SANTA CLARA, California - July 26, 2007 - NETGEAR, Inc. (NASDAQGM: NTGR), a worldwide provider of technologically advanced, branded networking products, today reported financial results for the second quarter ended July 1, 2007.
Net revenue for the second quarter ended July 1, 2007 was $164.3 million, a 26% increase as compared to $130.7 million for the second quarter ended July 2, 2006, and a decline of 5% as compared to $173.6 million in the first quarter of 2007. Net income, computed in accordance with GAAP, for the second quarter of 2007 was $6.1 million, or $0.17 per diluted share. This net income was a decrease of 38% compared to net income of $9.8 million for the second quarter of 2006 and a decrease of 56% compared to net income of $14.0 million in the first quarter of 2007. Diluted earnings per share, computed in accordance with GAAP, was $0.29 for the second quarter of 2006 and $0.40 for the first quarter of 2007.
Gross margin on a non-GAAP basis in the second quarter of 2007 was 35.5%, as compared to 34.8% in the year ago comparable quarter, and 34.7% in the first quarter of 2007. Non-GAAP operating margin was 11.2% in the second quarter of 2007, as compared to 11.2% in the second quarter of 2006, and 12.3% in the first quarter of 2007. In the second quarter of 2007, non-GAAP operating expenses were 24.2% of net revenue, as compared to 23.6% in the year ago comparable quarter, and 22.4% in the prior quarter.
Net income on a non-GAAP basis for the second quarter of 2007 was $13.7 million, a 30% increase compared to non-GAAP net income of $10.5 million for the second quarter of 2006, and a 12% decrease compared to non-GAAP net income of $15.6 million for the first quarter of 2007. Non-GAAP net income was $0.38 per diluted share in the second quarter of 2007, compared to $0.30 per diluted share in the second quarter of 2006 and $0.44 per diluted share in the first quarter of 2007. Non-GAAP net income for the second quarter of 2007 excludes $4.6 million of adjustments related to amortization of purchased intangibles and in-process research and development, $814,000 of impact to cost of sales from purchase accounting adjustments to inventory and $179,000 in acquisition related retention bonuses, net of taxes, related to our recent acquisitions. Non-GAAP net income for the second quarter of 2007 also excludes non-cash, stock-based compensation, net of tax, of $1.9 million. Non-GAAP net income for the second quarter of 2006 excludes non-cash, stock-based compensation, net of tax, of $622,000. Non-GAAP net income for the first quarter of 2007 excludes $254,000 of adjustments related to amortization of purchased intangibles and acquisition related retention bonuses, net of taxes, and also excludes non-cash, stock-based compensation, net of tax, of $1.3 million. 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, "Product-wise, we continue to see increased adoption of our 802.11n based products. Among the 13 new products introduced in the second quarter of 2007, notable launches included the ProSafe® Smart Wireless Switches, the 2-in-1 Powerline Network Extender that adds Powerline networking capability to an existing NETGEAR wireless or wired router, the Power over Ethernet Layer 3 10/100 stackable switch, and the VPN DSL modem router firewall. Additionally, we acquired privately-held Infrant Technologies, which expanded our product portfolio with 5 new models and a full pipeline of products for the next 12 months. This acquisition accelerates NETGEAR's participation in the expanding market for networked storage based on NAS technology. The addition of Infrant's seasoned team forms a dedicated world-class group focused on delivering storage products for the SMB and professional home users. Finally, revenue from service providers accounted for approximately 24% of total revenue in the second quarter of 2007 as compared to 21% of total revenue in the first quarter of 2007, and 15% in the second quarter of 2006."
Christine Gorjanc, Chief Accounting Officer of NETGEAR, said, "We ended the second quarter of 2007 with inventory at $85.6 million, compared to $68.4 million at the end of the first quarter 2007, and $69.3 million at the end of the second quarter of 2006. Ending inventory turns were 5.1, compared to 6.6 at the end of the first quarter of 2007, and 4.9 at the end of the second quarter of 2006. Days sales outstanding (DSO) were 75 in the second quarter of 2007, compared to 65 days in the first quarter of 2007 and 74 days in the second quarter of 2006. Cash and short-term investments were $155.8 million at the end of the second quarter of 2007, reflecting our $60.0 million cash acquisition of Infrant Technologies in the quarter; this compares to a balance of $216.2 million at the end of the first quarter of 2007, and $158.9 million at the end of the second quarter of 2006. Deferred revenue increased to $8.7 million at the end of the second quarter of 2007 as compared to deferred revenue of $5.8 million at the end of the first quarter of 2007 and $6.9 million at the end of the second quarter of 2006."
The U.S. retail channel inventory ended the second quarter of 2007 at 11.3 weeks compared to 13.3 weeks in the second quarter of 2006 and 10.4 weeks in the first quarter of 2007. U.S. distribution channel inventory ended the second quarter of 2007 at 5.2 weeks, as compared to 4.7 weeks in the second quarter of 2006, and 4.4 weeks in the first quarter of 2007. European distribution channel inventory ended the second quarter of 2007 at approximately 4.8 weeks, as compared to approximately 6.1 weeks in the second quarter of 2006 and 5.0 weeks in the first quarter of 2007. Asia Pacific distribution channel inventory ended the second quarter of 2007 at approximately 4.6 weeks, as compared to approximately 5.1 weeks in the second quarter of 2006, and 5.1 weeks in the first quarter of 2007.
Net revenue by geography comprises gross revenue less such items as marketing incentives paid to customers, sales returns and price protection. The following table shows net revenue by geography for the periods indicated:
Looking forward, Mr. Lo added, "We experienced difficulties in overcoming the seasonal weakness in the second quarter, which challenged our revenue achievement and our operating margin. Now as we begin the traditionally stronger second half of the year, we believe our new product line-up and expected gains from our acquisitions should allow us to capture the seasonal uplift relative to our second quarter level. Our focus remains on executing our strategy which is continuous growth through the expansion in product line-up, channel penetration, and entry into new geographic markets. We expect the seasonally strong third quarter net revenue to be approximately $178.0 million to $182.0 million, with non-GAAP operating margin in the range of 11.0% to 12.0%. Finally, we expect the non-GAAP effective tax rate to be approximately 36.5%."
Investor Conference Call / Webcast Details
NETGEAR will review the second quarter and 2007 results and discuss management's expectations for the third quarter of 2007 today, Thursday, July 26, 2007 at 5 p.m. EDT (2 p.m. PDT). The dial-in number for the live audio call is (201) 689-8560. A live webcast of the conference call will be available on NETGEAR's website at www.netgear.com. A replay of the call will be available 2 hours following the call through midnight EDT (9 p.m. PDT) on Thursday, August 2, 2007 by telephone at (201) 612-7415 and via the web at www.netgear.com. The account number to access the phone replay is 3055 and the conference ID number is 246520.
About NETGEAR, Inc.
NETGEAR (NASDAQGM: 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.
© 2007 NETGEAR, Inc. NETGEAR, the NETGEAR logo and ProSafe 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. Maximum wireless signal rate derived from IEEE Standard 802.11 specifications. Actual data throughput will vary. Network conditions and environmental factors, including volume of network traffic, building materials and construction, and network overhead, lower actual data throughput.
Executive Vice President, Investor Relations
The Ruth Group
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; product performance may be adversely affected by real world operating conditions; the Company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the Company's products or 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 "Part II - Item 1A. Risk Factors," pages 20 through 29, in the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 1, 2007, filed with the Securities and Exchange Commission on May 11, 2007. 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.