Delivers Double Digit Revenue Growth to $280 million Expects Strong Demand Trend to Continue in 2H2020
SAN JOSE, Calif.--(BUSINESS WIRE)-- NETGEAR, Inc. (NASDAQ: NTGR), a global networking company that delivers innovative networking and Internet connected products to consumers and businesses, today reported financial results for the second quarter ended June 28, 2020.
The accompanying schedules provide a reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis.
Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, “The NETGEAR team navigated challenging conditions to accommodate the robust end demand we saw during the quarter, all while working remotely. Driven by the CHP side of the business, we achieved revenue growth of 21% and more than doubled our operating profit over the prior year. The surge in demand that began in March continued throughout the entire quarter and resulted in strong growth in both the retail and service provider channels for the CHP business. The work-from-home transition taking place worldwide is driving the adoption of high performance WiFi at home as an indispensable necessity and, as the leader in WiFi 6 technology, we stand well positioned to enable this new reality. In conjunction with the increased penetration of high-end WiFi 6 mesh systems and routers into the market, we accelerated the acquisition of new service subscribers, particularly in cybersecurity protection and parental control services, growing our paid subscriber base 28% sequentially and putting us on a trajectory to exceed our goal of doubling our subscriber count in 2020.”
Mr. Lo continued, “As many employees continue to work from home today, companies are growing increasingly confident that their workforce can be productive remotely and are beginning to measure the positive aspects of remote work. This is driving a consensus that remote work will be a larger part of the landscape even as the pandemic eventually eases. As a result, we see strong demand for high performance home WiFi continuing to fuel our revenue growth at least through the rest of this year. While providing an unexpected tailwind for CHP, the pandemic has at the same time created a headwind for SMB. That said, our SMB business benefited from the opportunity to drive sales of more sophisticated home office setups, including low port count switches and commercial grade WiFi. Within SMB, we continue to see success in our ProAV business and expect it to grow during the next two quarters. Nevertheless, uncertainty still exists in our SMB business as reopening plans in some economies have stalled, or even taken steps backwards, as is the case in the United States. Unhindered by remote work, our teams continued to deliver important new products to the market, including another WiFi 6 Orbi mesh product and two new POE+ switches. Our 5G mobile hotspots shipped in material volume in Q2, and we see the expanded use of mobile hotspots continuing in the second half as people increasingly take to the road or seek more flexible WiFi solutions, and as more schools equip underprivileged students with hotspots to provide high speed WiFi access for remote learning.”
Bryan Murray, Chief Financial Officer of NETGEAR, added, “We had another quarter of strong cash flow, generating $63.2 million in cash from operations in the second quarter. Additionally, in Q2, we repurchased approximately 315,000 shares of common stock for $7.5 million. Although the full economic impact and duration of the current pandemic remain unclear, we believe we are well positioned to serve the demand trends we are currently seeing in the marketplace. Preserving strong liquidity and generating cash are paramount during these uncertain times, and we are confident in our ability to do so through the remainder of this year.”
Business Outlook
Mr. Murray continued, “While we are confident in the ongoing strength of end market demand for home networks, there is still considerable uncertainty around the slowing or reversals of re-openings, new waves of COVID-19 and by extension the speed of the economic recovery worldwide in the second half of 2020. This makes our most profitable business, SMB, difficult to forecast, and heightens the risk of supply chain disruption. Given this, we feel it is prudent to continue to suspend our practice of giving guidance for Q3 and full year 2020.”
Investor Conference Call / Webcast Details
NETGEAR will review the second quarter results and discuss management's expectations for the third quarter of 2020 today, Wednesday, July 22, 2020 at 5 p.m. ET (2 p.m. PT). The toll free dial-in number for the live audio call is (844) 709-2008. The international dial-in number for the live audio call is (647) 253-8663. The conference ID for the call is 1778426. A live webcast of the conference call will be available on NETGEAR's Investor Relations website at http://investor.netgear.com. A replay of the call will be available via the web at http://investor.netgear.com.
About NETGEAR, Inc.
