SMB business delivers record revenue; 20% year over year growth
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 July 3, 2022.
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, “In the second quarter, we delivered both revenue and non-GAAP operating margin above the high end of our guidance range. Strong execution by our team in navigating supply chain headwinds drove the outperformance, most notably for our ProAV managed switch, super premium WiFi mesh and 5G mobile hotspot products, and, as a result, each of these categories delivered double-digit year over year growth. This improved supply picture fueled strength in our SMB business, which delivered record quarterly revenue, and sales to our service provider customers, and we expect this momentum to continue into the second half as demand remains robust and our supply situation continues to improve.”
Mr. Lo continued, “Within our CHP business, we are pleased with our progress in growing the super-premium mesh market. This once again reinforces our strategy of focusing primarily on the premium, higher margin segments of the market and targeting those consumers with the highest propensity to subscribe to our service offerings. Accordingly, we continue to make progress growing our services business, ending the quarter with 654,000 paid subscribers, and remain on track towards our end of the year target of 750,000 subscribers.”
Bryan Murray, Chief Financial Officer of NETGEAR, added, “During the second quarter of 2022, we repurchased approximately 678,000 shares of common stock for $15.0 million. Preserving strong liquidity and generating cash remain paramount as the pandemic and its related supply chain challenges continue to persist. We expect to continue to opportunistically repurchase shares in future periods.”
Business Outlook
Mr. Murray continued, “With solid demand and improving supply, we expect SMB and the service provider channel to continue to gain momentum in the back half of the year. We expect third quarter revenue from the service provider channel will be approximately $40 million, and SMB revenue to grow sequentially. With some of our US retail customers intending to shrink their inventory positions further, we expect to continue working with them in the coming quarter to optimize their inventory levels. Together, these factors lead us to expect our third quarter net revenue to be in the range of $240 million to $255 million. While the supply picture continues to improve, we still expect to spend on airfreight to maximize our SMB revenue. As a result of these factors, our GAAP operating margin for the third quarter is expected to be in the range of (1.0)% to 0.0%, and non-GAAP operating margin is expected to be in the range of 1.5% to 2.5%. Our GAAP tax rate is expected to be approximately 22.0%, and our non-GAAP tax rate is expected to be 15.0% for the third quarter of 2022.
While we are confident in our ability to provide guidance at this time, we do so with the caveat that considerable uncertainty remains in the market due to the COVID-19 pandemic and supply chain conditions continuing to remain challenged and, should unforeseen events occur, in particular challenges related to closures affecting our manufacturing partners’ operations, increased transportation delays into any of our regional distribution or manufacturing centers, greater than expected freight or component costs, or lower than expected end market demand, our actual results could differ from the foregoing guidance.”
A reconciliation between the Business Outlook on a GAAP and non-GAAP basis is provided in the following table:
Three months ending
October 2, 2022
Operating Margin Rate
Tax Rate
GAAP
(1.0)% - 0.0%
22.0
%
Estimated adjustments for1:
Stock-based compensation expense
2.4
-
Amortization of intangibles
0.1
Non-GAAP tax adjustments
(7.0
)%
Non-GAAP
1.5% - 2.5%
15.0
1 Business outlook does not include estimates for any currently unknown income and expense items which, by their nature, could arise late in a quarter, including: litigation reserves, net; acquisition-related charges; impairment charges; restructuring and other charges and discrete tax benefits or detriments that cannot be forecasted (e.g., windfalls or shortfalls from equity awards or items related to the resolution of uncertain tax positions). New material income and expense items such as these could have a significant effect on our guidance and future GAAP results.
Investor Conference Call / Webcast Details
NETGEAR will review the second quarter results and discuss management's expectations for the third quarter of 2022 today, Wednesday, July 27, 2022 at 5 p.m. ET (2 p.m. PT). The toll-free dial-in number for the live audio call is (888) 660-6468. The international dial-in number for the live audio call is (929) 201-5709. The conference ID for the call is 1030183. 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.
