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NETGEAR's (NTGR) Q4 Earnings Beat Estimates, Decline Y/Y

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NETGEAR, Inc. NTGR reported decent fourth-quarter 2019 results, wherein both the top line and bottom line surpassed the respective Zacks Consensus Estimate. However, both earnings and revenues declined year over year.

Net Income

GAAP net loss from continuing operations in the reported quarter were $420 million or a loss of 1 cent per share compared with net loss of $535 million or a loss of 2 cents per share in the year-ago quarter. The year-over-year improvement, despite lower revenues, was due to lower operating expenses and lesser provision for income taxes. In 2019, earnings from continuing operations were $25.8 million or 81 cents per share compared with $17.3 million or 52 cents per share in 2018.

Non-GAAP net income from continuing operations was $10.4 million or 34 cents per share compared with $22.3 million or 68 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 5 cents. In full-year 2019, non-GAAP net income from continuing operations was $59.8 million or $1.87 per share compared with $64.4 million or $1.94 per share in 2018.

NETGEAR, Inc. Price, Consensus and EPS Surprise


NETGEAR generated net revenues of $253 million, down 12.4% from the previous-year quarter, due to manufacturing inefficiencies and delayed shipments of 5G product offerings. However, the top line surpassed the consensus estimate of $245 million. Full-year revenues, too, declined 5.7% to $998.8 million from $1,058.8 million in 2018.

Region wise, net revenues from the Americas were $169.1 million (66.9% of net revenues), down 11.1% year over year due to channel inventory adjustments. EMEA (Europe, Middle East and Africa) revenues were $50.5 million (20%), down 14.1%, while APAC (Asia Pacific Region) revenues were $33.4 million (13.2%), down 16.2% due to geopolitical turmoil in the Greater China region.

The number of registered app users recorded in the quarter was 4.4 million, exhibiting significant sequential growth from 3.6 million from third-quarter 2019. Notably, NETGEAR ended the quarter with 177,000 paid subscribers.

Segmental Performance

Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $183.9 million, down 14.7% year over year. The decline was primarily attributable to lower revenues in the Greater China region and realignment of channel inventory in North America with downfall in service provider business. Markedly, NETGEAR continues to hold about 52% market share in U.S. retail WiFi products, which include mesh, routers, gateways and extenders.

Net revenues from SMB declined 5.7% year over year to $69.1 million due to Brexit-related uncertainties and geopolitical tension in Greater China, its market share being 53%. NETGEAR also launched new PoE+ switches at the beginning of the reported quarter.

Other Details

Adjusted gross margin declined to 27.9% from 31.7% due to lower revenues. Non-GAAP operating margin was 4.4% compared with 9.4% a year ago due to lower operating income.

Cash Flow & Liquidity

During the fourth quarter, NETGEAR generated nearly $50 million of cash operating activities. As of Dec 31, 2019, the company had $190.2 million in cash and equivalents with $298.4 million of current liabilities compared with the respective tallies of $201 million and $384 million a year ago. Moreover, it repurchased approximately 721,000 shares at an average price of $30.49 per share for $22 million in the reported quarter.

Q1 Guidance Lowered

NETGEAR has lowered outlook for first-quarter 2020. Management anticipates revenues between $205 million and $220 million compared with the previous guidance of $240-$255 million, due to reduced service provider shipments and realignment of channel inventory toward WiFi 6 offerings in the existing quarter. The company anticipates GAAP operating margin to be in the vicinity of (1.8)-(0.8)% against prior outlook of 0.1-1.1%, and non-GAAP operating margin in the band of 2-3% compared with 4.5-5.5%.

Moving Forward

NETGEAR is confident that it will remain a leader in new product introduction, based on the efforts to realign channel inventory for an accelerated shift toward WiFi 6 and PoE+ in the United States in the first half of 2020. This, in turn, is further likely to drive positive cash flow amid competitive macro environment. The company also launched five PoE switches and Meural Canvas II, and aims to emerge as a pioneer of best-in-class networking technologies like 5G and WiFi 6, thereby benefiting from advanced technological innovations. Moving forward, NETGEAR intends to boost its registered app user base to pay future dividends, thereby continuing 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 Advantest Corporation ATEYY, BlackBerry Limited (BB - Free Report) and Perficient, Inc. PRFT, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Advantest surpassed earnings estimates twice in the trailing four quarters, the positive surprise being 27.5%, on average.

BlackBerry surpassed earnings estimates twice in the trailing four quarters, the positive surprise being 68.8%, on average.

Perficient surpassed earnings estimates in each of the trailing four quarters, the positive surprise being 10.3%, on average.

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