses came in at $69.2 million, up 25.1% year-over-year and up 5.4% sequentially as we had some onetime expenses related to moving our headquarters, and we continued our strategic hiring plans. We saw an increase in facility-related costs due to moving our new San Jose headquarters in Q3, but we expect this cost to normalize.

Our headcount was 753 at the end of the quarter, up from 707 in Q2. As a reminder, we conducted a reorganization in January to enact approximately $20 million in annual savings and are reinvesting those savings in the areas of the business that we expect will deliver the best growth and profitability. This is reflected in the sequential operating expense and headcount increase, most notably within our enterprise business.

Our non-GAAP R&D expense for the third quarter was 11.7% of net revenue as compared to 11% of net revenue in the prior year comparable period and 11.6% of net revenue in the second quarter of 2025.

To continue our technology and product leadership, we are committed to continued investment in R&D. I'm pleased that we delivered non-GAAP profitability above the high end of our guidance range, enabled by improved top line led by enterprise growth and compounded by gross margin improvement.

Our Q3 non-GAAP operating income was $3.8 million, resulting in non-GAAP operating margin of 2.1%, an improvement of 120 basis points compared to the year ago period and an improvement of 280 basis points compared to the prior quarter.

As a reminder, the prior year period included a $10.9 million benefit from a legal fee adjustment relating to the favorable settlement of a legal matter. Our non-GAAP tax expense was approximately $3.4 million in the third quarter of 2025.

Looking at the bottom line for Q3, we reported non-GAAP net income of approximately $3.5 million, resulting in a non-GAAP income of $0.12 per share. Turning to the balance sheet. We ended the third quarter of 2025 with $326.4 million in cash and short-term investments, down $37.1 million from the prior quarter due largely to $20 million in stock repurchases and changes in working capital.

During the quarter, $7.4 million of cash was used by operations, which brings our total cash provided by operations over the trailing 12 months to $3.6 million. We used $9.7 million in purchase of property and equipment during the quarter, elevated from normal levels relating to improvements to our new corporate headquarters, which brings our total cash used for capital expenditures over the trailing 12 months to $17.1 million.

In Q3, we spent $20 million to repurchase approximately 815,000 shares of NETGEAR common stock at an average price of $24.55 per share. We have approximately 2 million shares reserved in our current authorization, and our fully diluted share count is approximately 29.8 million shares as of the end of the third quarter. We're committed to returning value to our shareholders and plan to continue to opportunistically repurchase shares in future periods.

I'll now cover our outlook for the fourth quarter of 2025. Within enterprise, end-user demand for our ProAV line of managed switches is expected to remain strong. And although we expect to continue to make improvements in our supply position, we continue to face supply headwinds, which may limit our ability to capture the full top line potential of this growing business.

On the home networking side, we are seeing signs of the benefit of our broader product portfolio to address the market. On the mobile side, we expect revenue to be in line with Q3 as we await our new product introductions to round out the portfolio, which we don't expect to yield benefits until next year.

Accordingly, we expect fourth quarter net revenue to be in the range of $170 million to $185 million. In the fourth quarter, we expect our operating expenses to be slightly reduced with our facilities costs normalizing now that we have transitioned into our new corporate headquarters with some offset as we further ramp our planned investments.

We're focused on in-sourcing software development capabilities and enhancing our go-to-market capabilities supporting our enterprise business. Additionally, we expect a headwind to our gross margin of about 150 basis points, mainly related to the rising cost of memory as several of the large suppliers in this space have exited the DDR4 market.

Accordingly, we expect our fourth quarter GAAP operating margin to be in the range of negative 7.3% to negative 4.3% and non-GAAP operating margin to be in the range of negative 2% to 1%. Our GAAP tax expense is expected to be in the range of a benefit of $500,000 to an expense of $500,000. And our non-GAAP tax expense is expected to be in the range of $500,000 to $1.5 million for the fourth quarter of '25.

And with that, we can now open it up for questions.

[Operator Instructions] Your first question comes from the line of Tore Svanberg from Stifel.

Congrats on the continuous progress here. My first question is on the gross margin headwind for the fourth quarter. Is that across the board for each 3 of the segments? Or is this mainly more tied to the enterprise segment?

Yes. Good question. So, the main headwind is coming from the DDR4 memory situation where the largest suppliers in that space have taken their products end of life. And at this point, there are smaller players who are trying to pick up capacity. Memory is in products in each of our businesses. I'd say it's more acutely felt on the home networking side at this point, but it does impact all 3 businesses.

Very good. And when I look at your revenue guidance, it's like a $15 million spread. Could you just talk about some of the puts and takes? What would have to happen for you to get to the higher end of the range versus lower end of the range? And I assume supply is part of it because you obviously have very good backlog visibility. But anything else that you could share with us as far as variability within that guidance range?

Yes, I'll start there, and CJ can certainly chime in as well. supply is the big factor there. As we've said throughout the year, we're seeing tremendous progress on the managed switch side with the ProAV switches. We are still supply constrained. We are making progress there but really don't believe we'll be in a position to have safety stock in place until Q1 of next year. So that would be one lever.

