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Arlo Leads the Way in Another Strong Showing From Netgear

Netgear (NASDAQ: NTGR) announced third-quarter 2017 results on Wednesday after the market closed, highlighting modest overall growth driven once again by its burgeoning Arlo wireless security camera segment. And according to Netgear management, Arlo is only just getting started.

But Netgear's business is about more than just its Arlo line. So in the meantime, let's zoom out a bit to better understand what drove Netgear's results over the past few months and what shareholders should anticipate for the rest of the year.

IMAGE SOURCE: NETGEAR.

Netgear results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Growth

Revenue

$355.5 million

$338.5 million

5%

GAAP net income

$20.8 million

$21.1 million

(1.4%)

GAAP earnings per share

$0.64

$0.62

3.2%

Data source: Netgear. 

What happened with Netgear this quarter?

  • By comparison, three months ago, Netgear told investors to expect lower revenue in the range of $340 million to $355 million.
  • On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation -- net income was $26.2 million, or $0.81 per share, up from $25.9 million, or $0.76 per share in the same year-ago period.
  • Adjusted operating margin was 9.5% -- at the midpoint of guidance for 9% to 10% -- down from 11.5% in last year's third quarter.
  • By geography, Americas revenue climbed 8.5% to $244.4 million, EMEA revenue grew 3.5% to $62.2 million, and Asia-Pacific revenue declined 8% to $48.9 million.
  • By business segment:
    • Arlo revenue increased 127.1% year over year to $110.5 million.
    • Connected Home revenue fell 14.9% to $183.1 million, as expected, with higher sales of Nighthawk and Orbi brand products offset by a difficult year-over-year comparison for connected home product sales on the service provider side.
    • SMB revenue -- formerly known as Netgear's commercial business segment -- dropped 17.1% to $61.9 million, on flat year-over-year trends in the switching market. Netgear hopes to "slowly" return SMB switching revenue to growth with the recent introduction of its mobile app-managed Insight switches.
  • Repurchased roughly 682,000 shares of common stock for around $30 million.

What management had to say

Netgear chairman and CEO Patrick Lo stated:

The Arlo segment posted another stellar quarter[...]. We continued to grow our registered user base during Q3 thanks to our unique products and effective marketing. [...] The Arlo segment now represents over 30% of our overall business and we expect it will become an even larger piece of NETGEAR in the quarters to come. Meanwhile, as anticipated, the Connected Home Segment's growth was challenged during Q3. This was primarily due to a difficult year-over-year comparison for the service provider portion of the business. Additionally, the cable gateway market continued to be challenging.

Looking forward

For the fourth quarter of 2017, Netgear expects revenue of $375 million to $390 million, with adjusted operating margin in the range of 7% to 8%. Though we don't usually lend much credence to Wall Street's demands, consensus estimates predicted that Q4 revenue would be near the higher end of Netgear's guidance range.

To be fair, Netgear has also underpromised and overdelivered on its guidance for each of the past five quarters. And the pieces appear to be in place for its lagging Connected Home and SMB segments to return to sustained, profitable growth. With no other big surprises in this quarter's results, that's likely why Netgear stock closed modestly higher today.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Netgear. The Motley Fool has a disclosure policy.