NETGEAR's (NTGR) Q3 Earnings Top Estimates, Revenues Fall Y/Y

NETGEAR, Inc. NTGR reported weak third-quarter 2021 results (ended Oct 3, 2021), with both the earnings and revenues declining on a year-over-year basis. The bottom line beat the Zacks Consensus Estimate but the top line missed the same.

The network equipment and router company saw a considerable fall in shares in the extended trading session as a result of lowered fourth-quarter outlook due to persistent supply chain woes in the face of the pandemic. Soft retail and service provider businesses in the connected home segment posed a major headwind as well.

Despite such a challenging situation, NETGEAR continues to witness significant improvements in its Small and Medium Business (SMB) unit with robust demand for its products. Growing subscriber base and continued market share gains in the U.S. Retail Wi-Fi market are additional tailwinds.

Bottom Line

On a GAAP basis, net income in the quarter came in at $9.6 million or 31 cents per share compared with $25.5 million or 83 cents per share in the year-ago quarter. The drastic decline was mainly due to year-over-year top-line contraction.

Quarterly non-GAAP net income was $15.3 million or 50 cents per share compared with $34.7 million or $1.13 per share in the year-earlier quarter. The bottom line surpassed the Zacks Consensus Estimate by 8 cents.

NETGEAR, Inc. Price, Consensus and EPS Surprise

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

Revenues

NETGEAR generated net revenues of $290.2 million, down 23.3% year over year. The downtick was mainly due to weakness in the connected home products (CHP) segment. The company also witnessed a slowdown in the growth of the U.S. consumer networking market. The SMB segment performed well against a supply-constrained environment. Strong demand for Wi-Fi 6 offerings played a major role. The top line lagged the consensus mark of $294 million.

The company shipped nearly 3.4 million units, including 2.3 million nodes of wireless products in the third quarter. NETGEAR unveiled Quadband Wi-Fi 6E Orbi system during the quarter that provides up to 10 gigabit Internet speeds with less interference and lag. It is the first company to introduce the quad-band solution to the market to deliver unrivaled Wi-Fi performance to consumers.

Region-wise, net revenues from the Americas were $195.1 million (67.2% of net revenues), down 29.8% year over year. EMEA (Europe, Middle East and Africa) revenues were $56.9 million (19.6%), down 10.6% while APAC (Asia Pacific Region) revenues grew 4.3% to $38.1 million (13.1%).

The number of registered app users in the reported quarter was 12.2 million. NETGEAR ended the quarter with 552,000 service subscribers. Although the company is lagging behind its goal of tapping 650,000 subscribers by the end of 2021, NETGEAR remains confident of achieving 1 million subscribers in the next three years, which indicates healthy potential for its long-term profitability growth. Currently, it is projecting to end the year with 575,000 subscribers.

Segment Performance

Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming, and Meural brands, generated net revenues of $208.5 million, down 34.2% year over year from $316.7 million owing to soft retail and service provider businesses as a result of the pandemic. NETGEAR continues to hold about 46% share in U.S. retail Wi-Fi market, which includes mesh, routers, gateways, and extenders.

Driven by recovering switching business, revenues from SMB increased 33% year over year to $81.6 million. Fighting against a supply-constrained scenario, the segment showcased strong operational execution on the back of the growing demand for flexible working environments and new business formations. Robust demand for Wi-Fi 6 access points, low port count switches and SMB wireless products coupled with ProAV switching strength drove the momentum. A rise in sophisticated home office settings is expected to augment the SMB unit in the near future. The company continues to hold about 60% share in U.S. retail switch market.

Other Details

Adjusted gross margin decreased to 30.1% from 30.3% due to lower revenues. Non-GAAP operating margin was 6.7% compared with 10.9% in the year-ago quarter owing to lower operating income. NETGEAR worked with retail channel partners to optimize their inventory levels during the quarter.

Cash Flow & Liquidity

During the third quarter, NETGEAR utilized $17 million of cash from operations. As of Oct 3, 2021, the company had $283.3 million in cash and cash equivalents with $345.2 million of total current liabilities.

The company repurchased nearly 953,000 shares at an average price of $34.07 per share for $32.5 million during the third quarter of 2021. Further, NETGEAR’s board of directors approved the incremental repurchase of up to 3,000,000 shares.

Q4 Outlook Softened

For the fourth quarter of 2021, NETGEAR anticipates revenues in the range of $250 million to $265 million compared with the prior projection of $285 million to $300 million. Owing to the lost leverage from the top line along with increasing freight costs and numerous disruptions on the logistics front, GAAP operating margin is estimated to be in the (0.5)% to 0.5% range, down from the prior guidance of 2.1-3.1%. Non-GAAP operating margin is expected in the range of 2-3% versus the prior outlook of 5-6%. The company also expects lower service provider revenues as a result of supply chain disruptions, in turn, affecting the top line of both CHP and SMB businesses.

Moving Ahead

Given the uncertain macroeconomic conditions stemming from the COVID-19 pandemic, NETGEAR is continuing to witness supply chain hurdles due to higher freight costs and delivery times, component shortages, and productivity woes. However, the San Jose, CA-based company is focused on bolstering its presence in the consumer networking market on the back of higher demand for premium Wi-Fi products in response to the growing hybrid and remote work models, and SMB segment strength.

Thanks to its recurring revenue stream, it remains confident of maintaining its leadership in new product introduction, based on the Wi-Fi 6 standards. This, in turn, is likely to drive positive cash flow amid a dynamic environment. The company aims to emerge as a pioneer of next-gen networking technologies like Wi-Fi 6 and Pro AV, thereby benefiting from advanced technological innovations. The company intends to capitalize on technology inflections, create new categories, build recurring subscription service revenues, boost its paid subscriber base, and optimize channel inventory to propel its momentum.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader industry are Ooma, Inc. OOMA, Clearfield, Inc. CLFD, and SeaChange International, Inc. SEAC. While Ooma and Clearfield sport a Zacks Rank #1 (Strong Buy), SeaChange International carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ooma delivered a trailing four-quarter earnings surprise of 55.2%, on average.

Clearfield delivered a trailing four-quarter earnings surprise of 49%, on average.

SeaChange International delivered a trailing four-quarter earnings surprise of 28.9%, on average.

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