Netgear Delivers Another Beat on Continued Retail Strength

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

For the third consecutive quarter, Netgear (NTGR +1.87%) 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

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.