July 28, 2005

NETGEAR Reports Second Quarter 2005 Results

  • Second quarter 2005 net revenue increased to $107.6 million, 21.7% year-over-year growth
  • Second quarter 2005 non-GAAP net income increased to $8.3 million, as compared to $5.3 million in the comparable prior year quarter, 56.6% year over year growth
  • Second quarter 2005 non-GAAP gross margin at 35.9%, and non-GAAP operating margin at 12.5%
  • Second quarter 2005 non-GAAP diluted EPS of $0.25, as compared to $0.17 in the comparable prior year quarter, 47.1% year-over-year growth
  • Company expects third quarter 2005 net revenue to be in the range of $113 million to $118 million, with non-GAAP operating margin in the range of 12.0% to 12.5%<br /><br />

SANTA CLARA, Calif., July 28 /PRNewswire-FirstCall/ -- NETGEAR, Inc. (Nasdaq: NTGR), a worldwide provider of technologically advanced, branded networking products, today reported financial results for the second quarter ended July 3, 2005.

Net revenue for the second quarter ended July 3, 2005 was $107.6 million, a 21.7% increase as compared to $88.4 million for the second quarter ended June 27, 2004. Revenue for the first quarter of 2005 was $109.0 million. Net revenue in the second quarter of 2005 derived from North America was $55.2 million; the Europe, Middle East and Africa, or EMEA, region was $ 40.4 million; and, the Asia Pacific region was $12.0 million. Net income, computed in accordance with GAAP, for the second quarter of 2005 was $8.3 million or $0.26 per basic share and $0.25 per diluted share. This net income was a 5.1% increase compared to net income of $7.9 million for the prior quarter or $0.25 per basic share and $0.24 per diluted share, and a 69.4% increase compared to net income of $4.9 million for the second quarter of 2004 or $0.16 per basic share and $0.15 per diluted share.

Non-GAAP gross margin in the second quarter of 2005 was 35.9%, as compared to 33.0% in the prior quarter and 32.1% in the year ago comparable quarter. Non-GAAP operating margin was 12.5% in the second quarter of 2005, as compared to 11.5% in the prior quarter and 8.9% in the year ago comparable quarter. In the second quarter of 2005, non-GAAP operating expenses were 23.4% of net revenue, as compared to 21.4% in the prior quarter and 23.2% in the year ago comparable quarter. Sales and marketing, research and development and general and administration expenses as a percentage of net revenue were 16.9%, 3.0% and 3.5%, as compared with 15.5%, 2.6% and 3.3% in the prior quarter, and 17.0%, 2.6% and 3.6% in the year ago comparable quarter.

Non-GAAP net income for the second quarter of 2005 was $8.3 million, a 56.6% increase compared to non-GAAP net income of $5.3 million for the second quarter of 2004. Non-GAAP net income for the second quarter of 2005 excludes non-cash, stock based compensation of $324,000, and also excludes a $325,000 net tax benefit from exercises of stock options. Non-GAAP net income for the second quarter of 2004 excludes non-cash, stock-based compensation of $445,000. Non-GAAP net income per share was $0.26 per basic share and $0.25 per diluted share in the second quarter of 2005, compared to $0.18 per basic share and $0.17 per diluted share in the second quarter of 2004. The accompanying schedules provide a reconciliation of net income computed on a GAAP basis to net income computed on a non-GAAP basis.

Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, "We had a strong second quarter driven by the success of some new products; such as, our RangeMax? family of MIMO Wi-Fi products. The RangeMax pricing is attractive while providing our customers with innovative first-to-market technology. Gross and operating margins in the second quarter were the highest in NETGEAR's history. Given our strong financial performance, we invested in strengthening our sales and marketing staff in emerging markets such as Eastern Europe, Russia and India. We also ran significant in-store branding campaigns, such as sales associates training, point of sales material displays, and channel seed units in the established markets of the United States and Western Europe."

Lo continued, "NETGEAR introduced a record 17 new products in the second quarter. Our RangeMax line, which quickly became the #1 selling MIMO Wi-Fi products in the market, has been our most successful product introduction so far this year. We expect RangeMax sales volume to increase over the next few quarters as the product line benefits from positive product reviews and recommendations, numerous industry awards and NETGEAR's high brand recognition. Additionally, our industry design concept, Platinum II, which our RangeMax routers are based on, was bestowed the prestigious 2005 Industry Design Excellence Gold Award by the Industry Designers Society of America."

"We are also excited about our continuing sales penetration in the carrier market. In the second quarter, we shipped a new cable broadband gateway to Cox Communications, our newest customer in the service provider segment. We also introduced 3 new Voice over Internet (VoIP) products for 3 different operators: AT&T and AOL in the US, and Engin in Australia. The carrier market has been and will continue to be an important growth area for us. Revenue in the second quarter from service providers represents approximately 9% of total revenues."

