NETGEAR(R) Reports Second Quarter 2015 Results

SAN JOSE, CA--(Marketwired - Jul 23, 2015) - NETGEAR, Inc. (NASDAQ: NTGR)

• Second quarter 2015 net revenue of $288.8 million, as compared to $337.6 million in the comparable prior year quarter, decrease of 14.5%.

• Second quarter 2015 GAAP net income of $3.7 million, as compared to $14.7 million in the comparable prior year quarter.

  • Second quarter 2015 non-GAAP net income of $9.9 million, as compared to $21.4 million in the comparable prior year quarter.

• Second quarter 2015 GAAP net income per diluted share of $0.11, as compared to $0.40 in the comparable prior year quarter.

  • Second quarter 2015 non-GAAP net income per diluted share of $0.29, as compared to $0.58 in the comparable prior year quarter.

• Company expects third quarter 2015 net revenue to be in the range of $315 million to $330 million, with non-GAAP operating margin in the range of 8.5% to 9.5%. Additionally the Company expects non-GAAP tax expense to be in the range of $11 million to $13 million, an implied effective tax rate of approximately 41%.

• Board authorizes incremental repurchase of up to 3,000,000 shares.

NETGEAR, Inc. (NASDAQ: NTGR), a global networking company that delivers innovative products to consumers, businesses and service providers, today reported financial results for the second quarter ended June 28, 2015.

Net revenue for the second quarter ended June 28, 2015 was $288.8 million, as compared to $337.6 million in the second quarter ended June 29, 2014, and $309.2 million in the first quarter ended March 29, 2015. Net income, computed in accordance with GAAP, for the second quarter of 2015 was $3.7 million, or $0.11 net income per diluted share. This compared to GAAP net income of $14.7 million, or $0.40 net income per diluted share, in the second quarter of 2014, and GAAP net income of $8.0 million, or $0.23 net income per diluted share, in the first quarter of 2015. Non-GAAP net income was $0.29 per diluted share in the second quarter of 2015, as compared to non-GAAP net income of $0.58 per diluted share in the second quarter of 2014 and $0.46 per diluted share in the first quarter of 2015.

Operating margin, computed in accordance with GAAP, for the second quarter of 2015 was 3.9%, as compared to 7.3% in the year ago comparable quarter, and 5.7% in the first quarter of 2015. Non-GAAP operating margin was 7.1% in the second quarter of 2015, as compared to 10.1% in the second quarter of 2014 and 9.2% in the first quarter of 2015.

The differences between GAAP and non-GAAP financial measures include adjustments, net of any tax effect, for amortization of intangibles, stock-based compensation expense, restructuring and other charges, acquisition-related expense, losses on inventory commitments due to restructuring and litigation reserves, net. The accompanying schedules provide a reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis.

Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, "Our financial results for the second quarter of 2015 show meaningful sequential growth in the Retail Business Unit, despite what is typically a seasonally down quarter. In particular, RBU's performance during the quarter was driven by our Arlo smart home security camera and our premium line of Nighthawk routers and gateways. The growth we are seeing in these two product lines has surpassed our expectations, and forms the cornerstone of our retail business going forward. This is the beginning of the age of the connected smart home, one in which we believe we will play a central role. We feel that the growth of WiFi connected devices in the home will be exponential over the next five to ten years, and we are committed to being a market leader in this space."

Mr. Lo added, "During the quarter we also continued to manage through the previously announced restructuring of the Service Provider Business Unit, which is substantially close to completion. Meanwhile, the strengthening U.S. dollar has continued to challenge EMEA results, particularly for the Commercial Business Unit."

Christine Gorjanc, Chief Financial Officer of NETGEAR, added, "During the second quarter of 2015, we continued to leverage the strength of our balance sheet and cash position by repurchasing approximately 2.5 million shares of NETGEAR common stock for $76.2 million, at an average price of $30.90 per share. Since the start of our recent repurchase activity in Q4 2013, we have repurchased approximately 7.6 million shares, or approximately 19% of the fully diluted share count at the beginning of that period. We continue to believe that stock repurchases are an effective way of returning capital to shareholders, and plan to be opportunistic buyers of our stock in the coming quarters."

