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Netgear Looks Forward to Post-Arlo Growth

By Steve Symington – Nov 5, 2018 at 7:17PM

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The networking leader just beat estimates for the ninth consecutive quarter. Here's what investors need to know.

Netgear (NTGR 2.08%) announced strong third-quarter 2018 results late last month. The networking hardware specialist detailed not only its ninth straight quarter of exceeding guidance with continued broad-based growth, but also the successful spinoff of its Arlo Technologies (ARLO -2.01%) wireless security camera business.

Still, shares have declined modestly on the heels of that report. So, let's dig deeper to see how Netgear started the second half, and what investors should expect heading into the lucrative holiday season.

Netgear Orbi router mounted on an outdoor wall near a pool

IMAGE SOURCE: NETGEAR.

Netgear results: The raw numbers

Metric

Q3 2018

Q3 2017

Growth (YOY)

Revenue

$400.6 million

$355.5 million

12.7%

GAAP net income (loss)

$9.9 million

$20.8 million

(52.4%)

GAAP earnings (loss) per share

$0.30

$0.64

(53.1%)

DATA SOURCE: NETGEAR. YOY = year over year.

What happened with Netgear this quarter?

    • Revenue was above the high end of Netgear's latest guidance (provided in July) for a range of $380 million to $395 million.
    • On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation and Arlo separation expenses -- Netgear's net income declined 6.2% year over year to $0.76 per share, also above consensus estimates for adjusted earnings of $0.47 per share. 
    • Adjusted operating margin was 7.1%, above guidance for a range of 4% to 5%.
    • By business segment:
      • Connected Home revenue -- which notably includes Netgear's Nighthawk and Orbi networking lines -- grew 6.3% year over year to $194.7 million.
      • Small and Medium Business (SMB) solutions revenue jumped 20.7% to $74.7 million.
      • Arlo revenue increased 18.8% to $131.2 million.
    • 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.
    • It completed the initial public offering of Arlo on August 7, 2018, raising net proceeds of $170.2 million.
    • Netgear still owns an 84.2% controlling stake in Arlo, which -- per its plans when the separation was announced this past February -- will be distributed to Netgear stockholders as a tax-free distribution before the end of the first quarter of 2019. Following the distribution, Arlo's results will be reclassified into Netgear's discontinued operations.

What management had to say

Netgear Chairman and CEO Patrick Lo stated:

We had a very successful third quarter of 2018, driven by Orbi, cable modems and gateways, SMB switches and the Arlo business. We saw year-over-year top line growth across all three segments, which led to record top-line revenue of $400.6 million for the quarter. Finally, the entire team did an incredible job of moving forward with the separation of the Arlo business, as evidenced by the successful completion of Arlo's IPO in August. By continuing to capitalize on technology inflections, creating new categories, and building recurring service revenue, we believe we can maintain our market leadership position and drive future growth at NETGEAR.

Looking forward

For the fourth quarter of 2018, Netgear expects revenue in the range of $430 million to $445 million -- or roughly 10% year-over-year growth from its exceptional holiday performance in the same year-ago period -- and adjusted operating margin declining to a range of 2.5% to 3.5%. For perspective, the former range assumes Arlo revenue of $140 million to $155 million, and Connected Home/SMB revenue of $275 million to $290 million. The latter includes roughly $21 million of Arlo separation and "dis-synergy" costs.

All told, between Netgear's usual consolidated outperformance this quarter, the effective execution of its Arlo spinoff, and the continued momentum its remaining businesses are showing, this was a report as solid as any shareholder could have wanted. 

Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Netgear. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netgear Stock Quote
Netgear
NTGR
$21.61 (2.08%) $0.44
Arlo Technologies Stock Quote
Arlo Technologies
ARLO
$4.87 (-2.01%) $0.10

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