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NETGEAR® Reports Second Quarter Results

NETGEAR, Inc. (NASDAQ: NTGR), a global networking company that delivers innovative products to consumers, businesses and service providers, today reported financial results for the second quarter ended June 29, 2014.

Net revenue for the second quarter ended June 29, 2014 was $337.6 million, as compared to $357.7 million for the second quarter ended June 30, 2013, and $349.4 million in the first quarter ended March 30, 2014. Net income, computed in accordance with GAAP, for the second quarter of 2014 was $14.7 million, or $0.40 per diluted share. This compared to GAAP net income of $14.0 million, or $0.36 per diluted share, for the second quarter of 2013, and GAAP net income of $14.4 million, or $0.39 per diluted share, in the first quarter of 2014.

Gross margin on a non-GAAP basis in the second quarter of 2014 was 29.7%, as compared to 29.8% in the year ago comparable quarter, and 28.9% in the first quarter of 2014. Non-GAAP operating margin was 10.1% in the second quarter of 2014, as compared to 10.3% in the second quarter of 2013, and 9.7% in the first quarter of 2014. Non-GAAP net income was $0.58 per diluted share in the second quarter of 2014, as compared to non-GAAP net income of $0.62 per diluted share in the second quarter of 2013, and non-GAAP net income of $0.59 per diluted share in the first quarter of 2014.

Our non-GAAP tax rate was 36.5% in the second quarter 2014, as compared to 32.9% in the second quarter of 2013, and 35.2% in the first quarter of 2014.

The differences between GAAP and non-GAAP financial measures include adjustments, net of any tax effect, for amortization of purchased intangibles, stock-based compensation, restructuring and other charges, acquisition related expense, impact to cost of sales from acquisition accounting adjustments to inventory, and litigation reserves. 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, “Revenue for the second quarter came in at the low end of guidance due to continued difficulty in Europe. We are taking proactive measures to address this by realigning the Northern European RBU and CBU sales channels. We believe this should benefit NETGEAR in the long term with the goal of gaining market share and improving profitability in this region.”

“Recently the Retail Business Unit released the Nighthawk X6, the world’s first tri-band wireless router. Tri-band technology is an important step forward in enabling the Internet of Things within the home by grouping network traffic across three WiFi bands, each working at its optimal speed. In a mixed environment of many slow and high speed devices, the Nighthawk X6 can provide up to three times the combined speed compared to previous dual band 11ac routers. The Service Provider Business Unit recently launched the new low cost 4G LTE mobile hotspot with a usage meter. Our launch partner is Telstra in Australia. It is ideal for pre-paid and BYOD (Bring Your Own Device) customers. We intend to roll it out to other geographies in the coming quarters for both the operator and retail channels.”

Christine Gorjanc, Chief Financial Officer of NETGEAR, added, "During the second quarter of 2014, we continued to leverage our strong balance sheet and cash position by repurchasing approximately 841,000 shares of NETGEAR common stock for $27.2 million, at an average price of $32.37 per share. Over the last three quarters we have returned $106.2 million in cash to shareholders through our buyback program, which represents approximately 3.3 million shares repurchased. We continue to believe that returning cash to our shareholders in excess of our operating and strategic needs is important, and that a stock repurchase program is an effective means of accomplishing this. Furthermore, we believe in our long-term growth prospects and our cash flow generation capability. We plan to remain opportunistic buyers of our stock.”

Mr. Lo continued, "For the third quarter of 2014, we are expecting net revenue to be in the range of $345 million to $360 million, with non-GAAP operating margin in the range of 9.5% to 10.5%.”

Investor Conference Call / Webcast Details

NETGEAR will review the second quarter results and discuss management's expectations for the third quarter of 2014 today, Thursday, July 24, 2014 at 5 p.m. ET (2 p.m. PT). The dial-in number for the live audio call is (201) 689-8471. A live webcast of the conference call will be available on NETGEAR's website at http://investor.netgear.com. A replay of the call will be available 2 hours following the call through midnight ET (9 p.m. PT) on Thursday, July 31, 2014 by telephone at (858) 384-5517 and via the web at http://investor.netgear.com. The account number to access the phone replay is 13586575.

About NETGEAR, Inc.

NETGEAR (NASDAQ: NTGR) is a global networking company that delivers innovative products to consumers, businesses and service providers. The Company's products are built on a variety of proven technologies such as wireless, Ethernet and powerline, with a focus on reliability and ease-of-use. The product line consists of wired and wireless devices that enable networking, broadband access and network connectivity. These products are available in multiple configurations to address the needs of the end-users in each geographic region in which the Company's products are sold. NETGEAR products are sold in approximately 44,000 retail locations around the globe, and through approximately 37,000 value-added resellers. The company's headquarters are in San Jose, Calif., with additional offices in approximately 25 countries. NETGEAR is an ENERGY STAR partner. 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.

