Please ensure Javascript is enabled for purposes of website accessibility

Netgear Delivers Another Beat on Continued Retail Strength

By Steve Symington - Feb 5, 2016 at 7:14AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

But the networking products company also followed with lighter-than-expected revenue guidance. Here's what investors need to know.

Netgear's high-margin Nighthawk routers and Arlo security cameras are driving growth. Image source: Netgear.

For the third consecutive quarter, Netgear (NTGR -1.45%) has managed to easily outpace expectations. But after the networking equipment specialist followed with light guidance, don't expect Netgear stock to mimic last quarter's mind-boggling 30% post-earnings pop.

Let's take a closer look:

Netgear results: The raw numbers

 

Q4 2015 Actual

Q3 2014 Actual

Growth (YOY)

Revenue

 $360.9 million

 $353.2 million

 2.2%

GAAP Net Income

 $21.8 million

 -$40.4 million

 N/A

GAAP Earnings Per Share

 $0.66

 -$1.16

 N/A

Data source: Netgear.

What happened with Netgear this quarter?

  • One year ago, shares of Netgear sank after the company achieved solid fourth-quarter results, but took a large non-cash goodwill impairment charge as part of its service provider segment restructuring, resulting in a significant loss according to GAAP standards.
  • On a non-GAAP (adjusted) basis, net income still climbed 20.2% to $27.5 million. And thanks to share repurchases over the past year, adjusted earnings per share increased 27.7% to $0.83.
  • Adjusted operating margin climbed 70 basis points year over year to 10.8%
  • For perspective, Netgear's guidance called for lower revenue of $335 million to $350 million and adjusted operating margin in the range of 9.5% to 10.5%.
  • Revenue by geography:
    • Americas grew 19.1% year over year to $231.8 million
    • EMEA declined 18.2% to $86.9 million
    • Asia-Pacific fell 19.2% to $42.2 million
  • Revenue by segment:
    • The retail business unit grew 33.6% to $197.5 million
    • The commercial business unit fell 19.5% to $63.9 million
    • The service provider business unit fell 21% to $99.4 million
  • Retail strength was once again driven by demand for Arlo wireless security camera products and high-margin Nighthawk routers and switches
  • Netgear is taking "definitive steps to realign resources" within the service provider business given previously announced reduced revenue outlook for the segment. As it stands, the primary focus here is on driving profitability while continuing to deliver advanced technology.
  • Repurchased another 394,000 shares, and maintained plans to be "opportunistic buyers" of Netgear stock going forward.

What management had to say 
CEO Patrick Lo stated:

Our financial results for the fourth quarter of 2015 exceeded expectations, driven by the strength of our retail business during the holiday season. The Retail Business Unit had another all-time record quarter in sales, again led by our Nighthawk and Arlo product lines. Both product lines continue to drive up average selling prices for NETGEAR's retail business [...]. Meanwhile, we saw healthy end market demand for our commercial products during Q4. We continued to see lower channel inventory among our distributors as our online presence grows and we believe that [the Commercial Business Unit] is well positioned for success in 2016.

Looking forward 
For the current quarter, Netgear anticipates revenue of $290 million to $305 million, representing a decline of 6.2% to 1.3% from the same year-ago period, and adjusted operating margin of 9.5% to 10.5%.

By contrast, consensus estimates predicted significantly higher revenue of $326.4 million and earnings of $0.58 per share. CFO Christine Gorjanc explained their guidance takes into account not only seasonality for the retail business unit following the crucial holiday season -- particularly with Arlo home security cameras -- but also the aforementioned revenue guidance reduction for the service provider segment.

In any case, this was a solid quarter showing Netgear is capable of generating outsized growth where it counts (in the Retail Business Unit). And where it continues to lose ground (commercial, service provider), it remains nicely positioned to manage the business to maximize profitability while it works to return to sustained growth. In the end, combining that perspective with Netgear's recent propensity for underpromising and overdelivering, I think investors should be pleased with where Netgear stands today.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NETGEAR, Inc. Stock Quote
NETGEAR, Inc.
NTGR
$25.90 (-1.45%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.