Jonathan Mather, Executive Vice President and Chief Financial Officer of NETGEAR, said, "Aside from our strong gross margin and operating margin improvements, we remained focused on managing our assets. NETGEAR reduced inventory in the quarter to $44.1 million with turns of 6.3, while maintaining planned channel levels. Cash and short-term investments were at $147.9 million compared to $138.6 million at the end of the first quarter of 2005. Days sales outstanding (DSO's) was 66 days in the second quarter of 2005 compared to 67 days in the first quarter of 2005. The U.S. retail channel inventory ended the second quarter of 2005 at 10.1 weeks, as compared to 7.5 weeks in the first quarter of 2005, and 9.2 weeks in the second quarter 2004. U.S. distribution channel inventory ended the second quarter of 2005 at 3.3 weeks, as compared to 4.3 weeks in the first quarter of 2005 and 4.3 weeks in the second quarter of 2004. European distribution channel inventory ended the second quarter of 2005 at approximately 3.9 weeks, as compared to 4.5 weeks in the first quarter of 2005. Asia Pacific distribution channel inventory ended the second quarter of 2005 at approximately 5.3 weeks, as compared to 4.6 weeks in the first quarter of 2005."

Looking forward, Mr. Lo stated, "We are optimistic, as we enter the seasonally stronger third quarter. Our confidence is based on NETGEAR's market-leading product line-up and anticipated back to school seasonal demand. We expect to benefit from sales momentum in both the US and in Europe along with continued gains in the Asia-Pacific region. We believe net revenue for the third quarter 2005 will be approximately $113 million to $118 million, with non-GAAP operating margin in the range of 12.0% to 12.5%. Finally, we expect the non-GAAP effective tax rate to be approximately 39%."

Investor Conference Call / Webcast Details

NETGEAR will review second quarter 2005 results and discuss management's expectations for the third quarter of 2005 today, Thursday, July 28, 2005 at 5:00PM EDT (2:00PM PDT). The conference call-in will be available at http://www.netgear.com and by telephone at (201) 689-8261. A replay of the call will be available immediately following the call through midnight EDT (9:00PM PDT) on Thursday, August 4 by telephone at (201) 612-7415 and via the web at http://www.netgear.com. The account number to access the phone replay is 3055 and the conference ID number is 157830.

About NETGEAR, Inc.

NETGEAR (Nasdaq: NTGR) designs technologically advanced, branded networking products that address the specific needs of small and medium business and home users. The Company's product offerings enable users to share Internet access, peripherals, files, digital multimedia content and applications among multiple personal computers and other Internet-enabled devices. NETGEAR is headquartered in Santa Clara, Calif. For more information, visit the company's Web site at http://www.netgear.com or call (408) 907-8000.

NETGEAR, the NETGEAR Logo, and RangeMax are trademarks or registered trademarks of NETGEAR, Inc. in the United States and/or other countries. Other brand and product names are trademarks or registered trademarks of their respective holders. Information is subject to change without notice. All rights reserved.

Contacts: Doug Hagan Director, Corporate Marketing NETGEAR, Inc. (408) 907-8053 doug.hagan@netgear.com

David Pasquale Executive Vice President, Investor Relations The Ruth Group (646) 536-7006 dpasquale@theruthgroup.com

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 forward- looking statements represent NETGEAR, Inc.'s expectations or beliefs concerning future events and include statements, among others, regarding NETGEAR's expected revenue, earnings, operating income and tax rate on both a GAAP and non-GAAP basis, anticipated new product offerings, current and future demand for the Company's existing and anticipated new products, willingness of consumers to purchase and use the Company's products, and ability to increase distribution and market share for the Company's products domestically and worldwide. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including, without limitation, 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; the Company may be unsuccessful or experience delays in the manufacturing and distributing of its new and existing products; telecommunications service providers may choose to utilize competing products; 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; channel inventory information reported is estimated based on the average number of weeks of inventory on hand on the last Saturday of the quarter, as reported by certain of NETGEAR's customers. 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 "Risk Factors Affecting Future Results", pages 17 through 25, in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2005, filed with the Securities and Exchange Commission on May 13, 2005. 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.

Use of Non-GAAP Financial Information:

To supplement our consolidated financial statements presented on a GAAP basis, NETGEAR uses non-GAAP measures of operating results, net income and income per share, which are adjusted to exclude certain expenses and tax benefits we believe appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future. These adjustments to our current period GAAP results are made with the intent of providing both management and investors a more complete understanding of NETGEAR's underlying operational results and trends and our marketplace performance. For example, the non-GAAP results are an indication of our baseline performance before charges that are considered by management to be outside of our core operating results. In addition, these adjusted non-GAAP results are among the primary indicators management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or diluted net income per share prepared in accordance with generally accepted accounting principles in the United States.

