Here's What Drove Netgear, Inc.'s Latest Stellar Quarter

For the second time in as many quarters, Netgear (NTGR 1.05%) investors were given reason to rejoice following its latest financial results. Shares of the networking hardware company rose as much as 30% Friday after it handily outpaced expectations in Q3.

Let's take a closer look at what Netgear accomplished this quarter:

Netgear results: The raw numbers

Data source: Netgear.

What happened with Netgear this quarter?

• For perspective, on an adjusted basis, net income fell 17.2% year over year to $21.7 million, while adjusted net income per share declined 6.9% to $0.67.
• Adjusted operating margin was 10.3%.
• Netgear's third-quarter guidance called for much lower revenue of $315 million to $330 million and adjusted operating margin of 8.5% and 9.5%.
• Revenue by geography:
• Americas increased 13.3% to $219.7 million
• EMEA fell 28.3% to $77.7 million
• Asia-Pacific fell 12.9% to $44.4 million
• Revenue by segment:
• The retail business unit grew 24.9% to $164.1 million during the key back-to-school season, setting a new company record
• The commercial business unit fell 9.4% to $65.2 million
• The service provider business unit fell 24.9% to $112.6 million
• Retail strength driven by demand for Arlo wireless security camera products, and high-margin Nighthawk routers and switches.
• Commercial business increased sequentially from $63 million last quarter, driven by switching products. Momentum here is expected to continue in the coming quarters.
• Following recent restructuring, the service provider business continues to be managed with priority on profitability.
• Repurchased 642,000 shares for $20.6 million.

What management had to say 
As Netgear CEO Patrick Lo said:

We remain committed to being a leader in the connected home space by leveraging our home WiFi expertise and providing cutting edge, unique products for consumers. We continue to see a greenfield opportunity in the Internet of Things for Netgear following on the heels of our highly successful Arlo wire-free cameras. We are committed to investing significant R&D dollars in order to bring more exciting products to the rapidly growing Smart Home market.

Looking forward 
For the current quarter, Netgear expects revenue of $335 million to $350 million, representing a decline of 5.1% to 1%, and adjusted operating margin of 9.5% to 10.5%. By comparison, consensus estimates were predicting revenue below the midpoint of Netgear's guidance range at $338.3 million, with earnings of $0.61 per share.

Lo also expressed confidence in the retail business unit's performance heading into the crucial holiday season, especially as Arlo and Nighthawk products continue to drive up average selling prices and margins. In addition, Lo noted Netgear continues to expect shipments to service providers will return to a normalized $100 million annual run rate, in keeping with the company's goal when the restructuring was announced earlier this year. As service providers continue their transition in reducing wireline investments while continuing to invest in wireless, this should leave Netgear well positioned to benefit from the segment's most profitable accounts over the long term.

In light of this performance, it's hard to blame investors for aggressively bidding shares up today, especially as Netgear stock went into yesterday's close trading at just 14.6 times next year's expected earnings. But if Netgear can continue this momentum, executing on its growth potential as the Internet of Things and smart homes become more ubiquitous, I suspect Netgear stock has much further to rise from here.