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At that time, if you have a question, you will need to press star one on your telephone keypad. I would now like to turn the conference over to Mr. Erik Bylin. Please go ahead, sir.

Thank you, operator. Good afternoon, 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 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, growth 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 three 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 Wi-Fi 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 two 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's three 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 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 say 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. 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 debt, 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 number one value as a team is dare to transform enables us to reimagine how we work in a revolutionary, not evolutionary way. 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. 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 roadmap, but our conviction is high, and our teams are actively exploring what the future looks like for our customers. 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. To put it simply, AI is not a threat to what we're 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've already seen a competitor also receive approval, and it's expected that others will follow. Even without 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. Now I'll share an update on our transformation, starting with our enterprise segment. We want to highlight three 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 AV challenges. We're seeing this translate to solid wins across live production, corporate studios, and mid-tier broadcast environments where ease of deployment and reliability are key differentiators.

Our competitive position is strong and only strengthening with our planned roadmap as the shift to IP-based 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. 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. She's 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'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 they need 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 state. This is still early innings. The foundation is in place and the trajectory is encouraging. Third is the momentum that's building behind our enterprise non-device 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 non-device 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. 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. I'm confident we'll continue to see momentum here. Shifting over to our consumer business, we're executing on three 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 Matter Wi-Fi devices from their Google Home app, all enabled by NETGEAR. 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, 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 being 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 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 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 in 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. Taken in conjunction with improvements from a license acquisition of the OS that powers our ProAV line of managed switch products, this was the driving force that led to the record consolidating 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 Wi-Fi 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. 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 non-device 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 am 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. 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 Wi-Fi 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. More importantly, it continues to up-level our ability to bring greater value to the AV ecosystem faster than we could have otherwise. Rolling down to the profitability of our two 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 Wi-Fi 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 head count 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 insourcing 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 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 250 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 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 and property 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 our $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 and enterprise.

In consumer, we are focused on driving growth in our core product lines, executing on our roadmap, including the upcoming anticipated release of the Orbi Smart Home Hub, and further penetrating our install 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 and how it may affect us in the year ahead. I'm pleased to share that the nimbleness and shrewd 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. 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. 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-$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 -8.4% to -5.4%, and non-GAAP operating margin to be in the range of -1% to 2%. Our GAAP tax expense is expected to be in the range of $800,000-$1.8 million, and our non-GAAP tax expense is expected to be in the range of $500,000-$1.5 million for the second quarter of 2026. With that, we can now open it up for questions.

Thank you. Once again, everyone, if you do have a question today, please press star one on your telephone keypad. The first question is from Tore Svanberg from Stifel.

Yes. Thank you, CJ, Bryan, and congratulations on the continuous progress here. I guess my first question is on the top on guidance for Q2. It's a pretty wide range. I assume that obviously has something to do with the, you know, portfolio mix management here. Could you help us understand a little bit, you know, what the strategy is gonna be with that range? I mean, you gave us guidance for the service provider revenue, I assume the non-service provider revenue and consumer will still be down with the enterprise business continuing to grow sequentially. I think I have that right, you know, if you could add any color, that'd be great.

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. It's $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. Obviously we are optimizing that business for gross profit at the moment, just given the memory situation.

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 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. 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%-6%, and we're cautiously expecting a little bit of volume offset to that. We could get surprised on the upside. Obviously, we've 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. Thus far, it looks very promising that the market is digesting those. That's kind of the thoughts that went into providing that top-line guidance.

No, that's really helpful. As my follow-up, for you, CJ, in your preamble, you talked quite a bit about how you're leveraging AI, you know, throughout this transformation. I know it's going to be very difficult for you to share how that impacts you financially, but, you know, is there any metrics you can share with us, you know, as far as, you know, how much more would it cost you know, to develop software faster? You know, 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. Thank you.

Hey, Tore. Sounds good. We're furthest ahead on the software development side. As I said in my prepared remarks, we're kind of in a unique position there, right? We're insourcing 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. Since we've been leaning into the AI adoption, first of all, across our engineering team, it's been adopted 100%. There's no outliers. Everybody is using AI in their development. Of course, that varies a little bit by team.