As you saw in Q3, the upside to the quarter that obviously impacted gross margins as well as the top line was that we were able to pull things in ahead of expectations. So that would be one potential lever there. The other thing would certainly be the success of the Q4 holiday promotional period and what happens in the home networking market, I would say, would be another factor to unlocking more towards the upside potential in that revenue guide.

Your next question comes from the line of Adam Tindle from Raymond James.

Okay. CJ, I want to start by just acknowledging great progress on the gross margin front and very clear that your leadership and strategy towards pushing more of the enterprise business and quality of the business higher is manifesting itself in results. More recently, we've seen more headlines around TP-Link of late, and we obviously get a lot of investor questions on that. So, I just wanted to start on that subject. It seems like there's a lot of government activity around TP-Link. Just give us your sense of the latest of your understanding there and the potential timeline and opportunity on that.

Yes. Sounds good. And Tore -- Adam. So, Bloomberg reported a few weeks ago that there's been a flurry of activity, and I think that's a kind of well put statement around what's happening. In the article, they mentioned that there's a final initial determination on TP-Link. It's been completed and a bunch of administrative activity around that. I haven't heard much about it since then. But more broadly, the Senate just passed the NDAA, which states that it's going to evaluate TP-Link as a DoD covered company.

Yesterday, the FCC voted in favor of restricting networking equipment that has connected components from the Chinese covered list. There's a state of Texas investigation into the TP-Link, something apparently just dropped from Wisconsin of all places. There is a 60-minute piece. So, with all of this activity, I think our confidence is increasing that something is going to eventually drop here. Timing is obviously uncertain. In fact, I think our President's meeting with the right now or shortly.

And there's obviously a lot going on there. But one thing kind of related to that, not specific to a government action is that we have been seeing customers starting to recognize NETGEAR differently in the market as a U.S.-based public company trusted partner, and we've been winning some pretty big deals that may have previously not gone our way because of that. And so, I think all the messaging out there is actually helping us win with customers. And so, we're excited about that in the near term, but then also I think there's just a lot going on from the administration perspective. So, it'll be following it closely like everybody else.

Got it. Makes sense. And maybe just a follow-up for Bryan. I know you have an Investor Day coming, and I imagine we're going to get a lot more information. I appreciate the detailed guidance for Q4. So, I think we've got a good handle on that. But a number of moving parts that are happening, and I'm trying to unpack when some of these things unwind or how long headwinds persist. Maybe a simple way to ask would just be, as we have to shape our models for 2026 and in particular, for Q1, is there anything that you might just have us be mindful of, whether it's on the margin front or growth front or channel inventory front, just so we can make sure that we're in good shape heading into that Analyst Day and not caught with something that we mismodeled or a surprise.

Certainly. I'll start by saying that we're certainly thrilled and you kind of started your questions with this, that we're thrilled with the progress we've made on the transformation thus far and the unlocking of incremental gross margin performance on the business that certainly is putting us ahead of our plans. You may recall at the start of the year, we came in, we didn't think we would be profitable in 2025. And certainly, year-to-date, we're there.

And you can see by the guide where we expect the full year to shape up there. There are certainly a lot of additional opportunities ahead of us. And as we've said, we are very much focused on driving towards long-term sustainable profitable growth. These things will require investments. We've made some investments this year. We obviously took some aggressive actions to strip out $20 million of annual cost to help fund some of those, but we still have additional investments to go here to really get this business to where we think it can get to.

If I look at -- like if I look at the public estimates that are out there for next year, I think they're fairly reasonable when it comes to both the top line and the operating income side of things. And again, that's largely -- we do have investments that we need to continue to put into the business.

Shorter term or more near term, I should say, Q1, I would reiterate there is seasonality in the consumer side of the business. And while enterprise has gotten to about 50% of the mix, the other 50% is subject to some of those seasonal fluctuations. So Q1 seasonality typically off of the Q4 period, the markets would be down in the mid-teen percentage-wise. Certainly, that will impact top line leverage in the first part of the year. But as I said before, I think the public estimates that are out there for the full year 2026 are reasonable at this point.

Okay. And the mid-teens is just for the consumer side of the business, not for...

Correct. Yes, it's for the consumer side. Enterprise is not a seasonal business for us today.

Yes. I just want to make sure. Okay.

Your next question comes from the line of Jay Goldberg from Seaport.

First off, I wanted to ask about -- you mentioned considerable progress in growing your distributor channel for NETGEAR Enterprise. I get that right? I was wondering -- I was just hoping you could talk more about what's going on in the channel, what is drawing the channel's interest in NETGEAR and just sort of what you're hearing from them?

Yes. Great question, Jay, and good to see you on the call. One thing just to clarify, when we talk about our ProAV ecosystem partners and the growth of that, that relates more to the product integrations that we're doing with the broader AV ecosystem to kind of extend our product leadership and make it -- continue to make it simple to deploy complex IP-based AV networks.

That having been said, because I just make that point because I'm not sure if that's what you're referring to. But we are very focused on the channel on the enterprise side of things. And there's a number of transformational initiatives that are coming to market. And our overall philosophy is we just want NETGEAR to be the easiest company to do business with. And so, we've got a partner program that's launching on -- I guess, it's a week today on November 4, I believe it is, via webcast.

