Netgear Pulls Back After Another Strong Quarter

Netgear (NTGR +0.10%) announced better-than-expected second-quarter 2018 results early Monday, including broad-based growth and solid demand for its various networking-hardware lines, as well as updates on the imminent separation of its Arlo security camera segment. But similar to last quarter's report in April, Netgear once again followed with seemingly light forward guidance, leaving shares down more than 13% to start the week.

Let's take a closer look, then, to get a better idea of what Netgear accomplished over the past few months and what investors should be watching going forward.

IMAGE SOURCE: NETGEAR.

Netgear results: The raw numbers

DATA SOURCE: NETGEAR. 

What happened with Netgear this quarter?

• Revenue arrived above the high end of Netgear's guidance provided in April, which called for a range of $340 million to $355 million. 
• On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation and roughly $11 million one-time costs associated with the Arlo separation -- Netgear's net income was $18.6 million, or $0.57 per share, down from $0.60 per share in the same year-ago period.
• Adjusted operating margin was 5.9%, in line with guidance for a range of 5.5% to 6.5%. 
• By geography, Americas revenue grew 14.5% year over year to $259.8 million, EMEA revenue increased 24.4% to $68.7 million, and Asia-Pacific revenue declined 21.1% to $38.3 million.
• By business segment:
• Arlo revenue climbed 33.1% year over year to $104.8 million.
• Connected Home revenue -- including Nighthawk and Orbi products -- increased 2.8% to $191.2 million.
• Small and Medium Business (SMB) solutions revenue rose 7.2% to $70.8 million.
• In conjunction with today's earnings report, Arlo announced a new wire-free, smart connected audio doorbell and chime that can be paired with an Arlo wireless camera. Expected to be available this fall, it will be compatible with an Arlo smart subscription service plan to intelligently detect people and call e911 emergency services.
• Also today, Arlo launched a roadshow for its initial public offering. The company is offering 10,215,000 shares of common stock in the IPO, as well as a 30-day option for the underwriters to purchase an additional 1,532,250 shares at a price of between $18 and $20 per share. 

What management had to say

Netgear Chairman and CEO Patrick Lo stated:

We had an excellent second quarter in 2018, driven by Arlo, Orbi, the Nighthawk Pro Gaming Router, cable modems and gateways, and our SMB switches. As a result our net revenue for the quarter came in well above the revenue guidance range provided. We are also excited to see year-over-year revenue growth in all three segments for Q2, which drove 10.9% topline growth for NETGEAR overall. We continue to focus 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 third quarter of 2018, Netgear anticipates revenue of $380 million to $395 million -- or roughly 9% year-over-year growth at the midpoint -- with adjusted operating margin in the range of 4% to 5% (assuming $19 million of separation and "dis-synergy" costs). Though we don't usually pay close attention to Wall Street's demands, consensus estimates predicted third-quarter revenue would be slightly above the high end of that guidance range.

That said, investors should note that Netgear has now exceeded its revenue guidance for each of the past eight quarters, and next quarter will likely bring more of the same. But it also likely doesn't help that Netgear shares had climbed more than 70% in the year leading up to this report, leaving some traders compelled to take their profits off the table.

In the end, regardless of what today's drop might imply, I think Netgear shareholders should be pleased with what their company had to say.