NETGEAR, Inc. (NTGRFree Report) reported lukewarm second-quarter 2021 results, with both the bottom line and top line missing their respective Zacks Consensus Estimate. However, earnings and revenues increased on a year-over-year basis backed by impressive Small and Medium Business (SMB) performance, accretive subscriber base and continued market share gains in U.S. Retail Wi-Fi market, fueled by a pickup in businesses post COVID-19 lockdown.

Bottom Line

On a GAAP basis, net income in the June quarter was $17.8 million or 57 cents per share compared with $6 million or 20 cents per share in the year-ago quarter. The year-over-year significant improvement was mainly attributable to higher revenues.

Quarterly non-GAAP net income was $20.8 million or 66 cents per share compared with $16.3 million or 54 cents per share in the year-earlier quarter. The bottom line, however, missed the Zacks Consensus Estimate by 5 cents.

NETGEAR, Inc. Price, Consensus and EPS Surprise

Revenues

NETGEAR generated net revenues of $308.8 million, up 10.3% year over year, primarily driven by solid SMB performance and growth in the retail channel of connected home products (CHP). Strong demand for Wi-Fi 6 offerings played a major role as well. The top line lagged the consensus mark of $315 million. The company shipped nearly 3.9 million units, including 2.6 million nodes of wireless products in the second quarter.

Region wise, net revenues from the Americas were $212.6 million (68.9% of net revenues), up 5.1% year over year. EMEA (Europe, Middle East and Africa) revenues were $61.8 million (20%), up 27.7%. APAC (Asia Pacific Region) revenues grew 16.8% to $34.4 million (11.1%).

The number of registered app users in the reported quarter was 10.8 million. NETGEAR ended the quarter with 514,000 service subscribers. With a recurring revenue stream, the company added 33,000 subscribers in the quarter, and is on track to meet its goal of tapping 650,000 subscribers by the end of 2021, which indicates healthy potential for its long-term profitability growth.

Segment Performance

Connected Home, which includes Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenues of $229.9 million, down 0.1% year over year from $230 million in the year-ago quarter owing to soft service provider business. However, it was partly offset by growth in the retail business. NETGEAR continues to hold about 46% share in U.S. retail Wi-Fi market, which includes mesh, routers, gateways and extenders.

Driven by recovering switching business, revenues from SMB increased 57.8% year over year to $78.9 million. Fighting against a supply-constrained scenario, the segment showcased strong operational execution on the back of growing demand for flexible working environments and new business formations with rising vaccination rates and rebound in business operations post COVID-19 lockdown. Robust demand for low port count switches and SMB wireless solutions supported by ProAV strength drove the momentum. The company continues to hold about 61% share in U.S. retail switch market.

Other Details

Adjusted gross margin increased to 30.4% from 29.6% due to higher revenues. Non-GAAP operating margin was 8.6% compared with 7.5% in the year-ago quarter owing to higher operating income.

Cash Flow & Liquidity

During the second quarter, NETGEAR utilized $5.2 million of cash from operations. As of Jun 27, 2021, the company had $328.9 million in cash and cash equivalents with $343.4 million of total current liabilities.

The company repurchased nearly 654,000 shares at an average price of $38.21 per share for $25 million during the second quarter of 2021.

Q3 Outlook Lowered

For the third quarter of 2021, NETGEAR anticipates revenues in the range of $285 million to $300 million compared with the prior projection of $305 million to $320 million. Owing to the lost leverage from the top line, GAAP operating margin is estimated to be in the 2.1-3.1% range, down from second-quarter’s guidance of 6.5-7.5%. Non-GAAP operating margin is expected in the range of 5-6% compared with prior outlook of 9-10%.

Moving Ahead

Discouraged by uncertain macroeconomic conditions stemming from the COVID-19 pandemic, NETGEAR is continuing to witness supply chain hurdles due to higher freight costs and delivery times, component shortages and productivity woes. However, the San Jose, CA-based company is focused on bolstering its presence in the consumer networking market on the back of higher demand for premium Wi-Fi products in response to the growing work-from-home trend and SMB segment strength.

It remains confident of maintaining its leadership in new product introduction, based on the Wi-Fi 6 standards. This, in turn, is likely to drive positive cash flow amid a dynamic environment. The company aims to emerge as a pioneer of next-gen networking technologies like Wi-Fi 6 and Pro AV, thereby benefiting from advanced technological innovations. It intends to capitalize on technology inflections, create new categories, build recurring subscription service revenues, boost its paid subscriber base and optimize its channel inventory to drive the momentum in 2021.

Zacks Rank & Stocks to Consider

NETGEAR currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader industry are Ooma, Inc. (OOMAFree Report) , SeaChange International, Inc. (SEACFree Report) and TESSCO Technologies Incorporated (TESSFree Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ooma delivered a trailing four-quarter earnings surprise of 65.5%, on average.

SeaChange International delivered a trailing four-quarter earnings surprise of 12.2%, on average.

TESSCO delivered a trailing four-quarter earnings surprise of 2.5%, on average.

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