Why Netgear, Inc. Stock Plunged Today

By Steve Symington Markets Fool.com

Netgear's Nighthawk routers are driving strength in its retail business unit. IMAGE SOURCE: Netgear, Inc.

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What happened

Shares of Netgear (NASDAQ: NTGR) were down 10% as of 2:42 p.m. EST Wednesday, after the networking hardware specialist followed stronger-than-expected fourth-quarter 2016 results with weaker-than-expected forward guidance.

So what

Quarterly revenue grew 2% year over year, to $367.9 million, including 22.1% growth in retail business unit revenue, to $241.2 million; 17.9% growth in commercial business unit revenue, to $75.3 million; and a 48.3% decline in service provider segment revenue, to $51.4 million. Trending toward the bottom line, adjusted operating margin improved 60 basis points year over year during the quarter, to 11.4%, and adjusted net income per share grew 6% year over year, to $0.88.

For perspective, Netgear's most recent guidance called for lower fourth-quarter revenue in the range of $340 million to $355 million, and adjusted operating margin in the range of 10.5% to 11.5%. And though we don't pay close attention to Wall Street's quarterly demands, analysts' consensus estimates predicted lower adjusted earnings per share of $0.77.

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"Our financial results for the fourth quarter of 2016 exceeded expectations, setting an all-time record in quarterly revenue, driven primarily by the strength of the Retail Business Unit," stated Netgear chairman and CEO Patrick Lo. "The Retail Business Unit had another all-time record quarter in sales, led by the Nighthawk, Arlo and Orbi product lines."

Now what

For the current quarter, however, Netgear anticipates revenue of $300 million to $315 million -- compared to $310.3 million in last year's first quarter and well below the $318.8 million Wall Street was expecting -- with adjusted operating margin of 9.5% to 10.5%.

During the subsequent conference call, management also reiterated guidance for the combined retail and commercial business units to grow revenue 10% year over year for the full year of 2017. In addition, Netgear CFO Christine Gorjanc noted that because their thriving retail business unit is growing much faster than the rest of the business, that means significantly more pronounced seasonality than that to which investors have grown accustomed in prior years.

In any case, while Netgear's long-term story remains intact, it's clear the market isn't pleased with its first-quarter guidance today.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Netgear. The Motley Fool has a disclosure policy.