Additionally, the Company announced that its Board of Directors has authorized a program to repurchase up to 3,000,000 shares of the Company's common stock, or approximately 9.3% of the outstanding shares at the end of the second quarter. This is incremental to the approximately 266,000 shares that remained under the Company's previous share repurchase program at the end of the second quarter. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for acquisitions, current stock price, and other factors. Under the program, NETGEAR may repurchase shares from time to time on the open market. The company will finance the repurchase program with available cash on hand. The stock repurchase program may be modified or discontinued at any time.

Mr. Lo continued, "Looking forward, we expect third quarter net revenue to be in the range of $315 million to $330 million, driven by typical back-to-school seasonality and the success of our latest products. Non-GAAP operating margin is expected to be in the range of 8.5% to 9.5%. Our non-GAAP tax expense is expected to be approximately $11 million to $13 million, which implies an effective tax rate of 41% for the third quarter of 2015."

Investor Conference Call / Webcast Details
NETGEAR will review the second quarter results and discuss management's expectations for the third quarter of 2015 today, Thursday, July 23, 2015 at 5 p.m. ET (2 p.m. PT). The dial-in number for the live audio call is (201) 689-8471. A live webcast of the conference call will be available on NETGEAR's website at http://investor.netgear.com. A replay of the call will be available 2 hours following the call through midnight ET (9 p.m. PT) on Thursday, July 30, 2015 by telephone at (858) 384-5517 and via the web at http://investor.netgear.com. The account number to access the phone replay is 13614402.

About NETGEAR, Inc.
NETGEAR (NASDAQ: NTGR) is a global networking company that delivers innovative products to consumers, businesses and service providers. The Company's products are built on a variety of proven technologies such as wireless, Ethernet and powerline, with a focus on reliability and ease-of-use. The product line consists of wired and wireless devices that enable networking, broadband access and network connectivity. These products are available in multiple configurations to address the needs of the end-users in each geographic region in which the Company's products are sold. NETGEAR products are sold in approximately 39,000 retail locations around the globe, and through approximately 31,000 value-added resellers. The company's headquarters are in San Jose, Calif., with additional offices in approximately 25 countries. More information is available at http://investor.netgear.com or by calling (408) 907-8000. Connect with NETGEAR at http://twitter.com/NETGEAR and http://www.facebook.com/NETGEAR.

© 2015 NETGEAR, Inc. NETGEAR and the NETGEAR logo are trademarks or registered trademarks of NETGEAR, Inc. and its affiliates in the United States and/or other countries. Other brand and product names are trademarks or registered trademarks of their respective holders. The information contained herein is subject to change without notice. NETGEAR shall not be liable for technical or editorial errors or omissions contained herein. All rights reserved.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 for NETGEAR, Inc.:
This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The words "anticipate," "expect," "believe," "will," "may," "should," "estimate," "project," "outlook," "forecast" or other similar words are used to identify such forward-looking statements. However, the absence of these words does not mean that the statements are not forward-looking. The forward-looking statements represent NETGEAR, Inc.'s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding: expected net revenue and non-GAAP operating margin; expectations regarding the timing, distribution, sales momentum and market acceptance of recent and anticipated new product introductions that position the Company for growth; expectations regarding the timing and impact of restructuring activities; expectations regarding seasonal changes in the Company's business unit performance; and expectations regarding repurchases of the Company's common stock. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including the following: future demand for the Company's products may be lower than anticipated; consumers may choose not to adopt the Company's new product offerings or adopt competing products; product performance may be adversely affected by real world operating conditions; the Company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the Company's products or utilize competing products; the Company may be unable to collect receivables as they become due; the Company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings; the Company may fail to successfully continue to effect operating expense savings; changes in the level of NETGEAR's cash resources and the Company's planned usage of such resources, including potential repurchases of the Company's common stock; changes in the Company's stock price and developments in the business that could increase the Company's cash needs; fluctuations in foreign exchange rates; and the actions and financial health of the Company's customers. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Further information on potential risk factors that could affect NETGEAR and its business are detailed in the Company's periodic filings with the Securities and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled "Part II - Item 1A. Risk Factors," pages 39 through 59, in the Company's quarterly report on Form 10-Q for the fiscal quarter ended March 29, 2015, filed with the Securities and Exchange Commission on May 1, 2015. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Use of Non-GAAP Financial Information:
To supplement our consolidated financial statements presented on a GAAP basis, NETGEAR uses non-GAAP financial measures, which are adjusted to exclude certain expenses and tax adjustments, where applicable. We believe non-GAAP financial measures are appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future. These adjustments to our current period GAAP results are made with the intent of providing both management and investors a more complete understanding of NETGEAR's underlying operational results and trends and our marketplace performance. For example, the non-GAAP results are an indication of our baseline performance before charges that are considered by management to be outside of our core operating results. In addition, these adjusted non-GAAP results are among the primary indicators management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial measures prepared in accordance with generally accepted accounting principles in the United States.

