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 DetailsNETGEAR 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 [email protected]David Pasquale Executive Vice President, Investor Relations The Ruth Group (646) 536-7006 [email protected]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