And there's a number of other things happening under the hood in terms of -- we've launched our new website as part of the partner program launch. We're going to have a new partner portal. So, we're very closely monitoring the health of our channel and expanding the business that we do with our channel partners and helping enable them to work more seamlessly with NETGEAR.

So, it's a huge part of our transformation on the enterprise side, and we're really excited with the progress that we've made to date. And just to cap this all off, I spent a week on the East Coast a couple of weeks ago with customers, existing customers and potential customers. And the feedback that we're getting is like we're spot on in terms of our product strategy and how we're evolving our go-to-market capabilities. So, it's really validating to get that directly from those folks.

Got it. That sounds great. Let me just follow up real quick. As you went through your prepared remarks, you mentioned a number of new product launches, and they seem to be across all the business units. Could you just give us -- could you just sort of walk through the cadence of when we should be expecting new products over the next year as much as you can say now, it doesn't have to be dates or anything specific, just how we should think about new product launches?

Yes, it's a good question. Philosophically, I don't like to talk about new products coming to market until we've actually launched them. We will be teasing out some stuff at Investor Day. And I think we're going to see you there at least on the webcast. So, I definitely tune into that. But across the board, we are innovating for our end customers and have both kind of new devices coming to market. But most importantly, our focus is on innovating on the software side, driving differentiation via software. And part of this change that we highlighted in the call of making mobile more of a horizontal capability is we have a strong belief that that's combining our mobile products with what we've previously been calling our home networking products allows us to drive a lot of differentiation in terms of having a single app, a single subscription with all of those products connected in one experience.

And similarly, on the enterprise side, bringing our mobile products into our Insight Cloud management platform into our security experiences is quite differentiated. So, what you're going to see from us going forward is we've really got a consumer platform, an enterprise platform. And anything we launch is going to be connected into one of those for consumers on the one hand or our commercial customers on the other.

I look forward to seeing you in person at the Analyst Day.

Excellent. I wasn't sure if you'd be there. I saw your name on list. I wasn't sure if you're coming in person. That's great.

Yes, I'll be there.

Your next question comes from the line of Tore Svanberg from Stifel.

Just had a couple of clarifications or follow-ups. So, first of all, and not to really pick on this, right, because you had such a strong gross margin improvement in your home networking business in Q2. But when I do look at the gross margin this quarter, it was down slightly sequentially. So, I was just wondering, is that sort of the DDR4 pricing already starting to weigh on that gross margin? Or was there something else that contributed to the gross margin being down sequentially?

Yes. Good question. last quarter, we talked a little bit about there being a kind of out-of-period onetime benefit that would have been in the Q3 period there that was pertaining to improved experience with regards to sales returns. And we said at that time, it was about a 250 basis point windfall to the home networking gross margins on the quarter. So we said normalized, it would be about 27% going into Q4. We obviously beat that.

And I would say that, as I noted on the comments earlier that we did see some improvements and acceleration on our direct-to-consumer business, which grew to about 15% of our total sales for home networking that has higher gross margins. So that would be the improvement. We have not yet felt any of the impact of the memory pricing increase that won't hit us until Q4.

Very good. And my last question for you, CJ. You highlighted on the ProV side, company very uniquely positioned offering both networking and security. I was just hoping you could elaborate a little bit more on that, especially when it comes to how you potentially monetize that. I mean, obviously, by including security, you can charge more. But I'm just wondering if there's a software services part of that as well.

Yes. Great question, Tore. So, the way that we -- and you'll see this come out in Investor Day even more clearly is we are -- when we talk about our enterprise business, we can think about it in the context of ProAV and enterprise networking, which includes security. And when you hear from Pramod, he'll share kind of our long-term plans around those 2 different segments.

On the enterprise networking side of things, we're building a platform that combines networking and security that's targeted at small to medium enterprises, many of whom are served by MSPs. And the differentiation that we're looking to drive there is enterprise-level reliability with a very simple user interface that combines both of those things that tend to be presented in a complex, very feature-rich manner that those size customers don't value at an affordable price.

So, we're looking to be quite disruptive. And on the topic of gross margin, the competitors that we're looking to disrupt in that enterprise networking space have a very different margin profile that we do. So that's our opportunity. And a lot of the business growth that we expect to drive there will be on the services side of things.

So, we're very focused on software differentiation, driving recurring revenue and nondevice revenue and cloud management is a big piece of that. Security is going to be a big piece of that. And then support and services is another big piece of that. So hopefully, that answers your question, but that software recurring revenue side of things is a big priority for us on the enterprise networking and security side of things.

Sounds good. Look forward to hearing more about at New York, on November 17th.

[Operator Instructions] There are no further questions at this time. Mr. CJ, I turn the call back over to you.

Just a final shout out to the NETGEAR team. Really proud of the work that we've done to date on the transformation. And a little plug for our Investor Day. We've got exciting things to share. We're going to have some demos. I know many of the people on this call are committed to joining, but space is limited. So if you're interested in coming to New York on November 17, let us know, and we look forward to seeing you there.

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