© 2014 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: expected net revenue and non-GAAP operating margin; expectations regarding the timing and market acceptance of recent and anticipated new product introductions that position the Company for growth; expectations regarding the Company’s market share and leadership position in various product categories; and expectations regarding repurchases of the Company’s common stock. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including 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; 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,” pages 44 through 65, in the Company's quarterly report on Form 10-Q for the fiscal quarter ended March 30, 2014, filed with the Securities and Exchange Commission on May 6, 2014. 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 financial measures, which are adjusted to exclude certain expenses and tax benefits, where applicable. We believe non-GAAP financial measures are 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 financial measures prepared in accordance with generally accepted accounting principles in the United States.

 

NETGEAR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

         
June 29,
2014
December 31,
2013
 
ASSETS
Current assets:
Cash and cash equivalents $ 146,982 $ 143,009
Short-term investments 95,747 105,145
Accounts receivable, net 282,900 266,484
Inventories 194,533 224,456
Deferred income taxes 27,019 27,239
Prepaid expenses and other current assets 40,947   33,778
Total current assets 788,128 800,111
Property and equipment, net 28,151 27,194
Intangibles, net 75,180 84,118
Goodwill 155,916 155,916
Other non-current assets 30,617   26,591
Total assets $ 1,077,992   $ 1,093,930
 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 101,403 $ 114,531
Accrued employee compensation 19,684 16,551
Other accrued liabilities 128,849 143,218
Deferred revenue 33,381 24,496
Income taxes payable   1,287
Total current liabilities 283,317 300,083
Non-current income taxes payable 14,430 13,804
Other non-current liabilities 5,779   6,260
Total liabilities 303,526 320,147
Stockholders' equity:
Common stock 36 37
Additional paid-in capital 438,150 421,901
Cumulative other comprehensive income 10 69
Retained earnings 336,270   351,776
Total stockholders' equity 774,466   773,783
Total liabilities and stockholders' equity $ 1,077,992   $ 1,093,930
 

NETGEAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

   
Three Months Ended Six Months Ended
June 29,
2014
  March 30,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
 
Net revenue $ 337,604 $ 349,391 $ 357,719 $ 686,995 $ 651,118
Cost of revenue 240,418   251,466   254,289   491,884   459,951  
Gross profit 97,186   97,925   103,430   195,111   191,167  
Operating expenses:
Research and development 22,476 22,181 23,981 44,657 39,319
Sales and marketing 38,179 39,911 40,406 78,090 76,795
General and administrative 11,894 11,375 12,319 23,269 24,646
Restructuring and other charges (12 ) 842 1,587 830 1,557
Litigation reserves, net 68   117   3,555   185   3,603  

Total operating expenses

72,605   74,426   81,848   147,031   145,920  
Income from operations 24,581 23,499 21,582 48,080 45,247
Interest income 49 57 95 106 244
Other expense, net (227 ) (108 ) (548 ) (335 ) (474 )
Income before income taxes 24,403 23,448 21,129 47,851 45,017
Provision for income taxes 9,698   9,037   7,144   18,735   15,689  
Net income $ 14,705   $ 14,411   $ 13,985   $ 29,116   $ 29,328  
 
Net income per share:
Basic $ 0.41   $ 0.39   $ 0.36   $ 0.80   $ 0.76  
Diluted $ 0.40   $ 0.39   $ 0.36   $ 0.79   $ 0.75  
 

Weighted average shares outstanding
used to compute net income per share:

Basic 36,139   36,630   38,539   36,381   38,493  
Diluted 36,808   37,305   39,074   37,052   39,077  
 

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES

(In thousands, except per share data)

(Unaudited)

     

STATEMENT OF OPERATIONS DATA:

Three Months Ended Six Months Ended
June 29,
2014
  March 30,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
 
GAAP gross profit $ 97,186 $ 97,925 $ 103,430 $ 195,111 $ 191,167
Amortization of intangible assets 2,619 2,619 2,254 5,238 3,725
Stock-based compensation expense 489 471 406 960 595

Impact to cost of sales from acquisition
accounting adjustments to inventory

    568     568  
Non-GAAP gross profit $ 100,294   $ 101,015   $ 106,658   $ 201,309   $ 196,055  
Non-GAAP gross margin 29.7 % 28.9 % 29.8 % 29.3 % 30.1 %
 