For more than 25 years, NETGEAR® (NASDAQ: NTGR) has been the innovative leader in connecting the world to the internet with advanced networking technologies for homes, businesses and service providers around the world. As staying connected has become more important than ever, NETGEAR delivers award-winning network solutions for remote work, distance learning, ultra high def streaming, online game play and more. To enable people to collaborate and connect to a world of information and entertainment, NETGEAR is dedicated to providing a range of connected solutions. From ultra-premium Orbi Mesh WiFi systems and high performance Nighthawk routers, to high-speed cable modems and 5G mobile wireless products to cloud-based subscription services for network management and security, to smart networking products and Video over Ethernet for Pro AV applications, NETGEAR keeps you connected. NETGEAR is headquartered in San Jose, California. Learn more on the NETGEAR Investor Page or by calling (408) 907-8000. Connect with NETGEAR: Twitter, Facebook, Instagram, LinkedIn and the NETGEAR blog at NETGEAR.com.
© 2022 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 revenue, continued profitability and cash generation; expectations regarding continuing market demand for the Company’s products and the Company’s ability to respond to this demand; the Company’s strategic shift to focusing on the premium, higher-margin segments of the market and targeting consumers with the highest propensity to subscribe to NETGEAR’s service offerings; 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; expectations regarding supply constraints and inventory management; expectations regarding the ability to participate in promotional activities leading to further market share gains; expectations regarding expected tax rates; expectations regarding the impact of higher transportation and component costs and corresponding price increases; expectations regarding spending in transportation costs to maximize revenue; expectations regarding repurchases of the Company’s common stock; expectations regarding the Company’s small and medium business and service provider channel; expectations regarding price increases on NETGEAR's products; and expectations regarding NETGEAR's paid subscriber base growth. 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, including with respect to the Company’s supply chain, closures affecting the operations of the Company’s manufacturing partners and potential disruptions in the Company’s transportation network, including with respect to the Company’s distribution centers; future demand for the Company's products may be lower than anticipated; the Company’s shift in focus to premium products at the expense of lower end products may not prove to be successful; the Company may be unsuccessful, or experience delays, in manufacturing and distributing its new and existing products; consumers may choose not to adopt the Company's new product offerings or adopt competing products; the Company may be unable to continue to grow its number of registered users, its number of registered app users and/or its paid subscriber base; product performance may be adversely affected by real world operating conditions; the Company may fail to manage costs, including the cost of key components, the cost of air freight and ocean freight, and the cost of developing new products and manufacturing and distribution of its existing offerings; the Company may fail to successfully manage channel inventory levels; 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, including the Company’s ability to collect receivables as they become due. 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 April 3, 2022, filed with the Securities and Exchange Commission on May 6, 2022. 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 (loss), non-GAAP operating margin, non-GAAP other income (expenses), net, non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. These supplemental measures exclude adjustments for amortization of intangibles, stock-based compensation expense, change in fair value of contingent consideration, goodwill impairment, restructuring and other charges, litigation reserves, net, gain/loss on investments, net, and adjust for effects related to non-GAAP tax adjustments. 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, performance shares 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: change in fair value of contingent consideration, goodwill impairment, 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.
Non-GAAP tax adjustments consist of adjustments that we incorporate into non-GAAP measures in order to provide a more meaningful measure on non-GAAP net income (loss). We 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. Non-GAAP income tax expense is computed on a current and deferred basis with non-GAAP income consistent with use of non-GAAP income as a performance measure. The Non-GAAP tax provision is calculated by adjusting the GAAP tax provision for the impact of the non-GAAP adjustments, with specific tax provisions such as state income tax and Base-erosion and Anti-Abuse Tax recomputed on a non-GAAP basis. For interim periods, the non-GAAP income tax provision is calculated based on the forecasted annual non-GAAP tax rate before discrete items and adjusted for interim discrete items. Included in the non-GAAP tax adjustments for the three and six months ended July 3, 2022 are adjustments to tax expense related to changes in our forecasts.
