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Bryan Murray

Thank you, CJ, and thank you everyone for joining today's call. Thanks to the excellent execution of our team, we began the year with a strong start, delivering a fourth consecutive quarter where we exceeded the high end of our guidance range for revenue and non-GAAP operating margin. The first quarter's outperformance was driven mainly by strong performance in our higher margin NFB business segment which grew 15.4% year over year along with demand for our Mobile products coming in above our initial expectations. Following the accelerated destocking actions we took last year and our initiative to broaden our product portfolio in pursuit of a good-better-best strategy, we're continuing to see more predictable performance aligned to the market trends and improved linearity of channel execution. Our DSOs decreased again to 78 days, our best result in over seven years.
End user demand for our ProAV managed switch products again grew in the double digits year over year and we saw penetration of our broader WiFi 7 portfolio pick up momentum for our Home Networking and Mobile businesses. The leanness and health of our channels and our ability to match sell-in with sell-through were a significant contributor to our success starting off the year.
For the quarter ended March 30, 2025, revenue was above the high-end of our guidance range at $162.1 million, down 11.2% on a sequential basis largely due to seasonality in our Home Networking business and down 1.5% year over year. In Q1, we repurchased $7.5 million of our shares and experienced changes in working capital due to lower accruals leading to negative free cash flow of $10.1 million. We ended the quarter with nearly $392 million in cash and short term investments.
We delivered $79.2 million of revenue in the NFB segment for the first quarter, down 2% sequentially and up 15.4% year over year. Although, we continue to see supply constraints around certain managed switch products in our NFB business, the team executed well and was able to outperform our forecast for the quarter by working closely with key vendors to overcome these headwinds. We do believe that the supply challenge for this category will begin to ease as we exit Q2 and we should be in a healthier position as we enter the second half of the year. Revenue for the Mobile business in Q1 was $21.5 million, higher than our expectations, but down 25.3% year over year and down 10.9% sequentially. With additional new product introductions planned for release later this year, we expect the full benefits of our good-better-best strategy to build over time.
In Q1, the Home Networking business delivered net revenue of $61.4 million, down 8.7% on a year-over-year basis and down 20.8% sequentially due to seasonality coming off the Q4 holiday period. Aided by the recently released WiFi 7 offerings that helped fill out our good-better-best strategy, we were able to continue the momentum we saw exiting the fourth quarter and gained share in this highly competitive market for the first time in nearly four years. We exited the first quarter with 559,000 recurring subscribers and generated $8.7 million in recurring service revenue in the quarter, a year-over-year increase of 19.3%. We continue to see increased emphasis placed by consumers on cybersecurity protection, privacy and premium support, further substantiating our belief that focusing on increasing our recurring subscriber base is the optimal strategy to add high margin revenue to the Home Networking business. 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. For the third consecutive quarter, non-GAAP gross margin was above 30% in the first quarter of 2025 coming in at 35%. This marked a 550-basis-point increase compared to 29.5% in the prior year comparable period and 220-basis-point increase compared to 32.8% in the fourth quarter of 2024.
Compared to the prior year period, our profitability in the current period was aided by improved mix of our higher margin NFB business, as well as success in moving past older, higher cross inventory along with other benefits of operating with the channel inventory at leaner levels and improved forecasting and supply chain management. In addition to the margin expansion unlocked by our NFB products, we also continue to see improved product mix from our WiFi 7 lineup.
Drilling down to profitability of our three business segments. NFB gross margin was 46.3% up 440 basis points year over year. Mobile had the largest improvement in segment gross margin expansion up 730 basis points year over year to 24.6%. For the Home Networking segment, our improved mix of WiFi 7 products and moving into lower cost inventory improved our gross margin for this business by 190 basis points to 24.1%. The improved gross margin performance coupled with expense management propelled all three businesses to meaningful improvement contribution profitability as well.
Total Q1 non-GAAP operating expenses came in at $59.3 million, down 8.2% year over year and down 7.2% sequentially, below our expectations due to delays in our hiring plans, in part, from proceeding more cautiously during Q1 due to the uncertain tariff situation. Our headcount was 636 as at end of the quarter, down from 655 in Q4. As a reminder, in January we enacted a significant restructuring that drove cost reductions throughout the organization, impacting approximately 50 individuals and yielding a reduction in annual operating expenses of approximately $20 million or over 8% of our annual expense in 2024. We plan to redeploy these savings into opportunities that drive the greatest growth and profitability. While we got off to a slow start in Q1, we believe we can still achieve our hiring and investment goals for the year.
Our non-GAAP R&D expense for the first quarter was 10.9% of net revenue as compared to 11.9% of net revenue in the prior year comparable period and 10.5% of net revenue in the fourth quarter of 2024. To continue our technology and product leadership, we are committed to continued investment in R&D such as the opening of our Chennai-based Software Development Center that CJ referenced earlier. I'm pleased that we delivered profitability above the high-end of our guidance range, enabled by improved top-line leverage, led by our NFB and Mobile segments and compounded by greater efficiency in our channel execution and our expenses coming in lighter than we had projected. Our Q1 non-GAAP operating loss was $2.6 million resulting in a non-GAAP operating margin of negative 1.6%, an improvement of 810 basis points compared to the prior year period and an improvement of 70 basis points compared to the prior quarter. Our non-GAAP tax expense was $470,000 in the first quarter of 2025.
Looking at the bottom line for Q1, we reported non-GAAP net income of approximately $460,000, resulting in non-GAAP earnings of $0.02 per share. Turning to the balance sheet, we ended the first quarter of 2025 with $391.9 million in cash and short term investments, down $16.8 million from the prior quarter and equating to $12.95 per share. During the quarter, $8.7 million of cash was used by operations which brings our total cash provided by operations over the trailing 12 months to $138.9 million. We used $1.4 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 $7.9 million. In Q1, we spent $7.5 million to repurchase approximately 254,000 shares of NETGEAR common stock at an average price of $29.55 per share.
We have approximately 3.1 million shares reserved in our current authorization and our fully diluted share count is approximately 30.2 million shares as of the end of the first quarter. We're committed to returning value to our shareholders and plan to continue to opportunistically repurchase shares in future periods. Now, I'll cover our outlook for Q2 2025. We expect to continue to see more predictable performance that is aligned with the market for all of our businesses. Within NFB, 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 expect to continue to chase supply throughout the quarter 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 and expect to experience normal seasonality in this business.
On the Mobile side, we expect revenue to be in line with Q1 as we await our new product introductions to round out the portfolio later this year. Accordingly, we expect second quarter net revenue to be in the range of $155 million to $170 million. In the second quarter, we expect our gross margin to be in line or decrease slightly from the first quarter level and we expect to ramp our planned investments with focus on insourcing software development capabilities and enhancing our go-to-market capabilities supporting our NFB business.
Accordingly, we expect our second quarter GAAP operating margin to be in the range of negative 10.4% to negative 7.4% and non-GAAP operating margin to be in the range of negative 6.5% to negative 3.5%. Our GAAP tax expense is expected to be in the range of $0.5 million to $1.5 million and our non-GAAP tax expense is expected to be in the range of $1 million to $2 million for the second quarter of 2025. And with that we can now open it up for questions.

