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Why Netgear Inc. Stock Popped Today

Image source: Netgear

What: Shares of Netgear (NASDAQ: NTGR) rose as much as 13.3% early Thursday, then settled to trade up 11.3% as of 1:00 p.m. EST after the company announced strong first-quarter 2016 results.

So what: Quarterly revenue climbed a modest 0.4% year over year, to $310.3 million, as 30.2% growth in the company's core Retail business unit, to $157.5 million, was almost entirely offset by a 5.9% decline in Commercial segment sales, to $68.4 million, and a 27% drop in Service Provider sales, to $84.3 million. Adjusted operating margin rose 270 basis points, to 11.9%, while adjusted net income grew 51%, to $24.6 million. Thanks to share repurchases over the past year, adjusted net income per share rose 60.9%, to $0.74.

For perspective, just over a year ago Netgear took steps to resize the cost structure of its Service Provider business to compensate for reduced wireline investments in the industry. As such, Netgear anticipates this segment will ultimately settle to a quarterly revenue run rate of roughly $75 million.

What's more in February Netgear told investors to expect first-quarter revenue of $290 million to $305 million, and adjusted operating margin of 9.5% to 10.5%. And analysts, on average, were anticipating lower revenue of $298.6 million, with adjusted earnings of just $0.60 per share.

"The Retail Business Unit and Commercial Business Unit both met our expectations," explained Netgear CEO Patrick Lo, "while the Service Provider Business Unit's revenue came in above what we had expected. Overall, our first-quarter results reflect a strong start to the year for the Company."

Now what: For the current quarter, Netgear once again expects revenue of $290 million to $305 million, and adjusted operating margin of 9.5% to 10.5%. Here again, the midpoint of that revenue range sits slightly above analysts' expectations for revenue of $294.7 million.

All told, though Netgear's overall growth doesn't look like much given continued declines in its Service Provider business, it's still delivering on its most promising opportunity in retail as the proliferation of wireless devices continues. As such, I think investors have every right to celebrate today's report.