NETGEAR, Inc. (NASDAQ:) reported relatively solid second-quarter 2019 results, surpassing both top line and bottom-line estimates. The better-than-expected performance was driven by strength in its Orbi line of mesh WiFi systems, Nighthawk Pro Gaming, cable modems and gateways and SMB switching portfolio.
Net Income
On a GAAP basis, net income for the quarter was $0.8 million or 3 cents per share against net loss of $5.2 million or loss of 16 cents per share a year ago. The significant improvement in the bottom line, despite lower revenues, was primarily driven by lower operating expenses.
Non-GAAP net income from continuing operations was 28 cents per share compared with 29 cents in the year-ago quarter, comfortably beating the Zacks Consensus Estimate by 3 cents.
NETGEAR, Inc. Price, Consensus and EPS Surprise
NETGEAR, Inc. price-consensus-eps-surprise-chart | NETGEAR, Inc. Quote
Revenues
NETGEAR generated quarterly net revenues of $230.9 million, down 9.6% year over year. The decline in top line was largely due to a combination of factors, including reduced spending patterns by service providers ahead of 5G rollout; increased channel marketing to counter a slowdown in the U.S. market for the legacy 11ac routers; and seasonality issues. The top line, however, surpassed the consensus estimate of $225 million, and came in above the higher end of the company’s guided range of $215-$230 million.
Region wise, net revenues from the Americas were $157.2 million (68% of net revenues), down 9.9% year over year due to reduced service provider sales. EMEA (Europe, Middle East and Africa) revenues were $43.1 million (19%), down 10.6% due to adverse foreign currency translation. APAC (Asia Pacific Region) revenues were $30.6 million (13%), down 6.3% due to downturn in Australia and foreign currency woes.
Segmental Performance
Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $167.5 million, down 10.2% year over year owing to lower service provider revenues. Notably, 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 decreased 8% year over year to $63.4 million due to comparatively lower shipments in the United Kingdom.
Other Quarter Details
GAAP gross margin declined to 28.3% from 31.4% in the year-ago quarter on lower revenues. Non-GAAP operating margin was 4.4% compared with 4.1% a year ago as stringent cost-cutting initiatives led to lower operating expenses.
Cash Flow and Liquidity
During the second quarter, NETGEAR generated $27.3 million of cash from continuing operations. As of Jun 30, 2019, the company had $214.6 million of cash and cash equivalents. The company repurchased approximately 570,000 shares at an average price of $29.80 per share for $17 million. Since the initiation of the repurchase program in fourth-quarter 2013, the company has repurchased approximately 13.4 million shares for $484.8 million. Management further authorized the share repurchase of additional 4.5 million shares during the quarter.
Third-Quarter Guidance
For the third quarter of 2019, NETGEAR expects revenues between $265 million and $280 million due to reduced shipments. The company anticipates GAAP operating margin to be in the range of 5.2-6.2% while non-GAAP operating margin is projected to be 8.5-9.5%.
Moving Forward
NETGEAR is confident that it will remain a leader in new product introduction, based on the Wi-Fi 6 standards. The company aims to push its product line forward with two technology inflections — the shift from DOCSIS 3.0 to 3.1 and move from 11ac to WiFi 6. Moving forward, NETGEAR intends to capitalize on technology inflections, create new categories and build recurring service revenues to maintain its market leadership and drive growth. We remain impressed with its solid growth potential.
Zacks Rank & Stocks to Consider
NETGEAR currently carries a Zacks Rank #3 (Hold). A few top-ranked stocks in the broader industry are PCTEL, Inc. (NASDAQ:) , Cisco Systems, Inc. (NASDAQ:) and InterDigital Inc. (NYSE:) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PCTEL delivered average positive earnings surprise of 100% in the trailing four quarters.
Cisco has a long-term earnings growth expectation of 7%. It delivered average positive earnings surprise of 2.1% in the trailing four quarters, beating estimates on each occasion.
InterDigital has a long-term earnings growth expectation of 15%. It delivered average positive earnings surprise of 49.34% in the trailing four quarters, beating estimates thrice.
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