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Why Is NETGEAR, Inc. (NTGR) Up 5.3% Since Last Earnings Report?

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It has been about a month since the last earnings report for NETGEAR, Inc. (NTGR - Free Report) . Shares have added about 5.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is NETGEAR, Inc. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

NETGEAR Q1 Earnings Top Estimates, Outlook Raised

NETGEAR reported impressive first-quarter 2021 results, with the top and bottom lines surpassing the respective Zacks Consensus Estimate. Also, earnings and revenues increased significantly on a year-over-year basis backed by improved inventory position and growing subscriber base.

Net Income

On a GAAP basis, net income in the March quarter was $23 million or 72 cents per share against net loss of $4.2 million or loss of 14 cents per share in the year-ago quarter. The year-over-year improvement was mainly attributable to higher revenues.

Quarterly non-GAAP net income was $31.6 million or 99 cents per share compared with $6.4 million or 21 cents per share in the year-earlier quarter. The bottom line beat the Zacks Consensus Estimate by 33 cents.

Revenues

NETGEAR generated net revenues of $317.9 million, up 38.3% year over year, primarily driven by strong demand for Wi-Fi 6 offerings. Exceptional growth in the connected home products (CHP) business in the retail channel and better-than-expected SMB further drove the performance. Also, the top line surpassed the consensus estimate of $310 million. The company shipped nearly 4.1 million units, including 2.7 million nodes of wireless products in the first quarter.

Region wise, net revenues from the Americas were $219.2 million (68.9% of net revenues), up 38.5% year over year. EMEA revenues were $61.1 million (19.2%), up 44.9%. APAC revenues grew 27.2% to $37.7 million (11.9%). Significant growth in the regions can be attributed to higher demand for premium mesh products in CHP business and accretive paid subscriber base, fueled by the work-from-home trend and improved shipments.

The number of registered app users in the reported quarter was 10 million. Notably, NETGEAR ended the quarter with 481,000 paid subscribers. With a recurring revenue stream, the company is on track to meet its goal of tapping 650,000 subscribers by the end of 2021, which indicates healthy potential for its long-term profitability growth.

Segmental Performance

Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $240.9 million, up 46.3% year over year owing to robust product demand for premium Wi-Fi 6 solutions in the retail channel. Markedly, NETGEAR continues to hold about 43% share in U.S. retail Wi-Fi market, which includes mesh, routers, gateways and extenders.

Driven by recovering switching business, revenues from SMB improved 17.9% year over year to $77 million. Robust demand for work-from-home solutions like low port out switches supported by ProAV strength drove the momentum. The company continues to hold about 56% share in U.S. retail switch market.

Other Details

Adjusted gross margin increased to 35.2% from 29.2% due to higher revenues. Non-GAAP operating margin was 13.3% compared with 3.6% in the year-ago quarter owing to higher operating income.

Cash Flow & Liquidity

During the first quarter, NETGEAR generated $13.7 million in cash from operations, driven by robust liquidity position and strong operational execution. As of Mar 28, 2021, the company had $363.5 million in cash and cash equivalents with $361.3 million of total current liabilities.

Q2 Outlook

For the second quarter of 2021, NETGEAR anticipates revenues in the range of $305 million to $320 million compared with $300 million to $315 million in the prior quarter. GAAP operating margin is estimated between 6.5% and 7.5%, up from 4.5-5.5% in the first quarter. Non-GAAP operating margin is expected between 9% and 10% compared with 8% and 9% in the previous quarter.

Moving Forward

With improved supply chain scenario, 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 Wi-Fi 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 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, NETGEAR, Inc. has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise NETGEAR, Inc. has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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