GAAP research and development $ 22,476 $ 22,181 $ 23,981 $ 44,657 $ 39,319
Stock-based compensation expense (1,227 ) (1,396 ) (1,135 ) (2,623 ) (1,807 )
Non-GAAP research and development $ 21,249   $ 20,785   $ 22,846   $ 42,034   $ 37,512  
 
GAAP sales and marketing $ 38,179 $ 39,911 $ 40,406 $ 78,090 $ 76,795
Amortization of intangible assets (1,772 ) (1,771 ) (2,618 ) (3,543 ) (2,618 )
Stock-based compensation expense (1,401 ) (1,949 ) (1,310 ) (3,350 ) (2,540 )
Non-GAAP sales and marketing $ 35,006   $ 36,191   $ 36,478   $ 71,197   $ 71,637  
 
GAAP general and administrative $ 11,894 $ 11,375 $ 12,319 $ 23,269 $ 24,646
Stock-based compensation expense (1,817 ) (1,314 ) (1,540 ) (3,131 ) (3,039 )
Acquisition related expense   (8 ) (214 ) (8 ) (924 )
Non-GAAP general and administrative $ 10,077   $ 10,053   $ 10,565   $ 20,130   $ 20,683  
 
GAAP total operating expenses $ 72,605 $ 74,426 $ 81,848 $ 147,031 $ 145,920
Amortization of intangible assets (1,772 ) (1,771 ) (2,618 ) (3,543 ) (2,618 )
Stock-based compensation expense (4,445 ) (4,659 ) (3,985 ) (9,104 ) (7,386 )
Restructuring and other charges 12 (842 ) (1,587 ) (830 ) (1,557 )
Acquisition related expense (8 ) (214 ) (8 ) (924 )
Litigation reserves, net (68 ) (117 ) (3,555 ) (185 ) (3,603 )
Non-GAAP total operating expenses $ 66,332   $ 67,029   $ 69,889   $ 133,361   $ 129,832  
     

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)

(In thousands, except per share data)

(Unaudited)

 

STATEMENT OF OPERATIONS DATA (CONTINUED):

 
Three Months Ended Six Months Ended
June 29,
2014
  March 30,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
 
GAAP operating income $ 24,581 $ 23,499 $ 21,582 $ 48,080 $ 45,247
Amortization of intangible assets 4,391 4,390 4,872 8,781 6,343
Stock-based compensation expense 4,934 5,130 4,391 10,064 7,981
Restructuring and other charges (12 ) 842 1,587 830 1,557
Acquisition related expense 8 214 8 924

Impact to cost of sales from acquisition
accounting adjustments to inventory

568 568
Litigation reserves, net 68   117   3,555   185   3,603  
Non-GAAP operating income $ 33,962   $ 33,986   $ 36,769   $ 67,948   $ 66,223  
Non-GAAP operating margin 10.1 % 9.7 % 10.3 % 9.9 % 10.2 %
 
GAAP net income $ 14,705 $ 14,411 $ 13,985 $ 29,116 $ 29,328
Amortization of intangible assets 4,391 4,390 4,872 8,781 6,343
Stock-based compensation expense 4,934 5,130 4,391 10,064 7,981
Restructuring and other charges (12 ) 842 1,587 830 1,557
Acquisition related expense 8 214 8 924

Impact to cost of sales from acquisition
accounting adjustments to inventory

568 568
Litigation reserves, net 68 117 3,555 185 3,603
Tax effect (2,645 ) (2,904 ) (4,800 ) (5,549 ) (6,518 )
Non-GAAP net income $ 21,441   $ 21,994   $ 24,372   $ 43,435   $ 43,786  
     

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)

(Unaudited)

 

STATEMENT OF OPERATIONS DATA (CONTINUED):

 
Three Months Ended Six Months Ended

 

June 29,
2014
  March 30,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
 
NET INCOME PER DILUTED SHARE:
GAAP net income per diluted share $ 0.40 $ 0.39 $ 0.36 $ 0.79 $ 0.75
Amortization of intangible assets 0.12 0.12 0.12 0.24 0.16
Stock-based compensation expense 0.13 0.14 0.11 0.27 0.20
Restructuring and other charges 0.00 0.02 0.04 0.02 0.04
Acquisition related expense 0.00 0.01 0.00 0.02

Impact to cost of sales from acquisition
accounting adjustments to inventory

0.01 0.01
Litigation reserves, net 0.00 0.00 0.09 0.00 0.09
Tax effect (0.07 ) (0.08 ) (0.12 ) (0.15 ) (0.15 )
Non-GAAP net income per diluted share $ 0.58   $ 0.59   $ 0.62   $ 1.17   $ 1.12  
   