                                   NETGEAR, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share data)
                                 (Unaudited)

                             Three months ended         Six months ended
                            July 3      June 27,      July 3,     June 27,
                              2005         2004         2005         2004

    Net revenue           $107,576     $ 88,372    $ 216,528    $ 176,797

    Cost of revenue:
     Cost of revenue        68,937       59,975      141,970      120,874
     Amortization of
      deferred stock-based
      compensation              38           40           76           82
     Total Cost of revenue  68,975       60,015      142,046      120,956
    Gross profit            38,601       28,357       74,482       55,841

    Operating expenses:
     Research and
      development            3,207        2,277        6,044        4,620
     Sales and marketing    18,174       15,048       35,103       29,816
     General and
      administrative         3,806        3,213        7,387        6,395
     Amortization of deferred
      stock-based compensation:
      Research and development  73          119          153          237
      Sales and marketing      124          189          273          377
      General and
       administrative           89           97          183          194
         Total operating
          expenses          25,473       20,943       49,143       41,639
    Income from operations  13,128        7,414       25,339       14,202
    Interest income            897          321        1,668          544
    Other income (expense),
     net                      (780)         206        (834)          103
    Income before income
     taxes                  13,245        7,941       26,173       14,849
    Provision for income
     taxes                   4,944        3,066       10,012        5,824
    Net income             $ 8,301      $ 4,875     $ 16,161      $ 9,025

    Net income per share:
     Basic                  $ 0.26       $ 0.16       $ 0.51       $ 0.30
     Diluted                $ 0.25       $ 0.15       $ 0.48       $ 0.28

    Weighted average shares outstanding
     for net income per share:

      Basic                 32,146       30,367       31,901       29,951
      Diluted               33,716       32,238       33,480       32,348


                                NETGEAR, INC.
             NON-GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
      Excluding stock-based compensation and a tax benefit from stock option
       exercises that pertain to previously taken stock based compensation.
                      (in thousands, except per share data)
                                 (Unaudited)

                             Three months ended         Six months ended
                            July 3,     June 27,      July 3,     June 27,
                              2005         2004         2005         2004


    Net revenue          $ 107,576     $ 88,372    $ 216,528    $ 176,797
    Cost of revenue:
     Cost of revenue        68,937       59,975      141,970      120,874
     Amortization of
      deferred stock-based
      compensation               -            -            -            -
     Total Cost of revenue  68,937       59,975      141,970      120,874
    Gross profit            38,639       28,397       74,558       55,923

    Operating expenses:
     Research and
      development            3,207        2,277        6,044        4,620
     Sales and marketing    18,174       15,048       35,103       29,816
     General and
      administrative         3,806        3,213        7,387        6,395
     Amortization of
      deferred stock-based
      compensation:
        Research and
         development             -            -            -            -
        Sales and marketing      -            -            -            -
        General and
         administrative          -            -            -            -
          Total operating
           expenses         25,187       20,538       48,534       40,831
     Income from operations 13,452        7,859       26,024       15,092
     Interest income           897          321        1,668          544
     Other income (expense),
      net                     (780)         206         (834)         103
     Income before income
      taxes                 13,569        8,386       26,858       15,739
     Provision for income
      taxes                  5,269        3,066       10,383        5,824
    Net income             $ 8,300      $ 5,320     $ 16,475      $ 9,915
    Net income per share:

     Basic                  $ 0.26       $ 0.18       $ 0.52       $ 0.33
     Diluted                $ 0.25       $ 0.17       $ 0.49       $ 0.31

    Weighted average shares
     outstanding for net income per share:

     Basic                  32,146       30,367       31,901       29,951
     Diluted                33,716       32,238       33,480       32,348


                                NETGEAR, INC.
                       GAAP TO NON-GAAP RECONCILIATION
                    (in thousands, except per share data)
                                 (Unaudited)

                          Three months ended          Six months ended
                            July 3, 2005                 July 3, 2005
                       GAAP   Excluded Non-GAAP      GAAP  Excluded   Non-GAAP

    Net revenue    $ 107,576        $-$ 107,576  $ 216,528       $-  $ 216,528

    Cost of revenue:
     Cost of revenue  68,937         -   68,937    141,970        -    141,970
     Amortization of
      deferred stock-based
      compensation        38        38        -         76       76          -
     Total Cost of
      revenue         68,975        38   68,937    142,046       76    141,970
    Gross profit      38,601       (38)  38,639     74,482      (76)    74,558

