NetGear Reports Q2

Revenues were $107.6M, up 21.7% from last year's Q2, for net income of $8.3M ($0.26/share), up 69.4% from $4.9M ($0.16/share) a year ago

July 28, 2005

5 Min Read

SANTA CLARA, Calif. -- NETGEAR, Inc. (NASDAQ:NTGR) , a worldwide provider of technologically advanced, branded networking products, today reported financial results for the second quarter ended July 3, 2005.

Net revenue for the second quarter ended July 3, 2005 was $107.6 million, a 21.7% increase as compared to $88.4 million for the second quarter ended June 27, 2004. Revenue for the first quarter of 2005 was $109.0 million. Net revenue in the second quarter of 2005 derived from North America was $55.2 million; the Europe, Middle East and Africa, or EMEA, region was $ 40.4 million; and, the Asia Pacific region was $12.0 million. Net income, computed in accordance with GAAP, for the second quarter of 2005 was $8.3 million or $0.26 per basic share and $0.25 per diluted share. This net income was a 5.1% increase compared to net income of $7.9 million for the prior quarter or $0.25 per basic share and $0.24 per diluted share, and a 69.4% increase compared to net income of $4.9 million for the second quarter of 2004 or $0.16 per basic share and $0.15 per diluted share.

Non-GAAP gross margin in the second quarter of 2005 was 35.9%, as compared to 33.0% in the prior quarter and 32.1% in the year ago comparable quarter. Non-GAAP operating margin was 12.5% in the second quarter of 2005, as compared to 11.5% in the prior quarter and 8.9% in the year ago comparable quarter. In the second quarter of 2005, non-GAAP operating expenses were 23.4% of net revenue, as compared to 21.4% in the prior quarter and 23.2% in the year ago comparable quarter. Sales and marketing, research and development and general and administration expenses as a percentage of net revenue were 16.9%, 3.0% and 3.5%, as compared with 15.5%, 2.6% and 3.3% in the prior quarter, and 17.0%, 2.6% and 3.6% in the year ago comparable quarter.

Non-GAAP net income for the second quarter of 2005 was $8.3 million, a 56.6% increase compared to non-GAAP net income of $5.3 million for the second quarter of 2004. Non-GAAP net income for the second quarter of 2005 excludes non-cash, stock based compensation of $324,000, and also excludes a $325,000 net tax benefit from exercises of stock options. Non-GAAP net income for the second quarter of 2004 excludes non-cash, stock-based compensation of $445,000. Non-GAAP net income per share was $0.26 per basic share and $0.25 per diluted share in the second quarter of 2005, compared to $0.18 per basic share and $0.17 per diluted share in the second quarter of 2004. The accompanying schedules provide a reconciliation of net income computed on a GAAP basis to net income computed on a non-GAAP basis.

Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, "We had a strong second quarter driven by the success of some new products; such as, our RangeMax(TM) family of MIMO Wi-Fi products. The RangeMax pricing is attractive while providing our customers with innovative first-to-market technology. Gross and operating margins in the second quarter were the highest in NETGEAR's history. Given our strong financial performance, we invested in strengthening our sales and marketing staff in emerging markets such as Eastern Europe, Russia and India. We also ran significant in-store branding campaigns, such as sales associates training, point of sales material displays, and channel seed units in the established markets of the United States and Western Europe."

Lo continued, "NETGEAR introduced a record 17 new products in the second quarter. Our RangeMax line, which quickly became the #1 selling MIMO Wi-Fi products in the market, has been our most successful product introduction so far this year. We expect RangeMax sales volume to increase over the next few quarters as the product line benefits from positive product reviews and recommendations, numerous industry awards and NETGEAR's high brand recognition. Additionally, our industry design concept, Platinum II, which our RangeMax routers are based on, was bestowed the prestigious 2005 Industry Design Excellence Gold Award by the Industry Designers Society of America."

"We are also excited about our continuing sales penetration in the carrier market. In the second quarter, we shipped a new cable broadband gateway to Cox Communications, our newest customer in the service provider segment. We also introduced 3 new Voice over Internet (VoIP) products for 3 different operators: AT&T and AOL in the US, and Engin in Australia. The carrier market has been and will continue to be an important growth area for us. Revenue in the second quarter from service providers represents approximately 9% of total revenues."

Jonathan Mather, Executive Vice President and Chief Financial Officer of NETGEAR, said, "Aside from our strong gross margin and operating margin improvements, we remained focused on managing our assets. NETGEAR reduced inventory in the quarter to $44.1 million with turns of 6.3, while maintaining planned channel levels. Cash and short-term investments were at $147.9 million compared to $138.6 million at the end of the first quarter of 2005. Days sales outstanding (DSO's) was 66 days in the second quarter of 2005 compared to 67 days in the first quarter of 2005. The U.S. retail channel inventory ended the second quarter of 2005 at 10.1 weeks, as compared to 7.5 weeks in the first quarter of 2005, and 9.2 weeks in the second quarter 2004. U.S. distribution channel inventory ended the second quarter of 2005 at 3.3 weeks, as compared to 4.3 weeks in the first quarter of 2005 and 4.3 weeks in the second quarter of 2004. European distribution channel inventory ended the second quarter of 2005 at approximately 3.9 weeks, as compared to 4.5 weeks in the first quarter of 2005. Asia Pacific distribution channel inventory ended the second quarter of 2005 at approximately 5.3 weeks, as compared to 4.6 weeks in the first quarter of 2005."

Looking forward, Mr. Lo stated, "We are optimistic, as we enter the seasonally stronger third quarter. Our confidence is based on NETGEAR's market-leading product line-up and anticipated back to school seasonal demand. We expect to benefit from sales momentum in both the US and in Europe along with continued gains in the Asia-Pacific region. We believe net revenue for the third quarter 2005 will be approximately $113 million to $118 million, with non-GAAP operating margin in the range of 12.0% to 12.5%. Finally, we expect the non-GAAP effective tax rate to be approximately 39%."

Netgear Inc.

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