NETGEAR (NASDAQ: NTGR) has pioneered advanced networking technologies for homes, businesses, and service providers around the world since 1996 and leads the industry with a broad range of award-winning products designed to simplify and improve people’s lives. By enabling people to collaborate and connect to a world of information and entertainment, NETGEAR is dedicated to delivering innovative and advanced connected solutions ranging from mobile and cloud-based services for enhanced control and security, to smart networking products, video over Ethernet for Pro AV applications, easy-to-use WiFi solutions and performance gaming routers to enhance online game play. NETGEAR products are sold in approximately 25,000 retail locations around the globe, and through approximately 19,000 value-added resellers, as well as multiple major cable, mobile and wireline service providers around the world. The company's headquarters are in San Jose, Calif., with additional offices in approximately 20 countries. More information is available at http://investor.netgear.com or by calling (408) 907-8000. Connect with NETGEAR at http://twitter.com/NETGEAR and http://www.facebook.com/NETGEAR.
© 2020 NETGEAR, Inc. NETGEAR and the NETGEAR logo are trademarks or registered trademarks of NETGEAR, Inc. and its affiliates in the United States and/or other countries. Other brand and product names are trademarks or registered trademarks of their respective holders. The information contained herein is subject to change without notice. NETGEAR shall not be liable for technical or editorial errors or omissions contained herein. All rights reserved.
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 words “anticipate,” “expect,” “believe,” “will,” “may,” “should,” “estimate,” “project,” “outlook,” “forecast” or other similar words are used to identify such forward-looking statements. However, the absence of these words does not mean that the statements are not forward-looking. The forward-looking statements represent NETGEAR, Inc.’s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding: NETGEAR’s future operating performance and financial condition, including expectations regarding continued profitability and cash generation; expectations regarding the timing, distribution, sales momentum and market acceptance of recent and anticipated new product introductions that position the Company for growth and market share gain; and expectations regarding NETGEAR's paid subscriber base growth, registered users and registered app users and their effect on NETGEAR's paid subscriber base. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including the following: uncertainty surrounding the duration and impact of the global COVID-19 pandemic; 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 grow its number of registered users and/or registered app users; the Company may be unable to grow its paid subscriber base; 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; the Company may fail to successfully continue to effect operating expense savings; changes in the level of NETGEAR's cash resources and the Company's planned usage of such resources, including potential repurchases of the Company’s common stock; changes in the Company's stock price and developments in the business that could increase the Company's cash needs; fluctuations in foreign exchange rates; and the actions and financial health of the Company's customers. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. 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” in the Company's quarterly report on Form 10-Q for the fiscal quarter ended March 29, 2020, filed with the Securities and Exchange Commission on May 1, 2020. Given these circumstances, you should not place undue reliance on these forward-looking statements. 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, except as required by law.
Non-GAAP Financial Information:
To supplement our unaudited selected financial data presented on a basis consistent with Generally Accepted Accounting Principles (“GAAP”), we disclose certain non-GAAP financial measures that exclude certain charges, including non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development, non-GAAP sales and marketing, non-GAAP general and administrative, non-GAAP other operating expenses, net, non-GAAP total operating expenses, non-GAAP operating income, non-GAAP operating margin, Non-GAAP other income (expense), net, non-GAAP net income and non-GAAP net income per diluted share. These supplemental measures exclude adjustments for amortization of intangibles, stock-based compensation expense, separation expense, change in fair value of contingent consideration, restructuring and other charges, litigation reserves, net, gain/loss on investments, net, and the related tax effects. These non-GAAP measures are not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. We believe that these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. We compensate for the limitations of non-GAAP financial measures by relying upon GAAP results to gain a complete picture of our performance.
In calculating non-GAAP financial measures, we exclude certain items to facilitate a review of the comparability of our operating performance on a period-to-period basis because such items are not, in our view, related to our ongoing operational performance. We use non-GAAP measures to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. In addition, management’s incentive compensation is determined using certain non-GAAP measures. Since we find these measures to be useful, we believe that investors benefit from seeing results “through the eyes” of management in addition to seeing GAAP results. We believe that these non-GAAP measures, when read in conjunction with our GAAP financials, provide useful information to investors by offering:
The following are explanations of the adjustments that we incorporate into non-GAAP measures, as well as the reasons for excluding them in the reconciliations of these non-GAAP financial measures:
Amortization of intangibles consists primarily of non-cash charges that can be impacted by, among other things, the timing and magnitude of acquisitions. We consider our operating results without these charges when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such charges when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of our competitors.
