NetGear (NTGR 75.80, -0.25, -0.33%) is trading lower today after reporting Q2 results
this morning although it's very thin trading. NetGear is a provider of
networking products built on a variety of technologies such as wireless (WiFi
and LTE), Ethernet and powerline. The product line consists of wired and
wireless devices that enable networking, broadband access, and network
The company operates in three segments: Arlo, Connected Home, and Small and Medium Business (SMB). The Arlo segment is focused on internet-connected security cameras and video doorbells/chimes. The Connected Home segment is focused on consumers and consists of LTE and WiFi internet networking gear. Its Orbi Wi-Fi system has been popular as it provides the strongest Wi-Fi signal, ensuring no dead zones upstairs, downstairs or even outside. The SMB segment is focused on small and medium-sized businesses and consists of business networking, storage and security that brings enterprise-class functionality to small and medium-sized businesses at an affordable price.
In February 2018, NTGR announced that its Arlo Technologies unit will spin off in an IPO and act as a standalone business. BofA Merrill Lynch, Deutsche Bank, and Guggenheim Securities are acting as lead book-running managers. These Arlo security cameras have been surprisingly popular with consumers and NTGR apparently wants to get a better multiple for this segment by letting it trade on its own.
This morning, NTGR announced some details about the IPO, including that Arlo has launched a roadshow for its IPO. Arlo is offering 10.215 mln shares in the $18-20 range. An IPO date has not been set but with a roadshow launching, it won't be too long.
Turning to the Q2 results, non-GAAP EPS fell 5% year/year to $0.57, but that was a good bit better than market expectations. Revenue rose 10.9% year/year to $366.8 mln, which was well above prior guidance of $340-355 mln. Non-GAAP operating margin in Q2 fell to 5.9% from 8.5% in the prior year period. This performance was in-line with prior guidance of 5.5-6.5%.
It was a good Q2 result overall, the problem seems to be the Q3 revenue guidance, which at $380-395 mln is below market expectations. Also, non-GAAP operating margin is expected to decline sequentially in Q3 to the 4-5% range vs 5.9% in Q2.
NTGR says it had an excellent Q2, driven by Arlo, Orbi, the Nighthawk Pro Gaming Router, cable modems and gateways, and its SMB switches. As a result, revenue came in well above guidance. NTGR was also excited to see year/year revenue growth in all three segments for Q2. NTGR continues to focus on the successful separation of the Arlo business from NETGEAR, as well as driving its subscription services strategy for all three segments.
The stock is down on the disappointing Q3 revenue and margin guidance. However, over the past year, the stock has done pretty well. A lot of that is due to the surprising success of the Arlo security camera unit, which has been a hit with consumers. That has been a bright star for a company that has seen sluggish sales/margins for its networking gear. It makes a lot of sense to spin off Arlo in an IPO to let it garner a better P/E multiple that matches the growth potential there. It's also good to see NTGR moving to more of a subscription-based operating model in all of its segments. That provides a recurring revenue stream which tends to be steadier and more predictable over the longer term.
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