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Light Guidance Overshadows Netgear's Latest Quarterly Beat

Steve Symington, The Motley Fool

Netgear (NASDAQ: NTGR) announced better-than-expected first-quarter 2019 results on Wednesday after the market closed, detailing solid demand for its Orbi WiFi systems and Nighthawk gaming hardware. But the networking-device leader also offered disappointing forward guidance, driven by a combination of soft sales to service-provider customers and a planned ramp up in marketing to promote its newest innovations. 

With shares down around 10% in after-hours trading as of this writing, let's log on for a closer look at Netgear's latest quarter.

Outdoor Netgear Orbi router mounted on wood wall by pool.

IMAGE SOURCE: NETGEAR.

Netgear results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Growth

Revenue

$249.1 million

$245.2 million

1.6%

GAAP net income (loss) from continuing operations

$12.8 million

$1.0 million

1,180%

GAAP earnings (loss) per share from continuing operations

$0.39

$0.03

1,200%

Data source: Netgear. GAAP = generally accepted accounting principles.

What happened with Netgear this quarter?

  • Revenue was near the high end of Netgear's guidance provided in February for a range of $235 million to $250 million. 
  • Adjusted operating margin was 9.1%, up from 4.3% a year earlier and above the high end of guidance for a range of 8% to 9%.
  • Keep in mind that last year's first quarter included $0.14 per share in earnings from discontinued operations -- a category into which Arlo Technologies' (NYSE: ARLO) results were reclassified following the completion of Netgear's spinoff of Arlo earlier this year.
  • Adjusted for items like stock-based compensation and Arlo separation expenses, Netgear's non-GAAP net income from continuing operations was $0.60 per share, up from $0.26 per share in the same year-ago period.
  • By business segment:
  • By geography, Americas revenue fell 7.5%, to $148 million. EMEA (Europe, the Middle East, and Africa) region revenue grew 20.1%, to $57 million, and Asia-Pacific revenue climbed 16.8%, to $44.1 million.

What management had to say

Netgear CEO Patrick Lo stated:

We had a successful first quarter of 2019, driven by the Orbi line of mesh WiFi systems, the Nighthawk Pro Gaming line, cable modems and gateways, and our SMB switching portfolio. Our financial results for the quarter came in at the high end of our guidance range for revenue, and slightly above the range in non-GAAP operating margin. We are pleased to report that we reached 10.4 million registered users in Q1, which represents the foundation for building our paid subscriber base. Furthermore, our number of registered app users reached 2 million in the first quarter.

Looking forward

Lo added that with the rollout of its latest Nighthawk WiFi 6 router in May, the company will have four routers in the next-gen WiFi category. To secure early market leadership in the WiFi 6 space, however, Netgear intends to ramp up marketing in the second quarter to promote its WiFi 6 product portfolio.

After coupling those marketing investments with lower expected service-provider shipments, Netgear anticipates second-quarter revenue of $215 million to $230 million -- well below the $256 million most analysts were modeling -- with adjusted operating margin contracting to a range of 4% to 5%.

All things considered, these might be exactly the right moves for Netgear to effectively capitalize on the impending wave of WiFi 6-enabled devices. But given the company's revenue and profit headwinds in the meantime, it's hard to blame the market for bidding down Netgear stock in response.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Arlo Technologies, Inc. and Netgear. The Motley Fool has a disclosure policy.