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Why Shares of Netgear Inc. Surged on Friday

By Timothy Green – Jul 24, 2015 at 12:57PM

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The networking company reported a mixed quarter, but a growing retail segment and strong guidance sent the stock soaring.

What's Happening: Shares of networking company Netgear (NTGR 3.35%) surged on Friday after the company reported its second-quarter earnings. The results were mixed, with revenue of $288.8 million beating analyst estimates, while non-GAAP EPS of $0.29 was slightly short of what analysts were expecting. However, strong guidance, along with a growing retail segment, sent the stock higher. At 12:50 p.m. Friday, the stock was up about 20%.

Why It's Happening: Netgear's revenue declined by 14.5% year-over-year during the quarter, but analysts were expecting worse. Weakness in the European business, where revenue fell 32% year-over-year, was driven in part by the strong U.S. dollar, so this revenue decline isn't quite as bad as it appears.

Netgear's retail segment performed extremely well, and this is likely a major reason the stock is surging today. Retail revenue jumped 19.1% year-over-year, making up for weakness in both the commercial and service provider segments. During the quarter, Netgear continued its previously announced restructuring of its service provider business, and is now nearly done with the process.

Non-GAAP EPS was cut in half compared to the same period last year, driven by lower revenue and a decline in the gross margin. The company expects revenue in the third quarter to be between $315 million and $330 million, a significant sequential increase driven in part by back-to-school seasonality. Analysts were expecting third-quarter revenue of just $302.1 million.

Netgear's stock is soaring on better-than-expected revenue, despite the year-over-year decline, strength in the company's retail business, and guidance that came in well above analyst expectations. While EPS missed analyst estimates and fell considerably year-over-year, investors are focusing on the good news.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Netgear. 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.

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