NETGEAR, Inc. (NTGR – Free Report) announced lackluster results in the fourth quarter of 2021, with profits and revenue declining year-over-year. The bottom line beat the Zacks consensus estimate, but the top line missed the same.
Lower first-quarter outlook due to ongoing supply chain issues amid the pandemic is expected to hamper Connected Home Products (CHP) and Small and Medium Business (SMB) unit revenue.
Despite such a challenging situation, NETGEAR continues to witness a strong demand environment for its forward-thinking Wi-Fi 6 offerings. Additionally, increased penetration in the premium segment of the market, along with an accretive subscriber base and continued market share gains in the US retail Wi-Fi market, are a significant tailwind.
On a GAAP basis, net loss for the quarter was $1 million or a loss of 3 cents per share compared to net income of $30.9 million or 99 cents per share in the prior year quarter. The drastic deterioration was mainly due to the year-on-year revenue contraction and lower operating income.
Non-GAAP quarterly net income was $8.1 million or 27 cents per share, compared to $31 million or 99 cents per share in the prior quarter. Net income topped Zacks’ consensus estimate by 12 cents.
In 2021, GAAP net income was $49.4 million or $1.59 per share compared to $58.3 million or $1.90 per share in 2020. Non-GAAP net income for the year was $75.8 million or $2.44 per share compared to $88.3 million or $2.88 per share in 2020. 2020.
NETGEAR, Inc. Pricing, Consensus, and EPS Surprise
NETGEAR generated net revenue of $251.2 million, down 31.6% year-over-year. The decrease is mainly due to the weakness of the CHP segment. The company has witnessed a stabilization in the US consumer Wi-Fi market. However, the lumpy nature of service provider business has played a spoilsport role. Although demand for higher margin SMB products remained quite strong, the segment had limited ability to meet customer demand in a constrained supply environment with the temporary plant shutdown caused by the Omicron variant . The strong demand for Wi-Fi 6 offers has played a major role. The top line trailed the consensus mark of $259 million.
In 2021, NETGEAR revenue was $1,168.1 million compared to $1,255.2 million in 2020.
The company shipped nearly 2.7 million units, including 2 million wireless product nodes, in the fourth quarter. NETGEAR’s recently unveiled Quadband Wi-Fi 6E Orbi system has received acclaim from customers and industry experts. It provides internet speeds of up to 10 gigabits with less interference and lag. NETGEAR is the first company to introduce the quad-band solution to deliver unparalleled Wi-Fi performance to consumers.
By region, Americas net revenue was $159.4 million (63.5% of net revenue), down 38.6% year-over-year. Revenues from the EMEA (Europe, Middle East and Africa) region were $50 million (19.9%), down 25.8%, while revenues from the APAC region (Asia- Pacific) increased by 4.4% to $41.7 million (16.6%).
The number of registered application users during the reported quarter was 13 million. NETGEAR ended the quarter with 584,000 subscribers to the service, beating its year-end forecast of 575,000 subscribers for 33.6% year-over-year growth. The company remains confident of tapping 750,000 paid subscribers by the end of 2022, supported by its higher penetration in the premium segment of the market. This indicates good potential for growth in its long-term profitability.
Connected home, which includes the Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenue of $174.2 million, down 41.2% year-over-year from $296.1 million from retail and service provider businesses, as the prior year period was driven by high consumer demand due to the pandemic. However, the segment has seen strong demand for high-end Wi-Fi mesh systems, including tri-band and quad-band Wi-Fi 6 mesh offerings.
The Company is working to optimize channel partner inventory levels during the current year period to align with current demand expectations. NETGEAR has approximately 44% share of the US retail Wi-Fi market, which includes mesh, routers, gateways and extenders.
Driven by the recovery in the switching business, revenues from SME grew 8.6% year-over-year to $77 million. In a limited supply scenario, the segment showed strong operational execution due to growing demand for flexible working environments and new business training. Strong demand for Wi-Fi 6 access points, low-port-count switches and SMB wireless products, coupled with ProAV switching power, drove momentum. An increase in sophisticated home office settings should increase the SMB unit in the near future. The company holds approximately 52% of the US retail switch market share.
Adjusted gross margin fell from 30.6% to 30% due to lower revenues. The non-GAAP operating margin was 2.7%, compared to 11% in the corresponding quarter of the previous year, due to a weaker operating result.
Cash flow and liquidity
During the fourth quarter, NETGEAR provided $3.9 million in cash from operations. As of December 31, 2021, the company had $263.8 million in cash and cash equivalents with $341 million in total current liabilities, compared to respective counts of $346.5 million and $365.1 million for the period of the previous year.
The company repurchased nearly 539,000 shares at an average price of $32.52 per share for $17.5 million during the fourth quarter of 2021. Despite the lingering impact of COVID-19, continued flow strong cash and a strong liquidity position remain key priorities for NETGEAR in 2022.
Soft first quarter outlook
For the first quarter of 2022, NETGEAR forecasts net revenues of between $225 million and $240 million. The forecast reflects lower cogeneration revenues from retail channels as well as weak service provider activity. The SMB unit will also continue to face supply constraints, limiting its ability to reach its full potential.
Due to the loss of high-end leverage as well as increased transportation costs, higher component costs and numerous disruptions on the logistics front, the GAAP operating margin is estimated between (1.5 )% and (0.5)%. The non-GAAP operating margin should be between 1 and 2%. The company remains optimistic about reducing shipping costs with improved SME supply in the second half of 2022, creating a favorable environment for revenue and earnings.
Given the uncertain macroeconomic conditions resulting from the COVID-19 pandemic, NETGEAR continues to face supply chain hurdles due to higher transportation costs and delivery times, component shortages and productivity issues. However, the San Jose, Calif.-based company is focused on strengthening its presence in the consumer networking market due to increased demand for high-end Wi-Fi products in response to the growth of work models. hybrid and remote and to the strength of the SME segment.
With its recurring revenue stream, it remains confident to maintain its leadership in introducing new products based on Wi-Fi 6 standards. This, in turn, is likely to generate positive cash flow in a dynamic environment. . The company aims to become a pioneer in next-generation networking technologies such as Wi-Fi 6 and Pro AV, thereby benefiting from advanced technological innovations. The company intends to capitalize on technological inflections, create new categories, generate recurring revenue from subscription services, grow its paid subscriber base and optimize channel inventory to propel its momentum.
Zacks Ranking and Other Stocks to Consider
NETGEAR currently sports a Zacks #1 (Strong Buy) rating.
Some other top ranked stocks in the industry are Cisco Systems, Inc. (CSCO – free report), Extreme Networks, Inc. (OUTSIDE – free report) and NetScout Systems, Inc. (NTCT – Free Report), each carrying a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank stocks here.
The Zacks consensus estimate for Cisco’s earnings for next year has been revised up 0.5% in the past 30 days.
Cisco has posted a four-quarter earnings surprise of 1.9% on average. It has returned 18.8% over the past year. CSCO forecasts long-term earnings growth of 6.5%.
The Zacks consensus estimate for Extreme Networks’ current-year earnings has been revised up 8% in the past 30 days.
Extreme Networks posted a four-quarter earnings surprise of 19.1% on average. EXTR shares have gained 40.4% over the past year.
The Zacks consensus estimate for NetScout Systems’ current-year earnings has been revised up 0.6% over the past 30 days.
NetScout Systems recorded a four-quarter earnings surprise of 21.2% on average. The stock has gained 3.3% over the past year. NTCT expects long-term earnings growth of 5%.