NETGEAR (NTGR) Q3 Earnings Surpass Estimates, Revenues Rise

NETGEAR, Inc. NTGR reported solid third-quarter 2020 results, with the top and bottom lines surpassing the respective Zacks Consensus Estimate. Further, earnings and revenues increased considerably on a year-over-year basis backed by a growing subscriber base despite the COVID-19 mayhem.

Net Income

GAAP earnings from continuing operations were $25.5 million or 83 cents per share compared with $12.5 million or 39 cents per share in the year-ago quarter. The more than two-fold rise was primarily driven by higher revenues.

Non-GAAP net income from continuing operations was $34.7 million or $1.13 per share compared with $20.7 million or 65 cents per share in the year-earlier quarter. The bottom line beat the Zacks Consensus Estimate by 47 cents.

NETGEAR, Inc. Price, Consensus and EPS Surprise

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

Revenues

NETGEAR generated net revenues of $378.1 million, up 42.2% year over year driven by exceptionally solid demand for CHP (Connected Home Products) in the wake of growing work-from-trend due to the COVID-19 pandemic with high bandwidth consumption. The top line surpassed the consensus estimate of $317 million. The company shipped nearly 4.7 million units, including 3.5 million nodes of wireless products in the third quarter.

Region wise, net revenues from the Americas were $277.9 million (73.5% of net revenues), up 55.5% year over year. EMEA (Europe, Middle East and Africa) revenues were $63.7 million (16.8%), up 28.6%. Significant growth in both the regions can be attributed to higher demand of CHP products in retail and service provider channels backed by rising work-from-home trend. However, APAC (Asia Pacific Region) revenues fell 2.9% to $36.5 million (9.7%) due to sluggish service provider business in the region.

The number of registered app users in the reported quarter was 7.7 million. Notably, NETGEAR ended the quarter with 369,000 paid subscribers. With a recurring revenue stream, the company managed to double its subscriber base, which indicates healthy potential for profitability growth in the upcoming quarters.

Segmental Performance

Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $316.7 million, up 66.1% year over year owing to robust product demand in both retail and service provider channels. Markedly, NETGEAR continues to hold about 44% share in U.S. retail Wi-Fi market, which includes mesh, routers, gateways and extenders.

Net revenues from SMB (Small and Medium Business) declined 18.4% year over year to $61.4 million on reduced demand due to business closures stemming from the outbreak. However, on the product front, ProAV switching, wireless LAN and PoE Plus lines performed well. The company continues to hold about 49% share in U.S. retail switch market.

Other Details

Adjusted gross margin increased to 30.3% from 29.4% due to higher revenues. Non-GAAP operating margin was 10.9% compared with 7.8% in the year-ago quarter owing to higher operating income.

Cash Flow & Liquidity

During the third quarter, NETGEAR generated $42.9 million of cash from operating activities compared with $26.1 million in the year-ago quarter on the back of robust liquidity position. As of Sep 27, the company had $300.5 million in cash and equivalents with $326 million of total current liabilities. Markedly, NETGEAR did not repurchase any shares under its open buyback program as it aimed to maintain a strong cash position amid coronavirus-induced turmoil.

Q4 Outlook Suspended

Due to certain macroeconomic challenges related to the COVID-19 pandemic, NETGEAR has not provided any definitive financial guidance for the fourth quarter of 2020. The company witnessed a significant shift in its business operations and predicts supply-chain headwinds due to the ongoing pandemic situation. The company witnessed higher shipments of 5G mobile hotspots and launched a new line of AV switches.

With relatively healthy inventory levels, the company witnessed a significant development in Wi-Fi 6 offerings with a strong online presence. As channel partners migrate to efficient operating structures, the company is witnessing a change in demand from retail to online platforms. With sturdy growth potential, the company boasts accretive subscriber base and solid product demand owing to a rise in work-from-home trend.

Moving Forward

Despite supply chain disruptions, NETGEAR is poised to witness recurring top-line growth. 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 competitive macro environment. NETGEAR aims to emerge as a pioneer of best-in-class networking technologies like WiFi 6 and Pro AV, thereby benefiting from advanced technological innovations. It intends to capitalize on technology inflections, create new categories, build recurring service revenues and boost its paid subscriber base 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 Viasat, Inc. VSAT, Badger Meter, Inc. BMI and Extreme Networks, Inc. EXTR. While Viasat and Badger Meter sport a Zacks Rank #1 (Strong Buy), Extreme Networks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Viasat delivered a trailing four-quarter positive earnings surprise of 361.3%, on average.

Badger Meter delivered a trailing four-quarter positive earnings surprise of 5.4%, on average.

Extreme Networks delivered a trailing four-quarter positive earnings surprise of 223.2%, on average.

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