Netgear, Inc. Crushes It on Arlo Demand

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Netgear (NASDAQ: NTGR) announced stronger-than-expected second-quarter 2017 results on Wednesday, including solid demand for its Arlo security cameras, Orbi Wi-Fi systems, and Nighthawk networking products, after the market closed. Shares of the wireless networking hardware specialist jumped nearly 12% on the day when all was said and done.

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Let's adjust our antennas, then, to get a clearer view of Netgear's performance over the past few months, as well as what investors can expect from the company going forward.

Netgear results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Growth

Revenue

$330.7 million

$311.7 million

6.1%

GAAP net income

$14.6 million

$16.0 million

(8.8%)

GAAP earnings per share

$0.44

$0.48

(8.3%)

What happened this quarter?

  • By comparison, Netgear's latest guidance (provided last quarter) called for lower revenue in the range of $315 million to $330 million.
  • On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation and restructuring expenses -- net income was $19.9 million, or $0.60 per diluted share, down from $24.1 million, or $0.72 per share in the same year-ago period. Consensus estimates predicted lower adjusted earnings of $0.54 per share.
  • Adjusted operating margin declined to 8.5% -- to the midpoint of guidance for 8% to 9% -- from 11.6% in last year's second quarter.
  • By geography:
    • Revenue in the Americas grew 7.6% to $226.9 million.
    • EMEA revenue increased 6.9% to $55.2 million.
    • Asia-Pacific region revenue fell 9.4% to $48.6 million.
  • By segment:
    • Arlo revenue climbed 104% year over year to $78.7 million.
    • Connected Home revenue dropped 8.9% to $48.5 million, as strength from Nighthawk and Orbi brand sales were offset by decreases in sales of connected home products previously included in Netgear's restructured service provider business.
    • SMB revenue -- formerly the commercial business segment -- tumbled 3.6% to $66.1 million, with softness in both the switch and storage categories. Netgear believes the biggest growth opportunities for this segment lie with the translation to software-designed video-over-Ethernet (SDVoE) in the professional AV market, for which Netgear's switching portfolio is especially well positioned.
  • Repurchased roughly 929,000 shares for $45 million during the quarter.

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What management had to say

As Netgear Chairman and CEO Patrick Lo stated:

We are very pleased with our second quarter results, which were driven by both the triple digit growth of Arlo, as well as the strength of Orbi and Nighthawk. The Arlo segment grew an impressive 104% year-over-year. We reached all-time highs in market share in both the IP camera and consumer WiFi markets during the quarter, and will continue to execute on our strategy of increasing market share in the quarters to come.

CFO Christine Gorjanc added that the company still believes share repurchases "are an effective way of returning capital to shareholders," noting Netgear will remain "opportunistic buyers of our stock in the coming quarters."

Looking forward

For the third quarter of 2017, Netgear expects revenue in the range of $340 million to $355 million -- or roughly in line with the market's forward expectations -- with adjusted operating margin climbing sequentially to a range of 9% to 10%. Keep in mind, however, that Netgear has consistently exceeded its guidance for each of the past four quarters.

All things considered, there was little not to like this quarter as Netgear's popular new retail products continue to thrive and as the company positions itself for future growth in its supplementary markets.

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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.