Source: NETGEAR-F
NETGEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
July 3, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
$
149,049
263,772
Short-term investments
101,088
7,744
Accounts receivable, net
217,873
261,158
Inventories
300,796
315,667
Prepaid expenses and other current assets
30,698
34,752
Total current assets
799,504
883,093
Property and equipment, net
11,592
13,335
Operating lease right-of-use assets
39,703
23,176
Intangibles, net
1,586
1,856
Goodwill
36,279
80,721
Other non-current assets
86,868
76,350
Total assets
975,532
1,078,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
69,806
73,729
Accrued employee compensation
21,767
24,704
Other accrued liabilities
194,099
224,584
Deferred revenue
18,398
16,500
Income taxes payable
1,092
1,528
Total current liabilities
305,162
341,045
Non-current income taxes payable
16,709
18,990
Non-current operating lease liabilities
34,230
18,569
Other non-current liabilities
3,202
3,112
Total liabilities
359,303
381,716
Stockholders’ equity:
Common stock
29
Additional paid-in capital
936,424
923,228
Accumulated other comprehensive income
69
149
Accumulated deficit
(320,293
)
(226,591
Total stockholders’ equity
616,229
696,815
Total liabilities and stockholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and percentage data)
Three Months Ended
Six Months Ended
April 3, 2022
June 27, 2021
Net revenue
223,224
210,558
308,811
433,782
626,736
Cost of revenue
161,803
151,655
215,455
313,458
422,439
Gross profit
61,421
58,903
93,356
120,324
204,297
Gross margin
27.5
28.0
30.2
27.7
32.6
Operating expenses:
Research and development
22,205
23,821
22,586
46,026
46,415
Sales and marketing
34,546
35,586
35,740
70,132
73,555
General and administrative
14,147
13,602
15,623
27,749
31,028
Goodwill impairment
—
44,442
Other operating expenses (income), net
573
(3
(2,097
570
468
Total operating expenses
71,471
117,448
71,852
188,919
151,466
Income (loss) from operations
(10,050
(58,545
21,504
(68,595
52,831
Operating margin
-4.5
(27.8
7.0
(15.8
8.4
Other income (expenses), net
(820
(982
699
(1,802
147
Income (loss) before income taxes
(10,870
(59,527
22,203
(70,397
52,978
Provision for (benefit from) income taxes
(2,336
(2,317
4,369
(4,653
12,184
Net income (loss)
(8,534
(57,210
17,834
(65,744
40,794
Net income (loss) per share:
Basic
(0.30
(1.95
0.58
(2.26
1.33
Diluted
0.57
1.29
Weighted average shares used to compute net income (loss) per share:
28,891
29,350
30,574
29,114
30,614
31,464
31,648
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
5,398
7,881
Stock-based compensation
9,826
13,862
Gain/loss on investments, net
593
8
Change in fair value of contingent consideration
(3,003
Deferred income taxes
(10,862
7,083
Provision for excess and obsolete inventory
2,561
2,255
Changes in assets and liabilities:
43,285
46,455
12,310
(81,907
Prepaid expenses and other assets
4,920
(4,367
(5,322
(20,477
(2,937
(2,291
(31,299
4,760
1,992
1,859
(2,717
(4,402
Net cash provided by operating activities
6,446
8,510
Cash flows from investing activities:
Purchases of short-term investments
(114,631
(152
Proceeds from maturities of short-term investments
20,417
165
Purchases of property and equipment
(2,037
(4,556
Purchases of long-term investments
(330
(340
Net cash used in investing activities
(96,581
(4,883
Cash flows from financing activities:
Repurchases of common stock
(24,377
(24,999
Restricted stock unit withholdings
(3,581
(5,915
Proceeds from exercise of stock options
612
6,863
Proceeds from issuance of common stock under employee stock purchase plan
2,758
2,905
Net cash used in financing activities
