Netgear (NASDAQ:NTGR) released second-quarter 2019 results on Wednesday after the markets closed, showcasing sales above the top end of what admittedly seemed to be conservative guidance provided three months ago. The networking products company also highlighted a fast-growing subscriber base for its new cyber-threat protection services, setting the stage for what could be a substantial recurring revenue stream.

After climbing more than 5% on Wednesday ahead of the report, shares of Netgear are up another 9% in after-hours trading as the market digests its performance. Let's take a deeper look at what drove Netgear over the past few months, as well as what investors should be watching in the coming quarter.

Smartphone with other electronic devices in the background showing Netgear security software.

Image source: Netgear.

Netgear results: The raw numbers

Metric

Q2 2019

Q2 2018

Year-Over-Year Growth

Revenue

$230.9 million

$249.1 million

(9.6%)

GAAP net income (loss) from continuing operations

$0.8 million

$0.5 million

57.4%

GAAP earnings (loss) per share from continuing operations

$0.03

$0.02

50%

Data source: Netgear. GAAP = generally accepted accounting principles.

What happened with Netgear this quarter?

  • Revenue arrived above the high end of Netgear's guidance, provided in April, for a range of $215 million to $230 million.
  • Adjusted operating margin was 4.4%, within guidance for a range of 4% to 5%.
  • Adjusted for items like stock-based compensation and expenses related to Netgear's separation from Arlo Technologies (NYSE: ARLO) last year, Netgear's (non-GAAP) net income from continuing operations declined a penny per share from the same year-ago period, to $0.28 per share.
  • By business segment:
    • Connected Home Products revenue, which includes the Nighthawk and Orbi product lines, fell 10.2% year over year to $167.5 million, largely driven by lower sales to service providers.
    • Small and Medium Business solutions revenue declined 8% to $63.4 million.
  • By geography, Americas revenue fell 10% to $157.2 million, EMEA (Europe, Middle East, and Africa) revenue declined 10.6% to $43.1 million, and Asia-Pacific revenue dropped 6.3% to $30.6 million.
  • Netgear bought back 570,000 shares of stock for $17 million during the quarter. The company's board also approved the repurchase of an incremental 4.5 million shares of common stock, representing roughly 14.5% of Netgear's total outstanding shares.

What management had to say

Netgear CEO Patrick Lo elaborated:

During the second quarter of 2019, we saw improvement in the U.S. retail WiFi market driven by the continued roll out of our WiFi 6 Nighthawk routers and various channel marketing activities. The improved market demand allowed us to finish the quarter with healthy channel inventory levels. [...] We are pleased to report that we reached 11.2 million registered users in Q2, which represents the foundation for building our paid subscriber base. Furthermore, our number of registered app users reached 2.8 million in the second quarter. We recently launched NETGEAR Armor Cyber Threat Protection to our Orbi WiFi systems install base worldwide, and have been encouraged by the initial traction with trial users. We look forward to converting these users to paying customers in the coming quarters.

For perspective, those figures are up sequentially from roughly 10.4 million total registered users, and 2 million registered app users at the end of the first quarter.

Looking forward

For the third quarter of 2019, Netgear sees revenue arriving in the range of $265 million to $280 million, with adjusted operating margin expanding to a range of 8.5% to 9.5%. By comparison, most analysts were looking for revenue near the low end of Netgear's guidance range.

After coupling this strong outlook with Netgear's relative outperformance in the second quarter, and with shares down nearly 20% so far in 2019, it's no surprise to see Netgear stock rallying right now in response.