NETGEAR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

				June 28, 2015				December 31, 2014
ASSETS
Current assets:
	Cash and cash equivalents			$	136,755			$	141,234
	Short-term investments				76,160				115,895
	Accounts receivable, net				246,493				275,689
	Inventories				188,668				222,883
	Deferred income taxes				26,476				29,039
	Prepaid expenses and other current assets				39,133				38,225
		Total current assets			713,685				822,965
Property and equipment, net					25,591				29,694
Intangibles, net					57,434				66,230
Goodwill					81,721				81,721
Other non-current assets					48,352				48,077
		Total assets		$	926,783			$	1,048,687
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	71,217			$	106,357
	Accrued employee compensation				18,588				21,588
	Other accrued liabilities				123,847				143,742
	Deferred revenue				28,412				30,023
	Income taxes payable				--				2,406
		Total current liabilities			242,064				304,116
Non-current income taxes payable					15,551				15,252
Other non-current liabilities					9,280				7,754
		Total liabilities			266,895				327,122
Stockholders' equity:
	Common stock				32				35
	Additional paid-in capital				467,730				454,144
	Accumulated other comprehensive income (loss)				(57	)			38
	Retained earnings				192,183				267,348
		Total stockholders' equity			659,888				721,565
		Total liabilities and stockholders' equity		$	926,783			$	1,048,687

NETGEAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share and percentage data)

(Unaudited)

					Three Months Ended												Six Months Ended
					June 28, 2015				March 29, 2015				June 29, 2014				June 28, 2015				June 29, 2014
Net revenue					$	288,782			$	309,157			$	337,604			$	597,939			$	686,995
Cost of revenue						211,126				220,877				240,418				432,003				491,884
Gross profit						77,656				88,280				97,186				165,936				195,111
	Gross margin					26.9	%			28.6	%			28.8	%			27.8	%			28.4	%
Operating expenses:
		Research and development				21,102				20,452				22,476				41,554				44,657
		Sales and marketing				34,013				37,602				38,179				71,615				78,090
		General and administrative				10,366				11,023				11,894				21,389				23,269
		Restructuring and other charges				974				4,394				(12	)			5,368				830
		Litigation reserves, net				--				(2,690	)			68				(2,690	)			185
			Total operating expenses			66,455				70,781				72,605				137,236				147,031
Income from operations						11,201				17,499				24,581				28,700				48,080
	Operating margin					3.9	%			5.7	%			7.3	%			4.8	%			7.0	%
Interest income						67				52				49				119				106
Other income (expense), net						(343	)			475				(227	)			132				(335	)
Income before income taxes						10,925				18,026				24,403				28,951				47,851
Provision for income taxes						7,258				10,015				9,698				17,273				18,735
Net income					$	3,667			$	8,011			$	14,705			$	11,678			$	29,116
Net income per share:
		Basic			$	0.11			$	0.23			$	0.41			$	0.34			$	0.80
		Diluted			$	0.11			$	0.23			$	0.40			$	0.34			$	0.79
Weighted average shares used to compute net income per share:
		Basic				33,792				34,678				36,139				34,227				36,381
		Diluted				34,308				35,285				36,808				34,790				37,052

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES

(In thousands, except percentage data)

(Unaudited)

