What happened
Shares of networking technology leader NetGear Inc. (NTGR 1.18%) were down 12.6% at 2:59 p.m. EDT on Monday, following release of the company's second-quarter earnings before market open today. This marks yet another quarter in which strong guidance-beating results for the company are accompanied by a stock-price beatdown.
So what
NetGear reported sales of $367 million, ahead of analyst expectations. That's also above the company's own guidance range announced with last quarter's earnings, which called for between $340 million and $355 million in sales. Profits were also up on an adjusted basis, though it reported a net loss. The company reported non-GAAP earnings of $0.57 per share, though it reported a $5.2 million net loss on a GAAP basis. By both adjusted and GAAP profit measures, NetGear's performance deteriorated versus last year, when it reported EPS of $0.60 and $0.44 respectively.
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While its top- and adjusted bottom-line results exceeded most expectations, NetGear's guidance for the third quarter didn't reassure investors. Management is calling for sales between $380 million and $395 million, while Wall Street analysts were predicting an average of $397 million for the third quarter prior to today's earnings release.
Now what
NetGear's management also cautioned investors about the financial impact of its plans to take its webcam subsidiary Arlo public later this year. CFO Christine Gorjanc said that GAAP operating margins would be negative in the third quarter, including $11 million in one-time costs related to the separation of Arlo and NetGear. In total, the company expects it will spend $19 million in total in the quarter related to the Arlo IPO. The company also announced a financial roadshow for the Arlo IPO, with plans to offer 10.215 million shares at an expected $18 to $20 IPO share price.
Add it all up, and it looks like Mister Market is selling NetGear today on a combination of guidance that's short of analyst expectations, the financial impact and pricing of the Arlo separation, and some uncertainty around NetGear's profitability without Arlo. As per usual, much of the market's action today is a product of speculation about the short-term results and impact. There was not a lot of focus on the long-term prospects for NetGear, as the demand for high-performance networking equipment and services -- especially from the burgeoning esports market -- grows in the years ahead.