Our estimates so far that we're seeing 40%-50% productivity gains, we measure all sorts of stuff to come to that conclusion, you know, times from code to deploy, pull request velocity, things like that. For now, our focus has been on taking advantage of those efficiencies to accelerate the work that we're doing across our businesses. Where we have a leadership position like ProAV, we wanna strengthen and expand on that. Of course, on the embedded software side, there we recently acquired the OS for our ProAV, and that's another area where we get, you know, a real benefit from AI as we onboard that capability and the teams that are responsible for that.

We're not right now is, of course, we're being very disciplined from an OpEx perspective, but we're not looking to, you know, bank those savings per se. We're looking to accelerate our roadmap, extend our leadership, like I said, in AV. In other areas where we're transforming, like on the enterprise networking and security side, it just allows us to catch up, and, you know, eventually surpass competition. We expect it to allow us to do that. You know, we're being very focused and customer-centric in our development. Again, you know, 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.

Yeah, that's very helpful color. Thank you, CJ

Up next is Adam Tindle from Raymond James.

Okay, thanks. Good afternoon. CJ, I just wanted to start on the recent regulatory environment. Maybe I'll set the context. 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, you know, we still may hear in the timeline for that, and how you're thinking about the opportunity for NETGEAR's consumer business now. Thanks.

Yeah, great question, Adam. 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, you know, security in our supply chain, national security. 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 three requirements. The first two are very much about your leadership team, your corporate structure, your affiliations with government entities, et cetera, et cetera. I think if you...

You know, 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, you know, we received conditional approval first and so quickly because it's very easy for us to answer those questions. In the near term, it's hard to predict who receives conditional approval. So far, you know, we compete against a number of companies. So far, us and eero on the, you know, retail consumer side have received approval. Haven't seen anybody else receive approval yet, we don't have a crystal ball to predict who will get that permission.

In the near term, you know, 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. In the near term, we don't see, you know, a huge tailwind from this. In the medium and longer term, you know, depending on where conditional approval lands, right, there's a lot of long tail competition from, you know, foreign countries as well that would be impacted by this. We think this is a pretty significant tailwind for a trusted company like NETGEAR. 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 was helpful kind of like by quarter, but maybe, I don't know if it's a simpler way for us to think about some sort of sensitivity analysis on the rising costs, meaning like if you had not secured memory throughout 2026, what would the P&L look like or what would margins look like? You know, 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 costs. Anything to dimensionalize that would be helpful. Thanks.

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. 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, let me just point out that I think most of the models out there from the street are reflecting this, and you know, we tried to get in front of this in January. We obviously have better information today, especially as it relates to securing supply. 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 serve us 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 is 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 would be. 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 2026, and supply access will not be an impact to our top line.

You know, 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.

It sounds like you're obviously successfully mitigating the enterprise side through price increases, which is understandable. You know, I think when you quantify 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. You know, some are, you know, 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? Thanks.

Yeah, 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. We would fully acknowledge that there likely is future opportunity. However, we're balancing that out with, you know, building momentum back into some of these businesses that we're transforming.

Makes sense. Thank you.

We'll go back to Tore Svanberg from Stifel.

Yes, thank you. I just had some clarification questions on the 200 basis points impact in the second half. Bryan, I, you know, we should assume that that 200 basis points assumes that the mix stays constant because, you know, obviously, you know, if the mix of enterprise is higher than 50%-53%, the impact would be lower. Second of all, the starting point for that 200 basis points, would that be as of Q1 of this year or would it be as of Q4 of last year? Obviously you talked about the 100 additional and then another 200. Just wanted to clarify that. Thanks.

Yeah. 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 and the guidance for Q2, that was largely steering at the midpoint would be a very similar mix of enterprise that we would have experienced in Q1. I did say that we would neutralize any additional memory impact in the second quarter. The 200 basis points for the second half is relative to what you're seeing in the first half. Yeah. The first part of your question was?

Yeah, I mean, I was just, you know, asking about it in the context of mix, right? As you said, you are managing the consumer revenue to optimize profitability. You know, that 200 basis point comment for the second half of the year, that assumes that the mix between enterprise consumers stays relatively constant versus the first half. I guess that was my main question.

It is-- 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. 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 the second half of the year, but 200 basis points includes all of those factors on a consolidated basis.

Understood. Thank you.

Sure.

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 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.