NETGEAR® Reports Second Quarter 2019 Results


SAN JOSE, Calif., July 24, 2019 (GLOBE NEWSWIRE) -- NETGEAR, Inc. (NASDAQ: NTGR), a global networking company that delivers innovative networking and Internet connected products to consumers and businesses, today reported financial results for the second quarter ended June 30, 2019.

  • Second quarter 2019 net revenue of $230.9 million, a decrease of 9.6% from the comparable prior year quarter.
  • Second quarter 2019 GAAP operating income of $0.3 million, or 0.1% of net revenue, as compared to net loss of $0.1 million, or (0.0%) of net revenue, in the comparable prior year quarter.
    ◦ Second quarter 2019 non-GAAP operating income of $10.0 million, or 4.4% of net revenue, as compared to $10.5 million, or 4.1% of net revenue in the comparable prior year quarter.
  • Second quarter 2019 GAAP net income per diluted share from continuing operations of $0.03, as compared to $0.02 in the comparable prior year quarter.
    ◦ Second quarter 2019 non-GAAP net income per diluted share from continuing operations of $0.28, as compared to $0.29 in the comparable prior year quarter.
  • Board authorizes incremental repurchase of up to 4,500,000 shares.

The accompanying schedules provide a reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis.

Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, "During the second quarter of 2019, we saw improvement in the U.S. retail WiFi market driven by the continued roll out of our WiFi 6 Nighthawk routers and various channel marketing activities. The improved market demand allowed us to finish the quarter with healthy channel inventory levels. Our financial results for the quarter came in slightly above the high end of our guidance range for revenue, and in-line with the range for non-GAAP operating margin."

Mr. Lo continued, “We are pleased to report that we reached 11.2 million registered users in Q2, which represents the foundation for building our paid subscriber base. Furthermore, our number of registered app users reached 2.8 million in the second quarter. We recently launched NETGEAR Armor Cyber Threat Protection to our Orbi WiFi systems install base worldwide, and have been encouraged by the initial traction with trial users. We look forward to converting these users to paying customers in the coming quarters."

Bryan Murray, Chief Financial Officer of NETGEAR, added, "During the second quarter of 2019, we repurchased approximately 570,000 shares of common stock for $17.0 million. In addition, our Board of Directors has authorized the repurchase of up to an incremental 4,500,000 shares of the Company’s common stock, or approximately 14.5% of outstanding shares. We remain confident in our ability to generate meaningful levels of cash, and plan to continue to opportunistically repurchase shares in future quarters."

Business Outlook

Mr. Murray continued, "Looking ahead to the third quarter of 2019, in which we expect to launch more WiFi 6 products, net revenue is expected to be in the range of $265 million to $280 million. GAAP operating margin for the third quarter is expected to be in the range of 5.2% to 6.2%, and non-GAAP operating margin is expected to be in the range of 8.5% to 9.5%. Our GAAP tax rate is expected to be approximately 25.0%, and our non-GAAP tax rate is expected to be 22.0% for the third quarter of 2019.”

A reconciliation between the Business Outlook on a GAAP and non-GAAP basis is provided in the following table:

  Three months ending
  September 29, 2019
  Operating Margin Rate Tax Rate
GAAP 5.2% - 6.2% 25.0%
Estimated adjustments for1:    
Amortization of intangibles 0.6% __
Stock-based compensation expense 2.7% __
Tax effects of non-GAAP adjustments __ (3.0)%
Non-GAAP 8.5% - 9.5% 22.0%

1 Business outlook does not include estimates for any currently unknown income and expense items which, by their nature, could arise late in a quarter, including: litigation reserves, net; acquisition-related charges; impairment charges; and discrete tax benefits or detriments that cannot be forecasted (e.g., windfalls or shortfalls from equity awards or items related to the resolution of uncertain tax positions). New material income and expense items such as these could have a significant effect on our guidance and future GAAP results.

Investor Conference Call / Webcast Details
NETGEAR will review the second quarter results and discuss management's expectations for the third quarter of 2019 today, Wednesday, July 24, 2019 at 5 p.m. ET (2 p.m. PT). The toll free dial-in number for the live audio call is (844) 709-2008. The international dial-in number for the live audio call is (647) 253-8663. The conference ID for the call is 1959478. A live webcast of the conference call will be available on NETGEAR's Investor Relations website at http://investor.netgear.com. A replay of the call will be available via the web at http://investor.netgear.com.