STATEMENT OF OPERATIONS DATA:
			Three Months Ended												Six Months Ended
			June 28, 2015				March 29, 2015				June 29, 2014				June 28, 2015				June 29, 2014
GAAP gross profit			$	77,656			$	88,280			$	97,186			$	165,936			$	195,111
	Amortization of intangibles			2,506				2,590				2,619				5,096				5,238
	Stock-based compensation expense			336				496				489				832				960
	Losses on inventory commitments due to restructuring			--				407				--				407				--
Non-GAAP gross profit			$	80,498			$	91,773			$	100,294			$	172,271			$	201,309
Non-GAAP gross margin				27.9	%			29.7	%			29.7	%			28.8	%			29.3	%
GAAP research and development			$	21,102			$	20,452			$	22,476			$	41,554			$	44,657
	Stock-based compensation expense			(773	)			(845	)			(1,227	)			(1,618	)			(2,623	)
Non-GAAP research and development			$	20,329			$	19,607			$	21,249			$	39,936			$	42,034
GAAP sales and marketing			$	34,013			$	37,602			$	38,179			$	71,615			$	78,090
	Amortization of intangibles			(1,737	)			(1,806	)			(1,772	)			(3,543	)			(3,543	)
	Stock-based compensation expense			(1,272	)			(1,393	)			(1,401	)			(2,665	)			(3,350	)
Non-GAAP sales and marketing			$	31,004			$	34,403			$	35,006			$	65,407			$	71,197
GAAP general and administrative			$	10,366			$	11,023			$	11,894			$	21,389			$	23,269
	Stock-based compensation expense			(1,677	)			(1,614	)			(1,817	)			(3,291	)			(3,131	)
	Acquisition related expense			--				--				--				--				(8	)
Non-GAAP general and administrative			$	8,689			$	9,409			$	10,077			$	18,098			$	20,130
GAAP total operating expenses			$	66,455			$	70,781			$	72,605			$	137,236			$	147,031
	Amortization of intangibles			(1,737	)			(1,806	)			(1,772	)			(3,543	)			(3,543	)
	Stock-based compensation expense			(3,722	)			(3,852	)			(4,445	)			(7,574	)			(9,104	)
	Restructuring and other charges			(974	)			(4,394	)			12				(5,368	)			(830	)
	Acquisition related expense			--				--				--				--				(8	)
	Litigation reserves, net			--				2,690				(68	)			2,690				(185	)
Non-GAAP total operating expenses			$	60,022			$	63,419			$	66,332			$	123,441			$	133,361

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)

(In thousands, except percentage data)

(Unaudited)

STATEMENT OF OPERATIONS DATA (CONTINUED):
			Three Months Ended												Six Months Ended
			June 28, 2015				March 29, 2015				June 29, 2014				June 28, 2015				June 29, 2014
GAAP operating income			$	11,201			$	17,499			$	24,581			$	28,700			$	48,080
	Amortization of intangibles			4,243				4,396				4,391				8,639				8,781
	Stock-based compensation expense			4,058				4,348				4,934				8,406				10,064
	Restructuring and other charges			974				4,394				(12	)			5,368				830
	Acquisition-related expense			--				--				--				--				8
	Losses on inventory commitments due to restructuring			--				407				--				407				--
	Litigation reserves, net			--				(2,690	)			68				(2,690	)			185
Non-GAAP operating income			$	20,476			$	28,354			$	33,962			$	48,830			$	67,948
Non-GAAP operating margin				7.1	%			9.2	%			10.1	%			8.2	%			9.9	%
GAAP net income			$	3,667			$	8,011			$	14,705			$	11,678			$	29,116
	Amortization of intangibles			4,243				4,396				4,391				8,639				8,781
	Stock-based compensation expense			4,058				4,348				4,934				8,406				10,064
	Restructuring and other charges			974				4,394				(12	)			5,368				830
	Acquisition-related expense			--				--				--				--				8
	Losses on inventory commitments due to restructuring			--				407				--				407				--
	Litigation reserves, net			--				(2,690	)			68				(2,690	)			185
	Tax effect and tax related adjustments			(3,028	)			(2,571	)			(2,645	)			(5,599	)			(5,549	)
Non-GAAP net income			$	9,914			$	16,295			$	21,441			$	26,209			$	43,435

