Shares of Netgear (NASDAQ:NTGR) are little changed in Thursday's after-hours trading after the networking equipment company announced solid third-quarter results. So why the market's "Meh" response?
On one hand, quarterly revenue fell by 2.4% year over year, to $353.3 million. But adjusted net income per share increased by 24.1%, to $0.72, helped by a combination of a $0.04 per share tax benefit during the quarter, improved operating margins (10.6%, compared to 9.9% in Q3 last year), and the repurchase of 4.1 million shares of common stock during the past year. Both figures easily exceeded analysts' estimates, which called for earnings of $0.61 per share on sales of $352.5 million.
On the other hand, Netgear expects revenue for the current quarter of $335 million to $350 million, with adjusted operating margin of 9.5% to 10.5%. Analysts, on average, were modeling significantly higher revenue and earnings of $362.6 million and $0.63 per share, respectively.
Breaking it down
To explain the top-line guidance shortfall, Netgear CEO Patrick Lo noted the company was expecting "above average capex contraction" from major service provider customers in the fourth quarter. At the same time, however, he insisted, "We believe that this is not a Netgear specific event, but rather industry wide."
On a more encouraging note, Netgear owes its relative outperformance in Q3 to a successful back-to-school season for the Retail Business Unit, sales from which climbed slightly year over year, to $131.3 million. That included setting a new industry high mark for average selling prices with its popular high-end Nighthawk routers.
Even so, revenue for the Americas still fell 12.1% year over year, to $193.9 million, hurt primarily by lower commercial and service provider demand, as well as fewer shipments to distribution channels in the United States. According to Lo, Retail Business Unit performance would have been better had it not been for supply constraints amid higher-than-expected demand for new products, which led to a decline in retail channel inventory in the Americas.
Meanwhile, Netgear continues to realign its Northern European retail and commercial business units, which you might remember was the primary reason Netgear's revenue fell short of expectations with last quarter's report. But Netgear is also seeing "encouraging signs of progress in the region," and EMEA regional sales actually climbed 11.5% year over year, to $108.4 million. In addition, revenue from Netgear's Asia-Pacific region climbed an even more impressive 15.4% year over year, to $51 million.
More share repurchases, new products on the way
Lo also hinted of progress in its ambitions for fostering the "Internet of Things" at home. As if Netgear's routers, network-attached storage devices, and home video monitoring solutions weren't enough, Netgear is holding a press conference on Nov. 5, 2014 -- the same day as its Analyst Day -- to more fully outline its "vision for Internet of Things in the home and unveil a new Internet of Things product line." Color me intrigued.
Finally, for investors willing to wait for Netgear to put all the pieces together, Netgear authorized a new repurchase program to enable them to opportunistically buy back up to 3,000,000 shares of common stock. That represents roughly 8.5% of all outstanding shares, and shouldn't be a problem considering Netgear ended the quarter with no debt and $242.6 million in cash and short-term investments on its balance sheet.
It's ironic that this wireless networking company's report contains such a multitude of mixed signals, so I can't blame the market for not being able to make up its mind. But if one thing seems sure, it's that this solidly profitable business won't be going anywhere for a very long time.
Steve Symington owns shares of Netgear. The Motley Fool recommends Netgear. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.