About NETGEAR, Inc.
NETGEAR (NASDAQ: NTGR) is a global networking company that delivers innovative products to consumers, businesses and service providers. The Company's products are built on a variety of proven technologies such as wireless (WiFi and LTE), Ethernet and powerline, with a focus on reliability and ease-of-use. The product line consists of wired and wireless devices that enable networking, broadband access and network connectivity. These products are available in multiple configurations to address the needs of the end-users in each geographic region in which the Company's products are sold. NETGEAR products are sold in approximately 23,000 retail locations around the globe, and through approximately 21,000 value-added resellers, as well as multiple major cable, mobile and wireline service providers around the world. The company's headquarters are in San Jose, Calif., with additional offices in approximately 20 countries. More information is available at http://investor.netgear.com or by calling (408) 907-8000. Connect with NETGEAR at http://twitter.com/NETGEAR and http://www.facebook.com/NETGEAR.

© 2019 NETGEAR, Inc. NETGEAR, the NETGEAR logo, NETGEAR Armor, Orbi and Nighthawk are trademarks or registered trademarks of NETGEAR, Inc. and its affiliates in the United States and/or other countries. Other brand and product names are trademarks or registered trademarks of their respective holders.  The information contained herein is subject to change without notice. NETGEAR shall not be liable for technical or editorial errors or omissions contained herein.  All rights reserved.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 for NETGEAR, Inc.:
This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The words “anticipate,” “expect,” “believe,” “will,” “may,” “should,” “estimate,” “project,” “outlook,” “forecast” or other similar words are used to identify such forward-looking statements. However, the absence of these words does not mean that the statements are not forward-looking. The forward-looking statements represent NETGEAR, Inc.’s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding: NETGEAR’s future operating performance and financial condition, expected net revenue, GAAP and non-GAAP operating margins, and GAAP and non-GAAP tax rates; expectations regarding the timing, distribution, sales momentum and market acceptance of recent and anticipated new product introductions that position the Company for growth; expectations regarding NETGEAR's paid subscriber base, registered users and registered app users and their effect on NETGEAR's paid subscriber base; and expectations regarding seasonal changes in the Company’s business performance. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including the following: future demand for the Company's products may be lower than anticipated; consumers may choose not to adopt the Company's new product offerings or adopt competing products; product performance may be adversely affected by real world operating conditions; the Company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the Company's products or utilize competing products; the Company may be unable to grow its number of registered users and/or registered app users; the Company may be unable to grow its paid subscriber base; the Company may be unable to collect receivables as they become due; the Company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings; the Company may fail to successfully continue to effect operating expense savings; changes in the level of NETGEAR's cash resources and the Company's planned usage of such resources, including potential repurchases of the Company’s common stock; changes in the Company's stock price and developments in the business that could increase the Company's cash needs; fluctuations in foreign exchange rates; and the actions and financial health of the Company's customers. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Further information on potential risk factors that could affect NETGEAR and its business are detailed in the Company's periodic filings with the Securities and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled “Part II - Item 1A. Risk Factors” in the Company's quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2019, filed with the Securities and Exchange Commission on May 3, 2019. Given these circumstances, you should not place undue reliance on these forward-looking statements. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

Non-GAAP Financial Information:

To supplement our unaudited selected financial data presented on a basis consistent with Generally Accepted Accounting Principles (“GAAP”), we disclose certain non-GAAP financial measures that exclude certain charges, including non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development, non-GAAP sales and marketing, non-GAAP general and administrative, non-GAAP total operating expenses, non-GAAP operating income, non-GAAP operating margin, Non-GAAP other income (expense), net, non-GAAP net income and non-GAAP net income per diluted share. These non-GAAP financial measures represent results from continuing operations. These supplemental measures exclude adjustments for amortization of intangibles, stock-based compensation expense, separation expense, restructuring and other charges, litigation reserves, net, impairment charges to investments, and the related tax effects. These non-GAAP measures are not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. We believe that these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. We compensate for the limitations of non-GAAP financial measures by relying upon GAAP results to gain a complete picture of our performance.

In calculating non-GAAP financial measures, we exclude certain items to facilitate a review of the comparability of our operating performance on a period-to-period basis because such items are not, in our view, related to our ongoing operational performance. We use non-GAAP measures to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. In addition, management’s incentive compensation is determined using certain non-GAAP measures. Since we find these measures to be useful, we believe that investors benefit from seeing results “through the eyes” of management in addition to seeing GAAP results. We believe that these non-GAAP measures, when read in conjunction with our GAAP financials, provide useful information to investors by offering:

  • the ability to make more meaningful period-to-period comparisons of our on-going operating results;
  • the ability to better identify trends in our underlying business and perform related trend analyses;
  • a better understanding of how management plans and measures our underlying business; and
  • an easier way to compare our operating results against analyst financial models and operating results of competitors that supplement their GAAP results with non-GAAP financial measures.

