Why is NETGEAR (NTGR) up 16.1% since its last earnings report?

It has been about a month since NETGEAR, Inc.’s last earnings report. (NTGR). Shares have risen about 16.1% in that time, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or will NETGEAR slow down? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

NETGEAR’s first-quarter loss was larger than expected

NETGEAR reported a non-GAAP loss of 28 cents per share in the first quarter of 2024, compared to a non-GAAP loss of 19 cents reported in the prior-year quarter. The reported number was wider than the Zacks Consensus Estimate of a loss of 27 cents.

The company generated net revenue of $164.6 million, down 9% year-over-year. However, the upper limit was higher than the consensus by 0.4%.

Management noted that challenging macroeconomic conditions, combined with inflationary pressures and high interest rates, forced trading partners to reduce inventory levels across both consumer and B2B businesses, thereby impacting financial performance.

Moreover, increased inventory depletion coupled with an unfavorable product mix (shifting from premium consumer products to service provider products) and the promotional retail environment negatively impacted profitability during the quarter.

Regionally, net revenue in the Americas was $109.9 million (67% of total revenue), down 9.8% year-over-year. Europe, Middle East and Africa generated revenue (19%) of $31.2 million, down 20.4% year over year. Revenue from Asia Pacific (14%) increased 18.5% year-over-year to $23.5 million.

NETGEAR ended the quarter with 928,000 paid subscribers.

Segment efficiency

CHP segment (including the Orbi, Nighthawk and Armor brands) generated revenues of $96 million, down 6.6% year over year. The decline was due to poor performance of the overall US retail market in a weak macroeconomic environment. Our estimate was $97.7 million.

Continued development of CHP’s premium products (including the newly launched Orbi 97x mesh Wi-Fi 7 system and premium mobile hotspot) was a tailwind.

Despite strong demand for switched products managed by ProAV, revenues from NFB revenue declined 12.2% year-over-year to $68.6 million. The decline was due to continued reductions in channel resources by trading partners. Our estimate was $66.1 million.

Other details

Adjusted gross margin decreased to 29.5% from 33.6% year over year. Non-GAAP operating loss was $16 million, compared to an operating loss of $7.07 million in the prior-year quarter.

Non-GAAP operating expenses were $64.6 million, down 4.8% year-over-year.

The story continues

Cash flow and liquidity

For the quarter ended March 31, 2024, NETGEAR generated $17.2 million of cash from operations. It also had $172.7 million in cash and cash equivalents and $244.3 million in total current liabilities, compared to $176.7 million and $264.4 million, respectively, in the quarter ended December 31, 2023.

During the quarter in question, the company repurchased 783,000 shares worth $11.4 million.

Prospects for the second quarter

Management expects net revenues in the range of USD 125-140 million. The company expects to accelerate inventory clearance activities at NFB and CHP in collaboration with its channel partners, which will result in an increase in quarterly revenues of $25 million to $30 million.

Further management added that higher inventory costs due to the company’s inventory reduction efforts and accelerated retirement of slower-moving inventory are likely to impact margin results in the current quarter.

GAAP operating margin is estimated to be between (30.9)% and (27.9)%. The expected non-GAAP operating margin is in the range of (25)-(22)%.

How have estimates changed since then?

Investors have witnessed a downward trend in estimate revisions over the past month.

As a result of these changes, the consensus estimate moved -374.19%.

VGM results

NETGEAR currently has a strong Growth Index of A, although it lags well behind its Momentum Score of F. However, the stock is rated B for Value, ranking in the top 40% for this investment strategy.

Overall, the stock has a Total VGM Score of B. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. No wonder NETGEAR has a Zacks Rank #4 (Sell). We expect a below-average rate of return on stocks in the coming months.

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