Netgear (NTGR -1.30%) just released mixed quarterly results for the third time in a row, and the market isn't pleased. After climbing around 3% in Thursday's regular session, shares of Netgear fell nearly 5% in after-hours trading after it announced first-quarter revenue fell 11.5% year over year, to $309.2 million.
Adjusted operating margin fell to 9.2% during the quarter -- down from 9.7% in the same year-ago period -- and translated to a 22% decrease in adjusted net income per diluted share to $0.46. Analysts, on average, were expecting higher adjusted net income of $0.51 per share, but on lower sales of $307.3 million.
No big surprises...
Even so, Netgear CEO Patrick Lo pointed out, "Our revenues and operating margin for the first quarter of 2015 were in line with guidance, which was heavily influenced by our service provider business restructuring as well as the strengthening of the U.S. dollar."
Remember last quarter, Netgear took costly -- but necessary -- steps to resize the cost structure of its service provider business unit. That unit has suffered for the past several quarters, as service providers undergo a transition involving reducing wireline investments while continuing to invest in wireless. At the time, management said the segment would likely settle by the end of calendar 2015 to a quarterly revenue run rate of $100 million to $105 million.
By comparison, service provider revenue in Q1 totaled roughly $115.5 million, down around 24% over the same year-ago period. Commercial revenue fared better, falling 7.8%, to $72.7 million. Netgear's retail business continued to thrive -- at least on a relative basis -- with sales increasing 2.3% year over year to approximately $121 million.
Netgear's wireless Arlo cameras are selling well. Credit: Netgear.
Netgear was also hit hard overseas, particularly in its EMEA region, where sales declined 16.6% year over year, to $89.1 million. Adding insult to injury, Netgear CFO Chrstine Gorjanc elaborated that, due to the greater-than-expected international decline in both revenue and profits, Netgear's tax rate "increased meaningfully, negatively impacting our net income and EPS results during the quarter." For any old-school Fools following Netgear, you might recall the same thing happened just more than two years ago, when Netgear experienced an unexpected shift in revenue and profits to the Americas, where tax rates are higher.
On a more positive note, Netgear celebrated the successful launch in Q1 of its Arlo wireless smart home security camera, representing a long-awaited expansion of its efforts to capitalize on the Internet of Things at home. Arlo's release has been limited so far, but early sales are encouraging. As a result, Netgear plans to expand Arlo's channel and regional distribution in the coming quarters, as well as to release "additional unique smart products" under the Arlo brand going forward.
To the patient go the spoils
For the current quarter, Netgear expects revenue of $270 million to $285 million, with adjusted operating margin in the range of 6% to 7%. That's well below Wall Street's models, which called for second-quarter revenue of $300 million. If that were where Netgear left it -- given the earnings miss and light guidance -- it would be admittedly hard to blame the market for taking another step back today.
But Lo had one more comment near the bottom of the press release: "Looking ahead, we believe that we will see significant improvement in the second half of 2015 when we expect the SPBU restructuring to be complete, Arlo to be fully distributed worldwide, and the usual second half seasonal uptick in [retail] and [commercial].
With that in mind -- and with the caveat that I'll be watching Netgear's restructuring progress closely in the coming quarters -- I have no problem holding on to my own shares of Netgear as its long-term thesis continues to unfold. This quarter certainly wasn't pretty; but if Netgear can remain solidly profitable even amid these headwinds, I think the stock could still handsomely reward patient investors as the business takes a turn for the better later this year.
