Netgear, Inc. Connects With a Beat Despite Service Provider Weakness

By Markets Fool.com

Netgear's Arlo wireless security cameras and Nighthawk routers drove a "stellar" retail performance in Q2. Image source: Netgear.

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Netgear Inc.(NASDAQ: NTGR) released second-quarter 2016 results Wednesday after the market close, exceedingexpectations for the fifth consecutive quarter. With shares up around 7% in after-hours trading and touching a fresh 52-week high as of this writing, let'stake a closer look at what drove Netgear's strength in Q2.

Netgear results: The raw numbers

Metric

Q2 2016 Actual

Q2 2015 Actual

Growth (YOY)

Revenue

$311.7 million

$288.8 million

7.9%

GAAP net income

$16.0 million

$3.7 million

332.4%

GAAP earnings per share

$0.48

$0.11

336.4%

Data source: Netgear.

What happened with Netgear this quarter?

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  • On a non-GAAP (adjusted) basis -- which excludes items like stock-based compensation and restructuring expenses -- net income jumped 143.4% year over year, to $24.1 million. Adjusted net income per share grew 148.3% year over year, to $0.72.
  • Adjusted operating margin was 11.6%, up from 7.1% in the same year-ago period.
  • By comparison, Netgear's guidance called forrevenue of $290 million to $305 million, and adjusted operating margin in the range of 9.5% to 10.5%.
  • Revenue by geography:
    • Americas increased 22.3% year over year, to $210.9 million.
    • EMEA declined 24%, to $51.7 million.
    • Asia-Pacific increased 1.6%, to $49.1 million.
  • Revenue by segment:
    • Netgear's retail business unit grew 29.5% year over year, to $170.6 million.
    • Commercial business unit sales grew 16.9%, to $73.7 million.
    • Service provider business unit sales declined 28.3%, to $67.3 million, which was slightly less than expected considering Netgear's target for the recently realigned segment to settle to a roughly $75 million quarterly revenue run rate. But according to management during the subsequent conference call, this can also be chalked up to "typical service provider lumpiness."
  • According to CEO Patrick Lo during the call, this was a "stellar" performance from the retail segment, driven by strong demand for its high-margin Nighthawk routers, Cable Gateways, and Arlo wireless security cameras.
  • Repurchased 314,000 shares during the quarter for $13.2 million, or an average price of $42.13 per share.
  • Generated free cash flow of $23.8 million.
  • Ended the quarter with cash, cash equivalents and short-term investments of $352.7 million.

What management had to say

Lo added:

We were pleased with our financial results for the second quarter of 2016, which came in higher than we had expected in revenue and non-GAAP operating margin. The Retail Business Unit and Commercial Business Unit both outperformed expectations by posting sequential growth despite typically slower second quarter seasonality. Overall, our financial results reinforce that the Company is on a strong trajectory in 2016.

Looking forward

For the current quarter, Netgear anticipates revenue of $315 million to $330 million, representing a year-over-year decline of 7.9% to 3.5%. This range accounts for back-to-school seasonality in the retail business unit, but also reduced service provider sales. Third-quarter adjusted operating margin is expected to be in the range of 10.5% to 11.5%.

It's undeniably impressive that Netgear was able to exceed its guidance even as the lumpy service provider business under-performed last quarter. With shares now up more than 20% year to date, and with the lucrative back-to-school season right around the corner, Netgear's thriving retail business has a chance to continue running up the score from here. All things considered, I think Netgear investors have every right to celebrate today.

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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.