(24,588
(21,146
Net decrease in cash and cash equivalents
(114,723
(17,519
Cash and cash equivalents, at beginning of period
346,460
Cash and cash equivalents, at end of period
328,941
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES
(In thousands, except percentage data)
GAAP gross profit
GAAP gross margin
128
129
178
257
357
358
386
362
744
1,196
Non-GAAP gross profit
61,907
59,418
93,896
121,325
205,850
Non-GAAP gross margin
28.2
30.4
32.8
GAAP research and development
(1,095
(1,087
(1,272
(2,182
(2,418
Non-GAAP research and development
21,110
22,734
21,314
43,844
43,997
GAAP sales and marketing
(1,266
(1,570
(1,456
(1,953
(3,026
(3,733
Non-GAAP sales and marketing
32,976
34,130
33,787
67,106
68,556
GAAP general and administrative
(2,106
(1,768
(3,315
(3,874
(6,515
Non-GAAP general and administrative
12,041
11,834
12,308
23,875
24,513
GAAP other operating expenses (income), net
3,003
Restructuring and other charges
(573
23
(886
(550
(3,156
Litigation reserves, net
(20
(315
Non-GAAP other operating expenses, net
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)
GAAP total operating expenses
(4,771
(4,311
(6,540
(9,082
(12,666
(44,442
Non-GAAP total operating expenses
66,127
68,698
67,409
134,825
137,066
GAAP operating income (loss)
GAAP operating margin
(4.5
1,623
5,129
4,697
6,902
(23
886
550
3,156
20
315
Non-GAAP operating income (loss)
(4,220
(9,280
26,487
(13,500
68,784
Non-GAAP operating margin
(1.9
(4.4
8.6
(3.1
11.0
GAAP other income (expenses), net
(216
519
(41
303
Non-GAAP other income (expenses), net
(1,036
(463
658
(1,499
155
(In thousands, except per share data)
GAAP net income (loss)
(2,552
(709
(1,971
(3,261
(4,387
Non-GAAP net income (loss)
(5,472
(8,135
20,805
(13,607
52,368
NET INCOME (LOSS) PER DILUTED SHARE:
GAAP net income (loss) per diluted share
0.00
0.01
0.05
0.18
0.16
0.22
0.34
0.44
(0.10
(0.09
1.51
1.53
0.02
(0.00)
0.03
0.10
(0.01
(0.08
(0.02
(0.07
(0.12
(0.15
Non-GAAP net income (loss) per diluted share
(0.19
(0.28
0.66
(0.47
1.65
SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands, except per share data, DSO, inventory turns, weeks of channel inventory, headcount and percentage data)
October 3, 2021
Cash, cash equivalents and short-term investments
250,137
263,788
271,516
292,195
335,319
Cash, cash equivalents and short-term investments per diluted share
8.66
8.99
9.10
9.49
10.66
219,911
266,526
290,598
Days sales outstanding (DSO)
89
97
93
90
86
327,309
305,129
251,764
Ending inventory turns
2.2
1.9
2.7
3.4
Weeks of channel inventory:
U.S. retail channel
18.2
19.6
12.7
14.7
12.9
U.S. distribution channel
3.8
4.1
3.0
3.1
EMEA distribution channel
6.2
6.6
6.8
7.8
APAC distribution channel
14.0
14.4
13.4
9.6
11.5
Deferred revenue (current and non-current)
21,593
21,305
19,600
18,684
18,482
Headcount
740
766
771
780
769
Non-GAAP diluted shares
29,822
30,798
NET REVENUE BY GEOGRAPHY
Americas
144,027
65
144,649
68
212,634
288,676
66
431,784
EMEA
44,951
36,865
18
61,772
81,816
19
122,862
APAC
34,246
15
29,044
14
34,405
11
63,290
72,090
Total
100
SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
NET REVENUE BY SEGMENT
Connected Home
128,864
130,342
229,863
259,206
470,781
SMB
94,360
80,216
78,948
174,576
155,955
Total net revenue
SERVICE PROVIDER NET REVENUE
33,975
18,121
35,391
52,096
57,629
1,615
729
522
2,344
1,321
Total service provider net revenue
35,590
18,850
35,913
54,440
58,950
View source version on businesswire.com: https://www.businesswire.com/news/home/20220727005472/en/
Contact: NETGEAR Investor Relations Erik Bylin investors@netgear.com
Source: NETGEAR, Inc.