Why Netgear Stock Dropped Friday

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What's happening:
Shares of Netgear were down 9.7% as of 12:30 p.m. Friday after the company the day before announced better-than-expected fourth-quarter results, but followed with disappointing guidance.

Quarterly revenue fell 1% year over year to $353.2 million, which translated to adjusted earnings of $0.65 per diluted share. For reference, adjusted operating margin came in at 10.1%, compared to 10.6% in the year-ago period. But analysts, on average, were only looking for revenue and earnings of $344.5 million and $0.63 per share, respectively.

For the current quarter, however, Netgear expects revenue of $300 million to $315 million, with adjusted operating margin of 8.5% to 9.5%. Wall Street was modeling earnings of $0.59 per share on much higher revenue of $341.7 million.

Why it's happening:
First, note based on generally accepted accounting principles, Netgear actually turned in a surprise net loss of $1.16 per share in Q4. For that, they can thank a non-cash goodwill impairment charge of $74.2 million resulting in a loss of $1.62 per share related to its Service Provider Business Unit.

To be sure, while Netgear's Retail and Commercial business units performed admirably during the quarter, its Service Provider business saw a significant decline and, based on feedback from its customers, will likely suffer more in 2015 and for the foreseeable future. As a result, Netgear took steps to both resize the cost structure of its Service Provider Business and concentrate resources on profitable, long-term accounts.

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Of course, however constrained, that Service Provider weakness certainly isn't ideal. But in the end, patient investors -- myself included -- can take some solace knowing the company's core businesses are continuing to deliver on its long-term vision forcapitalizing on the Internet of Things.

The article Why Netgear Stock Dropped Friday originally appeared on Fool.com.

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.