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NETGEAR (NTGR) Q3 Earnings Beat, Revenues Miss on Macro Woes

Zacks Equity Research

NETGEAR, Inc. NTGR reported mixed third-quarter 2019 results, wherein the top line missed estimates but the bottom line beat the same. Both earnings and revenues declined year over year.

Net Income

GAAP earnings from continuing operations for the reported quarter were $12.5 million or 39 cents per share compared with $16.3 million or 49 cents per share in the year-ago quarter. The year-over-year decline despite lower operating expenses was primarily due to higher cost of sales.

Non-GAAP net income from continuing operations was $20.7 million or 65 cents per share compared with $24.1 million or 73 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 4 cents.

NETGEAR, Inc. Price, Consensus and EPS Surprise

 

NETGEAR, Inc. Price, Consensus and EPS Surprise

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

Revenues

NETGEAR generated net revenues of $265.9 million, down 1.3% from the previous-year quarter. The decline was largely due to macroeconomic challenges, including Brexit-related uncertainty, Yuan depreciation, German recession and sudden economic turmoil in the China-Hong Kong region due to trade war. The top line lagged the consensus estimate of $271 million.

Region wise, net revenues from the Americas were $178.7 million (67% of net revenues), up 1.6% year over year due to stable Wi-Fi retail market, higher subscriber base and strategic joint marketing initiatives. EMEA (Europe, Middle East and Africa) revenues were $49.6 million (19%), down 10.6% due to lower sales in Europe. APAC (Asia Pacific Region) revenues were $37.6 million (14%), down 6.3% due to adverse geopolitical factors, Yuan depreciation and economic downturn in China-Hong Kong region.

The number of registered app users recorded in the quarter was 3.6 million, exhibiting significant sequential growth from 2.8 million at the end of the second quarter.

Segmental Performance

Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $190.7 million, down 2.1% year over year due to lower revenues from EMEA and APAC regions. 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 increased 0.6% year over year to $75.2 million due to strong performance of PoE+ and ProAV switching lines, its market share being 53%. NETGEAR also announced the launch of first-ever configurable commercial grade mesh network.

Other Details

Adjusted gross margin declined to 29.4% from 35.3% due to lower revenues. Non-GAAP operating margin was 7.8% compared with 10.5% a year ago due to lower operating income.

Cash Flow & Liquidity

During the third quarter, NETGEAR generated $26.1 million of cash from continuing operations. As of Sep 29, 2019, the company had $168 million of cash and cash equivalents. It repurchased approximately 679,000 shares at an average price of $32.34 per share for $22 million. Since the commencement of the repurchase program in fourth-quarter 2013, the company has repurchased approximately 14 million shares for $506.7 million. Approximately 31.8 million shares were recorded as of the end of the reported quarter.

Q4 Guidance

For the fourth quarter of 2019, NETGEAR expects revenues between $240 million and $255 million due to uncertainty in Europe and China. The company anticipates GAAP operating margin to be in the range of 0.1-1.1%, and non-GAAP operating margin in the band of 4.5-5.5%.

Moving Forward

NETGEAR is confident that it will remain a leader in new product introduction, based on the efforts to reduce channel inventory for an accelerated shift toward WiFi 6 in the United States in early January 2020. The company also announced partnership with Broad Data, a leading ProAV equipment manufacturer, which is expected to provide cost-efficient next-gen ProAV systems by leveraging the IP technology.  It also aims to reduce sales headcount in China and Europe due to the economic turmoil in the region. Moving forward, NETGEAR intends to capitalize on technology inflections and proliferate its registered app user base to pay future dividends, thereby continuing to drive the momentum.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the broader industry are Extreme Networks, Inc. EXTR, NetScout Systems, Inc. NTCT and RADCOM Ltd. RDCM, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Extreme Networks delivered average positive earnings surprise of 90% in the trailing four quarters, beating estimates thrice.

NetScout Systems pulled off average positive earnings surprise of 20.6% in the trailing four quarters, beating estimates thrice.

RADCOM delivered average positive earnings surprise of 83.4% in the trailing four quarters.

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