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NETGEAR (NTGR) Misses on Q4 Earnings Despite Top-Line Growth

NETGEAR, Inc. NTGR reported mixed fourth-quarter 2018 results, wherein the top line beat the Zacks Consensus Estimate but the bottom line missed the same. The networking equipment maker’s financial performance was driven by strength in its Orbi, Nighthawk Pro Gaming, cable modems and gateways as well as SMB switching portfolio, particularly PoE and ProAV switches.

Net Loss

On a GAAP basis, net loss for the reported quarter was $12.9 million or loss of 39 cents per share compared with loss of $31.9 million or loss of $1.02 per share in the year-ago quarter. The year-over-year improvement was primarily driven by top-line growth and lower provision for income taxes. For full-year 2018, net loss was $2.6 million or loss of 8 cents per share against net income of $19.4 million or 61 cents per share in 2017.

Quarterly non-GAAP net income from continuing operations came in at $22.3 million or 68 cents per share, missing the Zacks Consensus Estimate by 6 cents.

NETGEAR, Inc. Price, Consensus and EPS Surprise

Revenues

The company generated quarterly net revenues of $288.9 million, up 5.4% year over year owing to growth for both the Connected Home and SMB segments. The top line surpassed the consensus estimate of $288 million. For full-year 2018, net revenues increased 1.9% year over year to $1,058.8 million.

Geographically, quarterly net revenues reflect the company’s continued strength in North America. Revenues for the Americas were $190.3 million or 65.9% of net revenues, up 7.6% year over year. EMEA revenues were $58.8 million or 20.3% of net revenues, slightly down year over year due to decline in service provider revenues. APAC revenues were $39.8 million or 13.8% of net revenues, up 4.6%.

Segmental Performance

The Connected Home segment, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $215.6 million, up 5.9% year over year. The improvement was primarily driven by growth in Orbi mesh, Nighthawk Pro Gaming routers and cable modems and gateways. Notably, NETGEAR continues to hold more than 50% market share in U.S. retail WiFi products, which include mesh, routers, gateways and extenders.

Net revenues from the SMB segment increased 3.8% year over year to $73.3 million driven by NETGEAR’s strength in switching portfolio, particularly PoE and ProAV switches.

Other Quarter Details

Gross margin improved to 31.4% from 27.8% in the year-ago quarter. Total operating expenses were $73.2 million, up 3.8%. Operating margin was 6% compared with 2% a year ago.

On Dec 31, 2018, NETGEAR completed the spin-off of the Arlo business through a distribution of 62,500,000 shares of Arlo Technologies stock to NETGEAR’s shareholders. Prior to that, the company owned approximately 84.2% of Arlo’s stock. Following the completion, the company no longer owns any shares of Arlo.

NETGEAR launched two products during the quarter, marking significant technology inflection points in wireless. The company unveiled its first WiFi fixed routers and debuted the world’s first millimeter wave 5G mobile routers with AT&T Inc. T.

Cash Flow and Liquidity

During the fourth quarter, NETGEAR utilized $56.1 million of cash from continuing operations. As of Dec 31, 2018, the company had $201 million of cash and cash equivalents with $199.5 million of accrued current liabilities compared with the respective tallies of $202.7 million and $149.8 million a year ago.

First-Quarter 2019 Guidance

For the first quarter of 2019, NETGEAR expects revenues between $235 million and $250 million, which reflects normal post-holiday seasonality. The company anticipates GAAP operating margin to be in the range of 4.5-5.5%. Non-GAAP operating margin is projected to be 8-9%. While GAAP tax rate is expected to be approximately 27%, non-GAAP tax rate is expected to be around 24.5%.

Looking Forward

NETGEAR is confident that it will remain a leader in new product introduction, based on the Wi-Fi 6 standards. The company is excited to be part of AT&T’s commitment to be the first to introduce mobile 5G services in the United States. It intends to launch more 5G related products in 2019. Furthermore, it released the third generation Meural Canvas. Notably, Meural is the world’s leading smart digital canvas. NETGEAR also announced an exciting new Meural content partnership with National Geographic. The company continues to capitalize on technology inflections, create new categories and build recurring service revenues in order to maintain its market leadership position and drive future growth. We remain impressed with its solid growth potential.

Zacks Rank & Other Stocks to Consider

NETGEAR currently carries a Zacks Rank #2 (Buy). A few other top-ranked stocks in the broader industry are Digi International Inc. DGII and Comtech Telecommunications Corp. CMTL, both carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Digi International has a long-term earnings growth expectation of 14.5%.

Comtech has a long-term earnings growth expectation of 5%.

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