SUPPLEMENTAL FINANCIAL INFORMATION

(In thousands, except per share data, DSO, inventory turns, weeks of channel inventory and headcount)

(Unaudited)

 
Three Months Ended
June 29,
2014
  March 30,
2014
  December 31,
2013
  September 29,
2013
  June 30,
2013
 

Cash, cash equivalents and short-term
investments

$ 242,729 $ 240,261 $ 248,154 $ 301,418 $ 288,103

Cash, cash equivalents and short-term
investments per diluted share

$ 6.59 $ 6.44 $ 6.46 $ 7.69 $ 7.37
 
Accounts receivable, net $ 282,900 $ 291,251 $ 266,484 $ 269,964 $ 288,483
Days sales outstanding (DSO) 76 74 69 68 73
 
Inventories $ 194,533 $ 201,630 $ 224,456 $ 211,275 $ 185,383
Ending inventory turns 4.9 5.0 4.6 4.9 5.5
 
Weeks of channel inventory:
U.S. retail channel 10.5 9.7 9.4 10.5 9.5
U.S. distribution channel 12.0 9.8 11.2 9.9 9.0
EMEA distribution channel 4.0 4.1 4.6 4.5 5.1
APAC distribution channel 9.0 7.1 8.5 8.2 7.3
 
Deferred revenue $ 35,229 $ 32,070 $ 26,433 $ 28,049 $ 33,717
 
Headcount 1,033 1,023 1,029 1,100 1,095
Non-GAAP diluted shares 36,808 37,305 38,408 39,198 39,074
 

NET REVENUE BY GEOGRAPHY

       
Three Months Ended Six Months Ended
June 29,
2014
    March 30,
2014
    June 30,
2013
  June 29,
2014
    June 30,
2013
 
Americas $ 187,534 55 % $ 194,779 55 % $ 200,848 56 % $ 382,313 56 % $ 357,524 55 %
EMEA 100,436 30 % 106,793 31 % 108,367 30 % 207,229 30 % 215,492 33 %
APAC 49,634   15 % 47,819   14 % 48,504   14 % 97,453   14 % 78,102   12 %
Total $ 337,604   100 % $ 349,391   100 % $ 357,719   100 % $ 686,995   100 % $ 651,118   100 %

NET REVENUE BY SEGMENT

       
Three Months Ended Six Months Ended
June 29,
2014
    March 30,
2014
    June 30,
2013
  June 29,
2014
    June 30,
2013
 
Retail $ 110,663 33 % $ 118,232 33 % $ 117,395 33 % $ 228,895 34 % $ 243,717 38 %
Commercial 75,447 22 % 78,863 23 % 88,446 25 % 154,310 22 % 159,297 24 %
Service Provider 151,494   45 % 152,296   44 % 151,878   42 % 303,790   44 % 248,104   38 %
Total $ 337,604   100 % $ 349,391   100 % $ 357,719   100 % $ 686,995   100 % $ 651,118   100 %

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I write and study often on the subject of digital transformation - the digital transformation of industries, markets, products, business models, etc. In brief, digital transformation is about the impact that collected and analyzed data can have when used to enhance business processes and workflows. If Amazon knows your preferences for particular books and films based upon captured data, then they can apply analytics to predict related books and films that you may like. This improves sales. This is a simple example, but let me tell you what I learned yesterday in sunny and warm San Francisco about more complex applications.
The worldwide cellular network will be the backbone of the future IoT, and the telecom industry is clamoring to get on board as more than just a data pipe. In his session at Internet of @ThingsExpo, Evan McGee, CTO of Ring Plus, Inc., to discuss what service operators can offer that would benefit IoT entrepreneurs, inventors, and consumers. Evan McGee is the CTO of RingPlus, a leading innovative U.S. MVNO and wireless enabler. His focus is on combining web technologies with traditional telecom to create a new breed of unified communication that is easily accessible to the general consumer. With over a decade of experience in telecom and associated technologies, Evan is demonstrating the power of OSS to further human and machine-to-machine innovation.
Whether you're a startup or a 100 year old enterprise, the Internet of Things offers a variety of new capabilities for your business. IoT style solutions can help you get closer your customers, launch new product lines and take over an industry. Some companies are dipping their toes in, but many have already taken the plunge, all while dramatic new capabilities continue to emerge. In his session at Internet of @ThingsExpo, Reid Carlberg, Senior Director, Developer Evangelism at salesforce.com, to discuss real-world use cases, patterns and opportunities you can harness today.