Netgear (NTGR 0.37%) may have just turned in mixed quarterly results for the fourth time in a row, but this time, the market has plenty of reason to rejoice. As of this writing, shares of Netgear are up 9.6% in Thursday's after-hours trading.
Revenue in the second quarter fell 14.5% year over year, to $288.8 million, which was well above analysts' expectations for sales of $277.8 million. On the bottom line, that translated to a 50% decline in adjusted net income, to $0.29 per share, or $0.01 below analysts' models for adjusted earnings of $0.30 per share.
And the winner is...
Netgear CEO Patrick Lo credited the top-line outperformance to "meaningful sequential growth in the Retail Business Unit, despite what is typically a seasonally down quarter."
Specifically, Netgear was pleasantly surprised to see Retail revenue climb 9% sequentially and 19% year over year, to $131.8 million, comprising 45% of total revenue. At the same time, Commercial revenue fell 13.4% sequentially and 16.5% year over year, to $63 million on continued currency headwinds in the EMEA region. Finally, Service Provider revenue dropped 18.6% from last quarter, and 38% year over year, to $94 million. (More on that below.)
For perspective, three months ago, Netgear downplayed its seasonally slow second quarter, offering revenue guidance well below Wall Street's expectations. Instead, Lo placed more emphasis on a probable rebound in the second half of the year. This move made sense at the time considering that's when Netgear anticipates its Service Provider Business restructuring will be complete, its new Arlo home security cameras to be distributed worldwide, and its usual second-half seasonal uptick to be in full swing.
Welcome to a new age
As it turns out, the Retail unit's outperformance arrived a quarter early, driven by a combination of early strength in Arlo smart home security cameras -- which enjoyed a successful initial launch in the first quarter of this year -- as well as strong demand for its premium line of high-margin Nighthawk routers and gateways.
"The growth we are seeing in these two product lines has surpassed our expectations," added Lo, "and forms the cornerstone of our retail business going forward. This is the beginning of the age of the connected smart home, one in which we believe we will play a central role."
In short, Lo is referring to Netgear's stated aspiration to become a leader enabling smart homes as the Internet of Things gains steam.
Restructuring (almost) complete
Next, Netgear's results are made all that much more impressive considering they were achieved as it worked through its ongoing Service Provider Business Unit restructuring. Lucky for investors, according to Lo, that restructuring is "substantially close to completion," and should pave the way for a much stronger finish to the year.
Recall that, during the fourth quarter of last year, Netgear opted to take a large non-cash goodwill impairment charge to kick off this restructuring in response to an ongoing transition by service providers to reduce wireline investments. When all is said and done, this restructuring has the goal of allowing Netgear to focus on the SPU's most profitable, long-term accounts, as well as its promising 4G LTE business. At the same time, Netgear intends to redeploy resulting savings to grow its healthier Retail and Commercial segments.
On guidance
Finally, for the third quarter, Netgear expects revenue of $315 million to $330 million, aided by the back-to-school season and continued success of its Arlo and Nighthawk products. In addition, adjusted operating margin should climb to a range of 8.5% to 9.5%, up sequentially from 7.1% in Q2. Analysts were only expecting revenue of $302.1 million, and earnings of $0.47 per share.
In the end, Netgear's slight bottom-line miss notwithstanding, I can't find a lot not to like about this report. Given its nearly complete restructuring, surprising retail strength, and impending ramp in performance for the second half of the year, I won't be the least bit surprised if Netgear stock continues to climb from here.