Question and Answer Session

Operator

Adam Tindle, Raymond James.

Adam Tindle

Congrats on the much better than expected results. CJ, I just maybe wanted to start on competitive dynamics. You mentioned no manufacturing in China. You're a trusted US company.
How are those things impacting competitive dynamics in your core market? And if you could maybe rope in some of the TP-Link stuff. I know you mentioned a couple things in the prepared remarks, but if you could maybe double click on what you're waiting for there and some of the timelines?

Charles Prober

Yes. Adam, good questions. So, competitively, the tariff landscape has worked out in our favor. Currently, there's been a lot of volatility there. But because we don't manufacture in China, and some of our competitors do, we benefit from the fact that we have the tariff exemption that doesn't apply to some of the China tariffs.
I would say that benefit is somewhat limited, because if you look at our competitive mix and the numbers that competitors that manufacture in China, it's very much a mix. And people have figured out a way to avoid paying those tariffs, rightly or wrongly. But on the broader point around kind of our posture as a trusted US-based public company, there's obviously been a bunch of developments on the TP-Link side of things since our last call. So there's a big congressional hearing that I don't think was intended to focus on TP-Link, but that ended up being the focus of the conversation there with some fairly impassioned perspectives on the right action to be taken.
And then a couple of Bloomberg articles dropped over the last month or so. One was kind of debunking the position that's being taken there that they've separated the companies and are now a US-based company. And the other was revealing the fact that there's a DOJ investigation, that's a criminal investigation focused on their pricing practices.
So I would say, to summarize it on the tariffs, some competitive benefit there. But the real benefit is that we're not subject to the tariffs and so, we're moving full speed ahead with our strategy and transformation. And then, preparing if tariffs were to reemerge for us in terms of cost sharing with our partners, and potential price increases.

Adam Tindle

Got it. And maybe a good way to dovetail to Bryan. How should we think about revenue for the rest of the year? If you can maybe just provide a little bit more color. I look at the all the things going on that CJ talked about, it sounds like, a lot of tailwinds.
Your Q2 guidance is showing double-digit growth year over year. Granted a little bit of an easier comparison, so not getting ahead of ourselves too much on that. But it does look like some acceleration in growth and just wanted to see if you could double click on how you're thinking about revenue for the rest of year?