Stock-based compensation expense consists of non-cash charges for the estimated fair value of stock options, restricted stock units and shares under the employee stock purchase plan granted to employees. We believe that the exclusion of these charges provides for more accurate comparisons of our operating results to peer companies due to the varying available valuation methodologies, subjective assumptions and the variety of award types. In addition, we believe it is useful to investors to understand the specific impact stock-based compensation expense has on our operating results.
Other items consist of certain items that are the result of either unique or unplanned events, including, when applicable: separation expense, change in fair value of contingent consideration, restructuring and other charges, litigation reserves, net, and gain/loss on investments, net. It is difficult to predict the occurrence or estimate the amount or timing of these items in advance. Although these events are reflected in our GAAP financial statements, these unique transactions may limit the comparability of our on-going operations with prior and future periods. The amounts result from events that often arise from unforeseen circumstances, which often occur outside of the ordinary course of continuing operations. Therefore, the amounts do not accurately reflect the underlying performance of our continuing business operations for the period in which they are incurred.
Tax effects consist of the various above adjustments that we incorporate into non-GAAP measures in order to provide a more meaningful measure on non-GAAP net income. We also believe providing financial information with and without the income tax effects relating to our non-GAAP financial measures provides our management and users of the financial statements with better clarity regarding the on-going performance of our business.
Source: NETGEAR-F
NETGEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
As of
June 28, 2020
December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
$
252,633
190,208
Short-term investments
5,919
5,499
Accounts receivable, net
277,490
277,168
Inventories
150,585
235,489
Prepaid expenses and other current assets
34,655
35,745
Total current assets
721,282
744,109
Property and equipment, net
15,536
17,683
Operating lease right-of-use assets, net
31,774
28,917
Intangibles, net
6,915
10,104
Goodwill
80,721
Other non-current assets
72,743
74,279
Total assets
928,971
955,813
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
76,086
80,531
Accrued employee compensation
22,793
20,024
Other accrued liabilities
163,079
189,547
Deferred revenue
8,171
6,450
Income taxes payable
805
1,839
Total current liabilities
270,934
298,391
Non-current income taxes payable
15,505
15,307
Non-current operating lease liabilities
27,749
25,434
Other non-current liabilities
8,637
7,988
Total liabilities
322,825
347,120
Stockholders’ equity:
Common stock
30
Additional paid-in capital
853,137
831,365
Accumulated other comprehensive income
7
21
Accumulated deficit
(247,028
)
(222,723
Total stockholders’ equity
606,146
608,693
Total liabilities and stockholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and percentage data)
Three Months Ended
Six Months Ended
March 29, 2020
June 30, 2019
Net revenue
280,052
229,963
230,852
510,015
479,934
Cost of revenue
198,751
163,722
165,407
362,473
332,481
Gross profit
81,301
66,241
65,445
147,542
147,453
Gross margin
29.0
%
28.8
28.3
28.9
30.7
Operating expenses:
Research and development
21,144
19,739
18,814
40,883
37,646
Sales and marketing
34,384
33,031
34,541
67,415
70,396
General and administrative
15,481
13,134
10,463
28,615
23,580
Other operating expenses (income), net
1,425
(332
1,301
1,093
1,497
Total operating expenses
72,434
65,572
65,119
138,006
133,119
Income from operations
8,867
669
326
9,536
14,334
Operating margin
3.2
0.3
0.1
1.9
3.0
Interest income, net
49
262
782
311
1,483
Other income (expense), net
314
(4,586
487
(4,272
828
Income (loss) before income taxes
9,230
(3,655
1,595
5,575
16,645
Provision for income taxes
3,247
518
756
3,765
2,963
Net income (loss)
5,983
(4,173
839
1,810
13,682
Net income (loss) per share:
Basic
0.20
(0.14
0.03
0.06
0.44