The following are explanations of the adjustments that we incorporate into non-GAAP measures, as well as the reasons for excluding them in the reconciliations of these non-GAAP financial measures:

Amortization of intangibles consists primarily of non-cash charges that can be impacted by, among other things, the timing and magnitude of acquisitions. We consider our operating results without these charges when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such charges when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of our competitors.

Stock-based compensation expense consists of non-cash charges for the estimated fair value of stock options, restricted stock units and shares under the employee stock purchase plan granted to employees. We believe that the exclusion of these charges provides for more accurate comparisons of our operating results to peer companies due to the varying available valuation methodologies, subjective assumptions and the variety of award types. In addition, we believe it is useful to investors to understand the specific impact stock-based compensation expense has on our operating results.

Other items consist of certain items that are the result of either unique or unplanned events, including, when applicable: separation expense, restructuring and other charges, litigation reserves, net, and impairment charges to investments. It is difficult to predict the occurrence or estimate the amount or timing of these items in advance. Although these events are reflected in our GAAP financial statements, these unique transactions may limit the comparability of our on-going operations with prior and future periods. The amounts result from events that often arise from unforeseen circumstances, which often occur outside of the ordinary course of continuing operations. Therefore, the amounts do not accurately reflect the underlying performance of our continuing business operations for the period in which they are incurred.

Tax effects consist of the various above adjustments that we incorporate into non-GAAP measures in order to provide a more meaningful measure on non-GAAP net income. We also believe providing financial information with and without the income tax effects relating to our non-GAAP financial measures provides our management and users of the financial statements with better clarity regarding the on-going performance of our business.

Source: NETGEAR-F

-Financial Tables Attached-


NETGEAR, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(In thousands) 
(Unaudited)
 
 As of
 June 30,
 2019
 December 31,
 2018
ASSETS   
Current assets:   
Cash and cash equivalents$214,611  $201,047 
Short-term investments3,700  73,317 
Accounts receivable, net238,635  303,667 
Inventories276,316  243,871 
Prepaid expenses and other current assets38,687  35,997 
Total current assets771,949  857,899 
Property and equipment, net21,074  20,177 
Operating lease right-of-use assets, net34,063   
Intangibles, net13,297  17,146 
Goodwill80,721  80,721 
Other non-current assets71,403  67,433 
Total assets$992,507  $1,043,376 
    
LIABILITIES AND STOCKHOLDERS' EQUITY   
Current liabilities:   
Accounts payable$108,444  $139,748 
Accrued employee compensation23,436  31,666 
Other accrued liabilities171,873  199,472 
Deferred Revenue10,093  11,086 
Income taxes payable1,141  2,020 
Total current liabilities314,987  383,992 
Non-current income taxes payable18,278  19,600 
Non-current operating lease liabilities29,263   
Other non-current liabilities7,907  12,232 
Total liabilities370,435  415,824 
Stockholders' equity:   
Common stock31  32 
Additional paid-in capital812,034  793,585 
Accumulated other comprehensive income (loss)12  (15)
Accumulated deficit(190,005) (166,050)
Total stockholders' equity622,072  627,552 
Total liabilities and stockholders' equity$992,507  $1,043,376 


 
NETGEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and percentage data)
(Unaudited)
 
 Three Months Ended Six Months Ended
 June 30,
 2019
 March 31,
 2019
 July 1,
 2018
 June 30,
 2019
 July 1,
 2018
          
Net revenue$230,852  $249,082  $255,276  $479,934  $500,477 
Cost of revenue165,407  167,074  174,996  332,481  343,878 
Gross profit65,445  82,008  80,280  147,453  156,599 
Gross margin28.3% 32.9% 31.4% 30.7% 31.3%
Operating expenses:         
Research and development18,814  18,832  21,946  37,646  43,137 
Sales and marketing34,541  35,855  38,552  70,396  76,426 
General and administrative10,463  13,117  18,458  23,580  34,219 
Separation expense  264    264   
Restructuring and other charges1,291  (68) 1,376  1,223  1,367 
Litigation reserves, net10    5  10  5 
Total operating expenses65,119  68,000  80,337  133,119  155,154 
Income (loss) from operations326  14,008  (57) 14,334  1,445 
Operating margin0.1% 5.6% (0.0%) 3.0% 0.3%
Interest income, net782  701  1,073  1,483  1,821 
Other income (expense), net487  341  788  828  (530)
Income before income taxes1,595  15,050  1,804  16,645  2,736 
Provision for income taxes756  2,207  1,271  2,963  1,185 
Net income from continuing operations839  12,843  533  13,682  1,551 
Net loss from discontinued operations, net of tax (1)    (5,763)   (1,191)
Net income (loss)$839  $12,843  $(5,230) $13,682  $360 
          