Bryan Murray

Sure, yes. I guess, you already kind of hit on it. The comp, obviously, with Q2 last year, as you recall was an aggressive action to clean up the channel, and so the comp is, is a bit easier in Q2. If I look to the three businesses, you know, if I start with NFB, there's not really a seasonal pattern to that business. We've got great momentum.
Keep referring to the double-digit end user momentum on the ProAV side of things. Deliver 15% growth in Q1 on the top line. We are still going to face some supply challenges in Q2, but we think those will largely alleviate as we start to exit Q2. So we are kind of constrained a bit in Q2. As we go into the back half of the year and get an easing in the supply, we certainly think that growth momentum we're seeing on ProAV will just continue.
And you're probably thinking about something like a mid-single digit sequential growth profile once we start to bring that supply in. And it will be, progressive as we go through Q3, but we think we'll be in a good shape for the second half of the year. Home Networking, at this point we see it operating at kind of normal seasonal patterns. Q2 typically is relatively flat to Q1. And then as you go into the back half of the year, Q3 is usually an uptick in the low to mid-teens percentage increase.
And then Q4, would be kind of flat to up mid-single digits in Q4 seasonally speaking. Mobile, I think we've talked about this a couple of cycles now that, the level you saw in Q1 is likely the level we expect to see for most of this year certainly through Q3. And as we get into Q4, we've got some products that we're working on that will broaden that portfolio. Mobile is a little bit behind, where Home Networking business is in terms of broadening that portfolio in the good-better-best strategy. But we do feel good about where those efforts are going into Q4.
So those are kind of the trends, I think, that you would expect to see. And of course what we've said in terms of we expect double-digit growth for NFB that all this still holds true.

Adam Tindle

Maybe just on the point of margins. Obviously, gross margin was very, very strong in Q1, in particular. If you could first touch on the sustainability of gross margin at sort of this mid-30s level. And then, also walk through the trajectory of operating margin from here. You've got the further reorg in January.
It sounds like a good portion, or maybe all of it is going to be reinvested. I'm just trying to figure out, should we think about sustaining gross margin at these levels, and what does that mean for the walk of operating margins for rest of year?

Bryan Murray

Yes, I'll start with the gross margin piece. I definitely believe that gross margin is sustainable given the current mix trends. Like, the growth trajectory of NFB is really what's lifting the Q1 performance. We expect that to be sustainable. We've kind of moved past some of the aged inventory challenges that we had last year, and the aggressive actions we took to clean that up in 2024.
So we're seeing that benefit. That should continue as we go forward. Q2, in particular, we're going to spend some on air freight. As I touched on the supply challenges that we still have during the quarter, we're going to supplement that with air freight. But that should start to diminish as we get into the back half of the year. So again, I think keeping those -- that mix of business and the trajectory NFB is on those the current gross margin level is sustainable.
From an operating margin standpoint, you could see in the Q2 guidance, we are going to start to ramp our investments. We were a little bit slow out of the gates in Q1, obviously, getting the full benefit of the restructuring actions given we took those actions pretty early. But we are moving forward in terms of the investments that we plan for the year, and those will build as the year progresses.
I still think you're probably to getting to an operating margin, above breakeven, you're probably looking to get to top line to nearly $200 million is probably that tipping point for us. But the investments in OpEx will build, as you can see in the Q2 guidance.

Adam Tindle

Does that mean operating margin then would be further challenged in Q3 and Q4 from this minus 5% midpoint in Q2? Or because of the leverage in the model, does Q2 maybe represent the low point on operating margin?

Bryan Murray

Yes, the latter. As we talked about, the kind of seasonality in the business with the lift that you would expect in the second half of the year, that would certainly help from a top-line leverage standpoint.

Adam Tindle

And then last one from me, the VAAG acquisition, CJ maybe if you could just touch on strategic rationale on that. And also any color on the size of that deal. And Bryan, if you could maybe just wrap that point by talking about expectations on free cash flow for the year?

Charles Prober

Yes. So as you'll recall, Adam, we recast our purpose as a company to power extraordinary experiences a couple quarters ago. And in order to do that we need to deliver great software. In order to deliver great software, we need great software teams. And so, we've been pursuing our transformation of insourcing our software development capability.
Pramod who leads the NFB business identified Chennai as a perfect location given the networking talent there. We're going down the path of, kind of build, hire, open an office, build an office. And the VAAG team presented itself. These are people that had worked with Pramod in the past, very well known, very well respected in the networking industry. They were early in their journey at VAAG.
And they were just excited about what we're doing here, and they wanted to join NETGEAR, and be part of the transformation and be part of leading the software development, team building, and capability building for Pramod. And so, we got lucky on top of bringing this team on Board.
There was another Chennai-based kind of wireless office that was shut down. We were able to cherry pick the top engineers from that group, and so we're really well positioned. And the best part about this is it comes with an overall lower cost profile.
So there is some transition costs as we insource from the expensive outsourced developers. But overall, we'll be able to do more with less as I said in our opening remarks. And it's just a great foundation of a team to build off of. It was very much an acqui hire, and even then much more on the higher side of an acqui hire. But it was just a win, win all round. So we're excited to welcome that team.

Bryan Murray

And on the free cash flow, we still expect that we'll, over the long-term, over the full year would be in the range of 85% to 100% of non-GAAP net income is the rate that we would correlate from a free cash flow standpoint. In Q1, we saw a little bit of swings from working capital with regards to liabilities coming down off the back of the seasonal trend with regards to revenue. But over the full year, we would expect in that range.

Operator

There are no further questions at this time. I would now like to turn the conference back over to Mr. CJ Prober for closing remarks.

Charles Prober

Yes, I just want to thank the Global NETGEAR team for driving the progress that we're seeing on the transformation, and delivering another great quarter.

Operator

This concludes today's conference. You may now disconnect your lines. Thank you for your participation.