SANTA CLARA, California – October 25, 2007 – NETGEAR, Inc. (NASDAQGM: NTGR), a worldwide provider of technologically advanced, branded networking products, today reported financial results for the third quarter ended September 30, 2007.
Net revenue for the third quarter ended September 30, 2007 was $191.7 million, a 26% increase as compared to $151.6 million for the third quarter ended October 1, 2006, and an increase of 17% as compared to $164.3 million in the second quarter ended July 1, 2007. Net income, computed in accordance with GAAP, for the third quarter of 2007 was $13.3 million, or $0.37 per diluted share. This net income was an increase of 66% compared to net income of $8.0 million for the third quarter of 2006 and an increase of 118 % compared to net income of $6.1 million in the second quarter of 2007. Diluted earnings per share, computed in accordance with GAAP, was $0.23 for the third quarter of 2006 and $0.17 for the second quarter of 2007.
Gross margin on a non-GAAP basis in the third quarter of 2007 was 34.0%, as compared to 33.5% in the year ago comparable quarter, and 35.5% in the second quarter of 2007. Non-GAAP operating margin was 11.7% in the third quarter of 2007, as compared to 11.9% in the third quarter of 2006, and 11.2% in the second quarter of 2007. In the third quarter of 2007, non-GAAP operating expenses were 22.3% of net revenue, as compared to 21.6% in the year ago comparable quarter, and 24.2% in the prior quarter.
Net income on a non-GAAP basis for the third quarter of 2007 was $16.0 million, a 34% increase compared to non-GAAP net income of $11.9 million for the third quarter of 2006, and a 17% increase compared to non-GAAP net income of $13.7 million for the second quarter of 2007. Non-GAAP net income was $0.44 per diluted share in the third quarter of 2007, compared to $0.35 per diluted share in the third quarter of 2006 and $0.38 per diluted share in the second quarter of 2007. Non-GAAP net income for the third quarter of 2007 excludes $811,000 of adjustments related to amortization of purchased intangibles and acquisition related retention bonuses, net of taxes, related to our recent acquisitions. Non-GAAP net income for the third quarter of 2007 also excludes non-cash, stock-based compensation, net of tax, of $1.8 million and $124,000 in litigation reserves, net of tax. Non-GAAP net income for the third quarter of 2006 excludes $3.0 million of adjustments related to amortization of purchased intangibles, in-process research and development, as well as acquisition related retention bonuses, net of taxes. Non-GAAP net income for the third quarter of 2006 also excludes non-cash, stock-based compensation, net of tax of $910,000. 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. 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, "This was another strong quarter for us. Revenue growth was ahead of our prior guidance led by robust back-to-school sales in North America, and strong demand in EMEA (Europe, Middle East and Africa) and Asia Pacific regions. Broadband penetration continues to increase at a steady pace worldwide among both homes and small businesses. Response has been very encouraging for our recently launched NETGEAR branded ReadyNAS™ line, making it one of the fastest ramping new products in our history. ReadyNAS is paralleling the initial rapid growth rate of our ProSafe® Smart Switches and RangeMax routers, which have been solid contributors for the past 3 years. We introduced an additional 10 new products in the quarter, including 2 new configurations in our ReadyNAS line. Net revenue from service providers in the third quarter was approximately 22% of total net revenue as compared to 24% in the second quarter of 2007, and 23% in the third quarter of 2006."
Christine Gorjanc, Chief Accounting Officer of NETGEAR, said, "We ended the third quarter of 2007 with net inventory at $79.3 million, compared to $85.6 million at the end of the second quarter 2007, and $77.8 million at the end of the third quarter of 2006. Ending inventory turns were 6.5, compared to 5.1 at the end of the second quarter of 2007, and 5.2 at the end of the third quarter of 2006. Days sales outstanding (DSO) were 66 in the third quarter of 2007, compared to 75 days in the second quarter of 2007 and 71 days in the third quarter of 2006. Cash, cash equivalents and short-term investments were $177.2 million at the end of the third quarter of 2007, compared to $155.8 million at the end of the second quarter of 2007, and $151.1 million at the end of the third quarter of 2006. Deferred revenue decreased to $7.8 million at the end of the third quarter of 2007, compared to deferred revenue of $12.5 million at the end of the third quarter of 2006, and $8.7 million at the end of the second quarter of 2007."
The U.S. retail channel inventory ended the third quarter of 2007 at 8.8 weeks, compared to 10.6 weeks in the third quarter of 2006, and 11.3 weeks in the second quarter of 2007. U.S. distribution channel inventory ended the third quarter of 2007 at 4.2 weeks, compared to 6.3 weeks in the third quarter of 2006, and 5.2 weeks in the second quarter of 2007. European distribution channel inventory ended the third quarter of 2007 at approximately 4.9 weeks, compared to approximately 3.8 weeks in the third quarter of 2006, and 4.8 weeks in the second quarter of 2007. Asia Pacific distribution channel inventory ended the third quarter of 2007 at approximately 4.7 weeks, compared to approximately 4.3 weeks in the third quarter of 2006, and 4.6 weeks in the second 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, "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. In NETGEAR's case, our attractive industrial design, ease of installation, superior performance, and compatibility with popular devices continue to give us a competitive edge. We believe our competitive edge has helped us gain share in the U.S., while further expanding our leadership in the EMEA region and propelling our growth in Asia Pacific. We expect the seasonally strong fourth quarter net revenue to be approximately $195 million to $200 million, with non-GAAP operating margin in the range of 11% to 12%. Finally, we expect the non-GAAP effective tax rate to be approximately 38.0%."
Investor Conference Call / Webcast Details
NETGEAR will review the third quarter 2007 results and discuss management's expectations for the fourth quarter of 2007 today, Thursday, October 25, 2007 at 5 p.m. EDT (2 p.m. PDT). The dial-in number for the live audio call is (201) 689-8470. A live webcast of the conference call will be available on NETGEAR's website at www.netgear.comwww.netgear.com. The account number to access the phone replay is 3055 and the conference ID number is 257788.
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, ProSafe and ReadyNAS 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.
Contact:
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; 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 27 through 37, in the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2007, filed with the Securities and Exchange Commission on August 10, 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.