Net income (loss) per share - basic:         
Income from continuing operations$0.03  $0.41  $0.02  $0.44  $0.05 
Loss from discontinued operations    (0.19)   (0.04)
Net income (loss)$0.03  $0.41  $(0.17) $0.44  $0.01 
          
Net income (loss) per share - Diluted:         
Income from continuing operations$0.03  $0.39  $0.02  $0.42  $0.05 
Loss from discontinued operations    (0.18)   (0.04)
Net income (loss)$0.03  $0.39  $(0.16) $0.42  $0.01 
          
Weighted average shares used to compute net income (loss) per share:         
Basic31,246  31,483  31,674  31,365  31,550 
Diluted32,112  32,874  32,742  32,518  32,722 

(1)  Historical results of Arlo Technologies, Inc. are reflected as discontinued operations for the periods presented.

 
NETGEAR, INC. 
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES 
(In thousands, except percentage data) 
(Unaudited)
 
STATEMENT OF OPERATIONS DATA:        
          
 Three Months Ended Six Months Ended
 June 30,
 2019
 March 31,
 2019
 July 1,
 2018
 June 30,
 2019
 July 1,
 2018
          
GAAP gross profit$65,445  $82,008  $80,280  $147,453  $156,599 
GAAP gross margin28.3% 32.9% 31.4% 30.7% 31.3%
Amortization of intangibles178  179  209  357  532 
Stock-based compensation expense755  668  572  1,423  1,135 
Non-GAAP gross profit$66,378  $82,855  $81,061  $149,233  $158,266 
Non-GAAP gross margin28.8% 33.3% 31.8% 31.1% 31.6%
          
GAAP research and development$18,814  $18,832  $21,946  $37,646  $43,137 
Stock-based compensation expense(1,288) (1,192) (1,122) (2,480) (2,134)
Non-GAAP research and development$17,526  $17,640  $20,824  $35,166  $41,003 
          
GAAP sales and marketing$34,541  $35,855  $38,552  $70,396  $76,426 
Amortization of intangibles(1,504) (1,831) (1,757) (3,335) (3,513)
Stock-based compensation expense(2,085) (2,041) (2,188) (4,126) (4,393)
Non-GAAP sales and marketing$30,952  $31,983  $34,607  $62,935  $68,520 
          
GAAP general and administrative$10,463  $13,117  $18,458  $23,580  $34,219 
Stock-based compensation expense(2,611) (2,557) (3,364) (5,168) (6,448)
Non-GAAP general and administrative$7,852  $10,560  $15,094  $18,412  $27,771 
          
GAAP total operating expenses$65,119  $68,000  $80,337  $133,119  $155,154 
Amortization of intangibles(1,504) (1,831) (1,757) (3,335) (3,513)
Stock-based compensation expense(5,984) (5,790) (6,674) (11,774) (12,975)
Separation expense  (264)   (264)  
Restructuring and other charges(1,291) 68  (1,376) (1,223) (1,367)
Litigation reserves, net(10)   (5) (10) (5)
Non-GAAP total operating expenses$56,330  $60,183  $70,525  $116,513  $137,294 


 
NETGEAR, INC.
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)
(In thousands, except percentage data)
(Unaudited)
 
STATEMENT OF OPERATIONS DATA (CONTINUED):      
      
 Three Months Ended Six Months Ended
 June 30,
 2019
 March 31,
 2019
 July 1,
 2018
 June 30,
 2019
 July 1,
 2018
          
GAAP operating income (loss)$326  $14,008  $(57) $14,334  $1,445 
GAAP operating margin0.1% 5.6% (0.0%) 3.0% 0.3%
Amortization of intangibles1,682  2,010  1,966  3,692  4,045 
Stock-based compensation expense6,739  6,458  7,246  13,197  14,110 
Separation expense  264    264   
Restructuring and other charges1,291  (68) 1,376  1,223  1,367 
Litigation reserves, net10    5  10  5 
Non-GAAP operating income$10,048  $22,672  $10,536  $32,720  $20,972 
Non-GAAP operating margin4.4% 9.1% 4.1% 6.8% 4.2%
          
GAAP other income (expense), net$487  $341  $788  $828  $(530)
Impairment charges to investments        1,400 
Non-GAAP other income (expense), net$487  $341  $788  $828  $870 
          