Diluted
0.42
Weighted average shares used to compute net income (loss) per share:
29,617
29,583
31,246
29,608
31,365
30,070
32,112
30,079
32,518
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES
(In thousands, except percentage data)
STATEMENT OF OPERATIONS DATA:
GAAP gross profit
GAAP gross margin
Amortization of intangibles
179
178
357
Stock-based compensation expense
1,501
705
755
2,206
1,423
Non-GAAP gross profit
82,981
67,124
66,378
150,105
149,233
Non-GAAP gross margin
29.6
29.2
29.4
31.1
GAAP research and development
(1,707
(1,034
(1,288
(2,741
(2,480
Non-GAAP research and development
19,437
18,705
17,526
38,142
35,166
GAAP sales and marketing
(1,340
(1,341
(1,504
(2,681
(3,335
(1,890
(1,779
(2,085
(3,669
(4,126
Non-GAAP sales and marketing
31,154
29,911
30,952
61,065
62,935
GAAP general and administrative
(4,074
(2,818
(2,611
(6,892
(5,168
Non-GAAP general and administrative
11,407
10,316
7,852
21,723
18,412
GAAP other operating expenses (income), net
Separation expense
—
(264
Change in fair value of contingent consideration
(311
222
(89
Restructuring and other charges
(1,117
135
(1,291
(982
(1,223
Litigation reserves, net
3
(25
(10
(22
Non-GAAP other operating expenses, net
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)
STATEMENT OF OPERATIONS DATA (CONTINUED):
GAAP total operating expenses
(7,671
(5,631
(5,984
(13,302
(11,774
Non-GAAP total operating expenses
61,998
58,932
56,330
120,930
116,513
GAAP operating income
GAAP operating margin
1,519
1,682
3,038
3,692
9,172
6,336
6,739
15,508
13,197
264
(222
89
1,117
(135
1,291
982
1,223
(3
25
10
22
Non-GAAP operating income
20,983
8,192
10,048
29,175
32,720
Non-GAAP operating margin
7.5
3.6
4.4
5.7
6.8
GAAP other income (expense), net
Gain/loss on investments, net
4,530
Non-GAAP other income (expense), net
(56
258
(In thousands, except per share data)
GAAP net income (loss)
Tax effects of above non-GAAP adjustments
(1,778
(1,511
(3,289
(3,413
Non-GAAP net income
16,321
6,369
8,854
22,690
28,655
NET INCOME (LOSS) PER DILUTED SHARE:
GAAP net income (loss) per diluted share
0.05
0.10
0.11
0.31
0.21
0.52
0.41
0.01
(0.01
0.00
0.04
(0.00)
0.15
(0.07
(0.05
(0.11
Non-GAAP net income per diluted share 1
0.54
0.28
0.75
0.88
Shares used in computing GAAP net income (loss) per diluted share
Shares used in computing non-GAAP net income per diluted share
30,045
1 The per share reconciliation of GAAP to non-GAAP may not aggregate due to both calculations utilizing a different share basis. The GAAP net loss per diluted share calculation uses a lower share count as it excludes potentially dilutive shares included in the non-GAAP net income per diluted share calculation.
SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands, except per share data, DSO, inventory turns, weeks of channel inventory, headcount and percentage data)
September 29, 2019
Cash, cash equivalents and short-term investments
258,552
209,714
195,707
171,917
218,311
Cash, cash equivalents and short-term investments per diluted share
8.60
6.98
6.35
5.40
6.80
257,582
248,070
238,635
Days sales outstanding (DSO)
90
100
102
85
94
180,602
275,584
276,316
Ending inventory turns
5.3
3.1
2.7
2.4
Weeks of channel inventory:
U.S. retail channel
6.4
7.0
8.0
8.6
10.6
U.S. distribution channel
4.2
4.5
5.4
5.5
EMEA distribution channel
4.7
6.7
5.9
5.8
4.6
APAC distribution channel
11.9
8.3
9.6
7.8
7.4
Deferred revenue (current and non-current)
10,792
8,963
8,511
7,712
12,047
Headcount
788
797
809
802
824
Non-GAAP diluted shares
30,800
31,819
NET REVENUE BY GEOGRAPHY
Americas
202,246
72
158,190
69
157,170
68
360,436
70
305,199
63
EMEA
48,359
17
42,148
18
43,091
19
90,507
100,054
APAC
29,447
11
29,625
13
30,591
59,072
12
74,681
16
Total
SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
NET REVENUE BY SEGMENT
Connected Home
230,017
164,663
167,495
394,680
336,860
SMB
50,035
65,300
63,357
115,335
143,074
Total net revenue
SERVICE PROVIDER NET REVENUE
44,152
26,687
26,901
70,839
63,719
871
922
1,668
2,398
Total service provider net revenue
45,023
27,484
27,823
72,507
66,117
View source version on businesswire.com: https://www.businesswire.com/news/home/20200722005848/en/
NETGEAR Investor Relations Erik Bylin investors@netgear.com
Source: NETGEAR, Inc.