Netgear (NASDAQ:NTGR) announced stronger-than-expected first-quarter 2018 results on Wednesday after the market closed, highlighting robust demand for its network security cameras and stronger profitability from its Connected Home segment, as well as continued progress toward the impending separation of Arlo into its own publicly traded company.

But after following with disappointing forward guidance, shares of the networking hardware specialist fell nearly 8% in after-hours trading. So let's dig deeper to see what Netgear had to say, as well as what investors should expect from the company in the coming quarters.

Netgear 500 Nighthawk router with four antennas


Netgear results: The raw numbers


Q1 2018

Q1 2017

Year-Over-Year Growth


$345.0 million

$323.7 million


GAAP net income (loss)

$5.6 million

$16.0 million


GAAP earnings (loss) per share





What happened with Netgear this quarter?

    • Revenue came in at the high end of Netgear's most recent guidance, which called for a range of $330 million to $345 million.
    • On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation and separation expenses -- Netgear's net income was $20.4 million, or $0.62 per diluted share, down from $21.7 million, or $0.64 per share in the same year-ago period. This was also above investors' expectations for adjusted earnings of $0.60 per share.
    • Adjusted operating margin was 7.5%, near the high end of guidance for a range of 6.5% to 7.5%.
    • By geography, revenue in the Americas increased 10.4% to $233.6 million, EMEA revenue grew 14% to $66.6 million, and Asia-Pacific revenue declined 16.5% to $44.7 million.
    • By business segment:
      • Arlo revenue soared 58.5% to $96.2 million, driven by continued strength in Arlo's wireless security camera offerings.
      • Connected Home revenue -- which includes the Nighthawk and Orbi brands -- fell 8.5% to $177.8 million.
      • Small and Medium Business (SMB) solutions grew 3.5% to just under $71 million.
    • Netgear confidentially submitted a draft S-1 registration segment to the SEC during the quarter related to the proposed IPO of Arlo Technologies.
    • Recall that Netgear initially announced its plan to spin off Arlo last quarter. At the time, it told investors that Arlo is expected to issue less than 20% of its common stock in an IPO in the second half of 2018. Assuming that's still the case, Netgear will retain the remaining shares to be distributed to shareholders after the IPO as a tax-free distribution.

What management had to say

Chairman and CEO Patrick Lo noted that his company's results arrived near the high end of guidance, elaborating:

We had a successful first quarter of 2018, driven by our Orbi line, our new Nighthawk gaming router, Arlo Pro2, and our SMB switching line. [...] We saw year-over-year top line growth for both the Arlo and SMB segments. Meanwhile, the [connected home products] segment showed meaningful improvement in profitability on a sequential basis, and we continue to lead the consumer WiFi market with our premium routers, gateways, mesh systems and extenders. Our focus remains on the successful separation of the Arlo business from Netgear, as well as driving our subscription services strategy for all three segments.

Looking forward

For the second quarter of 2018, Netgear anticipates revenue in the range of $340 million to $355 million. By comparison -- and though we don't usually lend much credence to Wall Street's near-term demands -- consensus estimates predicted second-quarter revenue near the high end of that range.

In addition, Netgear sees GAAP operating margin ranging from negative 1.2% to negative 0.2%, including roughly $10 million of one-time separation expenses for various advisory and audit-related costs.

Adjusted operating margin should contract slightly to a range of 5.5% to 6.5%, assuming roughly $4 million in costs related to the separation and resulting "dis-synergies" from duplicate roles required to prepare the smaller company "to stand up on its own." Netgear also expects to bolster its research and development spending as a percentage of overall sales, including higher investments in all three product segments with a particular focus on Arlo.

To be fair, Netgear has now beaten its own revenue guidance for each of its past seven quarters. So it seems likely that its latest outlook is conservative as well. But with the market growing accustomed to its quarterly outperformance, and with costs climbing ahead of the Arlo separation, it's no surprise to see Netgear stock pulling back in response.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.