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NETGEAR (NTGR) Q1 Earnings Beat Estimates, Withdraws Outlook

Zacks Equity Research
·6 min read

NETGEAR, Inc. NTGR delivered impressive first-quarter 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. However, both earnings and revenues declined year over year.

Bottom Line

GAAP net loss from continuing operations in the reported quarter were $4.2 million or a loss of 14 cents per share against net income of $12.8 million or 39 cents per share in the year-ago quarter. The year-over-year deterioration was primarily caused by lower revenues.

Non-GAAP net income from continuing operations was $6.4 million or 21 cents per share compared with $19.8 million or 60 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 3 cents.

NETGEAR, Inc. Price, Consensus and EPS Surprise


NETGEAR, Inc. Price, Consensus and EPS Surprise
NETGEAR, Inc. Price, Consensus and EPS Surprise

NETGEAR, Inc. price-consensus-eps-surprise-chart | NETGEAR, Inc. Quote



NETGEAR generated net revenues of $230 million, down 7.7% from the prior-year quarter’s figure. The year-over-year decline was caused by reduction in service provider revenues of nearly $11 million. However, the top line surpassed the consensus estimate of $217 million. The company shipped nearly 3.4 million units, including 2.4 million nodes of wireless products in the first quarter of 2020.

Region wise, net revenues from the Americas were $158.2 million (68.8% of net revenues), up 6.9% year over year. The growth was primarily driven by higher demand of wireless products, owing to work-from-home trend triggered by the coronavirus pandemic. EMEA (Europe, Middle East and Africa) revenues were $42.1 million (18.3%), down 26% year over year. The decline was mainly due to lower service provider revenues. APAC (Asia Pacific Region) revenues were $29.6 million (12.9%), down 32.8% due to COVID-19 crisis in the Greater China region coupled with lower service provider revenues in Australia.

The number of registered app users recorded in the quarter was 5.1 million, up from 4.4 million on a sequential basis. Notably, NETGEAR ended the quarter with 228,000 paid subscribers.

Segmental Performance

Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $164.7 million, down 2.8% year over year. The decline was primarily caused by lower service provider revenues in the APAC region, partially offset by robust retail channels and service provider revenues in the Americas.  Markedly, NETGEAR continues to hold about 51% market share in U.S. retail WiFi products, which include mesh, routers, gateways and extenders.

Net revenues from SMB declined 18.1% year over year to $65.3 million due to reduced demand stemming from the virus outbreak. Markedly, the company continues to hold about 53% market share in U.S. retail switch market. NETGEAR also launched new PoE+ switches for small businesses in the reported quarter.

Other Details

Adjusted gross margin declined to 29.2% from 33.3% due to lower revenues. Non-GAAP operating margin was 3.6% compared with 9.1% in the year-ago quarter thanks to lower operating income.

Cash Flow & Liquidity

During the first quarter, NETGEAR generated $29 million of cash from operating activities. As of Mar 29, 2020, the company had $204.3 million in cash and equivalents with $234.2 million of total current liabilities. It repurchased approximately 584,000 shares at an average price of $25.71 per share for $15 million in the reported quarter.

2020 Guidance Withdrawn

Due to the COVID-19 pandemic, NETGEAR has withdrawn its earlier guidance for full-year 2020 and has not given any definitive financial outlook for the second quarter of 2020. The company witnessed a significant shift in its business operations. It expects that the major shift coupled with higher freight costs will likely reduce the operating margin in the next quarter. As channel partners migrate to efficient operating structures, the company is witnessing a change in demand from retail to online platforms. As a result, channel inventory is expected to decline in the future, which will further put pressure on revenue growth in the second quarter.

Despite these shortcomings, the current demand surge for WiFi products is expected to bolster revenues in the Connected Home segment in the second quarter. The revenue growth will be partially offset by softness in the SMB segment. The company is currently facing a 50% decline in its SMB segment due to the coronavirus pandemic. Consequently, it is estimated that if the IT demand does not recoup, then SMB revenues are likely to decline 25% sequentially.

Moving Forward

Despite supply chain disruptions amid global pandemic, NETGEAR is confident that it will maintain its leadership in new product introduction, based on the Wi-Fi 6 standards. This, in turn, is likely to drive positive cash flow amid competitive macro environment. The company also launched second generation 5G mobile hotspot and new PoE+ switches. It aims to emerge as a pioneer of best-in-class networking technologies like WiFi 6 and Pro AV, thereby benefiting from advanced technological innovations. In order to ramp up the availability of its products, the company is committed to help customers with superior performance and emerge as the biggest contributor in these crucial times. Moving forward, NETGEAR intends to boost its registered app user base to pay out future dividends and continue to drive the momentum in 2020.

Zacks Rank & Stocks to Consider

NETGEAR currently has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader industry are Opera Limited OPRA, InterDigital, Inc. IDCC and Radcom Ltd. RDCM. While Opera and InterDigital sport a Zacks Rank #1 (Strong Buy), Radcom carries a Zack Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Opera’s bottom line surpassed the Zacks Consensus Estimate twice in the last four quarters. The company has a trailing four-quarter positive earnings surprise of 192.9%, on average.

InterDigital’s bottom line surpassed the Zacks Consensus Estimate thrice in the last four quarters. The company has a trailing four-quarter positive earnings surprise of 62%, on average.

Radcom’s bottom line surpassed the Zacks Consensus Estimate thrice in the last four quarters. The company has a trailing four-quarter positive earnings surprise of 47.1%, on average.

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