GAAP net income from continuing operations$839  $12,843  $533  $13,682  $1,551 
Amortization of intangibles1,682  2,010  1,966  3,692  4,045 
Stock-based compensation expense6,739  6,458  7,246  13,197  14,110 
Separation expense  264    264   
Restructuring and other charges1,291  (68) 1,376  1,223  1,367 
Litigation reserves, net10    5  10  5 
Impairment charges to investments        1,400 
Tax effects of above non-GAAP adjustments(1,707) (1,706) (1,546) (3,413) (4,432)
Non-GAAP net income from continuing operations$8,854  $19,801  $9,580  $28,655  $18,046 


 
NETGEAR, INC.
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)
(In thousands, except per share data)
(Unaudited)
 
STATEMENT OF OPERATIONS DATA (CONTINUED):      
          
 Three Months Ended Six Months Ended
 June 30,
 2019
 March 31,
 2019
 July 1,
 2018
 June 30,
 2019
 July 1,
 2018
NET INCOME PER DILUTED SHARE:         
GAAP net income per diluted share from continuing operations$0.03  $0.39  $0.02  $0.42  $0.05 
Amortization of intangibles0.05  0.06  0.06  0.11  0.12 
Stock-based compensation expense0.21  0.20  0.22  0.41  0.43 
Separation expense  0.01    0.01   
Restructuring and other charges0.04  0.00  0.04  0.04  0.04 
Litigation reserves, net0.00    0.00  0.00  0.00 
Impairment charges to investments        0.04 
Tax effects of above non-GAAP adjustments(0.05) (0.06) (0.05) (0.11) (0.13)
Non-GAAP net income per diluted share from continuing operations$0.28  $0.60  $0.29  $0.88  $0.55 


 
NETGEAR, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands, except per share data, DSO, inventory turns, weeks of channel inventory, headcount and percentage data)
(Unaudited)
 
 Three Months Ended
 June 30,
 2019
 March 31,
 2019
 December 31,
 2018
 September 30,
 2018
 July 1,
 2018
          
Cash, cash equivalents and short-term investments$218,311  $212,652  $274,364  $341,968  $355,489 
Cash, cash equivalents and short-term investments per diluted share$6.80  $6.47  $8.36  $10.37  $10.86 
          
Accounts receivable, net$238,635  $262,531  $303,667  $241,862  $232,770 
Days sales outstanding (DSO)94  95  97  82  83 
          
Inventories$276,316  $236,123  $243,871  $198,037  $168,263 
Ending inventory turns2.4  2.8  3.3  3.5  4.2 
                    
Weeks of channel inventory:                   
U.S. retail channel10.6  10.4  7.7  9.8  10.6 
U.S. distribution channel5.5  5.7  5.2  4.1  4.3 
EMEA distribution channel4.6  4.0  4.1  4.3  4.1 
APAC distribution channel7.4  6.4  7.4  6.6  7.9 
          
Deferred revenue (current and non-current)$12,047  $13,598  $11,865  $9,726  $5,577 
          
Headcount824  828  837  833  901 
Non-GAAP diluted shares32,112  32,874  32,803  32,974  32,742 


NET REVENUE BY GEOGRAPHY

 Three Months Ended Six Months Ended
 June 30,
 2019
 March 31,
 2019
 July 1,
 2018
 June 30,
 2019
 July 1,
 2018
Americas$157,170 68% $148,029 59% $174,414 68% $305,199 63% $334,426 67%
EMEA43,091 19% 56,963 23% 48,209 19% 100,054 21% 95,643 19%
APAC30,591 13% 44,090 18% 32,653 13% 74,681 16% 70,408 14%
Total$230,852 100% $249,082 100% $255,276 100% $479,934 100% $500,477 100%


NETGEAR, INC.
SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
(In thousands)
(Unaudited)

NET REVENUE BY SEGMENT

 Three Months Ended Six Months Ended
 June 30,
 2019
 March 31,
 2019
 July 1,
 2018
 June 30,
 2019
 July 1,
 2018
Net revenue:         
Connected Home$167,495  $169,365  $186,424  $336,860  $360,739 
SMB63,357  79,717  68,852  143,074  139,738 
Total net revenue$230,852  $249,082  $255,276  $479,934  $500,477 

SERVICE PROVIDER NET REVENUE

 Three Months Ended Six Months Ended
 June 30,
 2019
 March 31,
 2019
 July 1,
 2018
 June 30,
 2019
 July 1,
 2018
Connected Home$26,901  $36,818  $46,333  $63,719  $88,130 
SMB922  1,476  700  2,398  1,763 
Total service provider net revenue$27,823  $38,294  $47,033  $66,117  $89,893 

 


            

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