Netgear Cuts the Cord on Arlo After Another Strong Quarter

Netgear (NTGR 1.07%) announced better-than-expected fourth-quarter 2017 results on Tuesday after the market closed, detailing a record holiday season and the continued strength of its Arlo security camera line.

However, the networking hardware specialist not only followed with disappointing guidance, but also revealed plans to spin off Arlo into its own publicly traded company. Shares plunged more than 15% as investors absorbed the news.

Now that the dust has settled, let's take a closer look at what drove Netgear over the past few months, as well as what we can expect in the coming quarters.

Netgear will separate its Arlo business later this year. IMAGE SOURCE: NETGEAR.

Netgear results: The raw numbers

Data source: Netgear. 

What happened with Netgear this quarter?

• Revenue arrived above the high end of guidance provided last quarter, which called for a range of $375 million to $390 million.
• Netgear's GAAP loss was caused by a one-time charge of $48.3 million related to recent U.S. tax reform. Excluding one-time items, Netgear's adjusted (non-GAAP) earnings were $0.71 per share, above expectations for $0.64 per share.
• Adjusted operating margin was 7.3%, within Netgear's 7% to 8% guidance range.
• By geography, revenue in the Americas grew 8.5% year over year to $275.1 million, EMEA revenue increased 12.8% to $78.1 million, and Asia-Pacific revenue declined 2.6% to $43.9 million. 
• By business segment:
• Arlo revenue grew 66.9% to $128.5 million, driven by strong demand during the holidays.
• Connected Home revenue -- including the Nighthawk and Orbi brands -- declined 7.6% year over year to $198.7 million.
• SMB revenue fell 8.1% to $69.8 million.
• In perhaps the most significant news today, Netgear announced plans to separate its Arlo business into a new publicly traded company.
• Arlo is expected to issue less than 20% of its common stock in an IPO in the second half of 2018. Netgear will retain the remaining interest, and after the IPO will distribute shares of Arlo stock held by Netgear to its shareholders as a tax-free distribution.

What management had to say

Netgear chairman and CEO Patrick Lo stated:

We had a very successful fourth quarter, as demand during the holiday season was stronger than we had originally expected. I'm pleased to report that we set an all-time record in quarterly net revenue. Our Arlo and Orbi product lines were both massive hits with consumers. We could not have asked for a better finish to 2017. Meanwhile, we recently expanded our Nighthawk line into the gaming category, and released several new and exciting products and services for the SMB segment.

Regarding the planned Arlo separation, Lo elaborated:

Both Arlo and NETGEAR are market-leading businesses that have benefited from the resources that come with being part of a single company. That being said, we believe that now is an opportune time for them to part ways and pursue different growth trajectories. Arlo will aggressively acquire new users, while NETGEAR will continue to deepen engagement with its vast installed base. Both businesses are strong enough to operate independently, and will benefit from the focus, flexibility and financial resources that come with separation.

Looking forward

In the meantime, Netgear expects revenue for the first quarter of 2018 to be in the range of $330 million to $345 million -- the midpoint of which sits slightly below investors' expectations for $342.4 million -- with adjusted operating margin remaining steady in the 6.5% to 7.5% range.

That said, Netgear has exceeded revenue expectations in each of its past six quarters, so I won't be surprised if its latest guidance range also proves conservative. But combining that light outlook with the relative uncertainty of parting ways with Arlo -- its fastest-growing business -- as well as the fact that Netgear stock was up nearly 30% in the year leading up to this report, and it's hardly surprising to see shares pulling back in response today.