    Operating expenses:
     Research and
      development      3,207         -    3,207      6,044        -      6,044
     Sales and
      marketing       18,174         -   18,174     35,103        -     35,103
     General and
      administrative   3,806         -    3,806      7,387        -      7,387
     Amortization of
      deferred stock-based
      compensation:
      Research and
       development        73        73        -        153      153         -
      Sales and
       marketing         124       124        -        273      273         -
      General and
       administrative     89        89        -        183      183         -
        Total operating
         expenses     25,473       286   25,187     49,143      609    48,534
     Income from
      operations      13,128      (324)  13,452     25,339     (685)   26,024
     Interest income     897         -      897      1,668        -     1,668
     Other expense      (780)        -     (780)      (834)       -      (834)
     Income before
      income taxes    13,245      (324)  13,569     26,173     (685)   26,858
     Provision for
      income taxes     4,944      (325)   5,269     10,012     (371)   10,383
     Net income      $ 8,301       $ 1  $ 8,300   $ 16,161   $ (314) $ 16,475

     Net income per share
      Basic           $ 0.26             $ 0.26     $ 0.51             $ 0.52
      Diluted         $ 0.25             $ 0.25     $ 0.48             $ 0.49
     Weighted average shares outstanding

      for net income per share:
      Basic           32,146             32,146     31,901             31,901
      Diluted         33,716             33,716     33,480             33,480


                                NETGEAR, INC.
                       GAAP TO NON-GAAP RECONCILIATION
                    (in thousands, except per share data)
                                 (Unaudited)

                           Three months ended             Six months ended
                             June 27, 2004                  June 27, 2004
                        GAAP  Excluded  Non-GAAP   GAAP   Excluded   Non-GAAP

    Net revenue     $ 88,372     $-   $ 88,372   $ 176,797   $-     $ 176,797

    Cost of revenue:
     Cost of revenue  59,975      -     59,975     120,874    -       120,874
     Amortization of
      deferred stock-based
      compensation        40     40         -           82    82            -
     Total Cost of
      revenue         60,015     40    59,975      120,956    82      120,874
    Gross profit      28,357    (40)   28,397       55,841   (82)      55,923

    Operating expenses:
     Research and
      development      2,277      -     2,277        4,620     -        4,620
     Sales and
      marketing       15,048      -    15,048       29,816     -       29,816
     General and
      administrative   3,213      -     3,213        6,395     -        6,395
     Amortization of
      deferred stock-based
      compensation:
     Research and
      development        119    119        -           237   237           -
    Sales and marketing  189    189        -           377   377           -
    General and
     administrative       97     97        -           194   194           -
      Total operating
       expenses       20,943    405   20,538        41,639   808      40,831
    Income from
     operations        7,414   (445)   7,859        14,202  (890)     15,092
    Interest income      321      -      321           544     -         544
    Other income         206      -      206           103     -         103
    Income before
     income taxes      7,941   (445)   8,386        14,849   (890)    15,739
    Provision for
     income taxes      3,066      -    3,066         5,824      -      5,824
    Net income       $ 4,875 $ (445) $ 5,320       $ 9,025 $ (890)   $ 9,915

    Net income per share
      Basic           $ 0.16          $ 0.18        $ 0.30            $ 0.33
      Diluted         $ 0.15          $ 0.17        $ 0.28            $ 0.31

    Weighted average
     shares outstanding
     for net income per share
      Basic           30,367          30,367        29,951            29,951
      Diluted         32,238          32,238        32,348            32,348


                                NETGEAR, INC.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                 (unaudited)

                                                       July 3,    December 31,
                                                         2005           2004
    ASSETS
    Current assets:
     Cash and cash equivalents                       $ 74,252       $ 65,052
     Short-term investments                            73,686         76,663
     Accounts receivable, net                          77,982         82,203
     Inventories                                       44,106         53,557

     Deferred income taxes                             12,423         11,475

     Prepaid expenses and other current assets          7,218          7,151
       Total current assets                           289,667        296,101
    Property and equipment, net                         4,331          3,579
    Goodwill, net                                         558            558
       Total assets                                 $ 294,556      $ 300,238

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
     Accounts payable                                $ 22,428       $ 52,742
     Accrued employee compensation                      5,983          5,534
     Other accrued liabilities                         49,624         50,966
     Deferred revenue                                   2,672          2,143
     Income taxes payable                                 918          3,659
       Total current liabilities                       81,625        115,044

    Stockholders' equity:

     Common stock                                          32             31
     Additional paid-in capital                       199,788        188,900
     Deferred stock-based compensation                 (1,119)        (1,882)
     Other comprehensive income (loss)                    (83)            (7)
     Retained earnings (accumulated deficit)           14,313         (1,848)
      Total stockholders' equity                      212,931        185,194
      Total liabilities and stockholders' equity    $ 294,556      $ 300,238


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