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)

(In thousands, except per share data)

(Unaudited)

STATEMENT OF OPERATIONS DATA (CONTINUED):
			Three Months Ended												Six Months Ended
			June 28, 2015				March 29, 2015				June 29, 2014				June 28, 2015				June 29, 2014
NET INCOME PER DILUTED SHARE:
GAAP net income per diluted share			$	0.11			$	0.23			$	0.40			$	0.34			$	0.79
	Amortization of intangibles			0.12				0.12				0.12				0.25				0.24
	Stock-based compensation expense			0.12				0.12				0.13				0.24				0.27
	Restructuring and other charges			0.03				0.12				0.00				0.15				0.02
	Acquisition-related expense			--				--				--				--				0.00
	Losses on inventory commitments due to restructuring			--				0.01				--				0.01				--
	Litigation reserves, net			--				(0.08	)			0.00				(0.08	)			0.00
	Tax effect and tax related adjustments			(0.09	)			(0.06	)			(0.07	)			(0.16	)			(0.15	)
Non-GAAP net income per diluted share			$	0.29			$	0.46			$	0.58			$	0.75			$	1.17

SUPPLEMENTAL FINANCIAL INFORMATION

(In thousands, except per share data, DSO, inventory turns, weeks of channel inventory, headcount and percentage data)

(Unaudited)

			Three Months Ended
			June 28, 2015			March 29, 2015			December 31, 2014			September 28, 2014			June 29, 2014
Cash, cash equivalents and short-term investments			$	212,915		$	247,405		$	257,129		$	242,648		$	242,729
Cash, cash equivalents and short-term investments per diluted share			$	6.21		$	7.01		$	7.40		$	6.69		$	6.59
Accounts receivable, net			$	246,493		$	254,745		$	275,689		$	278,568		$	282,900
Days sales outstanding (DSO)				78			73			73			72			76
Inventories			$	188,668		$	200,948		$	222,883		$	206,494		$	194,533
Ending inventory turns				4.5			4.4			4.5			4.9			4.9
Weeks of channel inventory:
	U.S. retail channel			7.0			7.7			7.8			7.7			10.5
	U.S. distribution channel			10.1			11.5			12.0			10.6			12.0
	EMEA distribution channel			4.8			4.4			5.4			4.4			4.0
	APAC distribution channel			7.1			7.4			7.2			6.8			9.0
Deferred revenue (current and non-current)			$	31,116		$	25,802		$	31,621		$	35,654		$	35,229
Headcount				967			979			1,038			1,047			1,033
Non-GAAP diluted shares				34,308			35,285			35,348			36,250			36,808

NET REVENUE BY GEOGRAPHY

		Three Months Ended																		Six Months Ended
		June 28, 2015						March 29, 2015						June 29, 2014						June 28, 2015						June 29, 2014
Americas		$	172,459		59	%		$	173,786		56	%		$	187,534		55	%		$	346,245		58	%		$	382,313		56	%
EMEA			67,993		24	%			89,109		29	%			100,436		30	%			157,102		26	%			207,229		30	%
APAC			48,330		17	%			46,262		15	%			49,634		15	%			94,592		16	%			97,453		14	%
	Total	$	288,782		100	%		$	309,157		100	%		$	337,604		100	%		$	597,939		100	%		$	686,995		100	%

NET REVENUE BY SEGMENT

			Three Months Ended																		Six Months Ended
			June 28, 2015						March 29, 2015						June 29, 2014						June 28, 2015						June 29, 2014
Retail			$	131,809		45	%		$	120,957		39	%		$	110,663		33	%		$	252,766		42	%		$	228,895		34	%
Commercial				63,017		22	%			72,731		24	%			75,447		22	%			135,748		23	%			154,310		22	%
Service Provider				93,956		33	%			115,469		37	%			151,494		45	%			209,425		35	%			303,790		44	%
	Total		$	288,782		100	%		$	309,157		100	%		$	337,604		100	%		$	597,939		100	%		$	686,995		100	%