NETGEAR® Reports Third Quarter 2010 Results

Third Quarter 2010 Financial Highlights:

- Net revenue of $236.0 million, compared to $171.1 million in the comparable prior year quarter, 38% year-over-year growth

- Non-GAAP net income of $16.1 million, compared to net income of $11.0 million in the comparable prior year quarter

- Non-GAAP diluted earnings per share of $0.45, compared to diluted earnings per share of $0.31 in the comparable prior year quarter

- Company expects fourth quarter 2010 net revenue to be in the range of $240 million to $250 million, with non-GAAP operating margin in the range of 11% to 12%

Oct 26, 2010, 16:00 ET from NETGEAR, Inc.

SAN JOSE, Calif., Oct. 26 /PRNewswire-FirstCall/ -- NETGEAR, Inc. (Nasdaq: NTGR), a global networking company that delivers innovative products to consumers, businesses and Internet service providers, today reported financial results for the third quarter ended October 3, 2010.

Net revenue for the third quarter ended October 3, 2010 was $236.0 million, as compared to $171.1 million for the third quarter ended September 27, 2009, and as compared to $196.0 million for the second quarter ended June 27, 2010.  Net income, computed in accordance with GAAP, for the third quarter of 2010 was $13.1 million, or $0.36 per diluted share.  This compared to GAAP net income of $8.5 million, or $0.24 per diluted share, for the third quarter of 2009, and to GAAP net income of $10.5 million, or $0.29 per diluted share, for the second quarter of 2010.  

Gross margin on a non-GAAP basis in the third quarter of 2010 was 32.7%, as compared to 33.5% in the third quarter of 2009, and 36.3% in the second quarter of 2010.  Non-GAAP operating margin was 11.0% in the third quarter of 2010, as compared to 10.6% in the third quarter of 2009, and 13.1% in the second quarter of 2010. Non-GAAP net income was $0.45 per diluted share in the third quarter of 2010, as compared to non-GAAP net income of $0.31 per diluted share in the third quarter of 2009, and non-GAAP net income of $0.38 per diluted share in the second quarter of 2010.  

The differences between GAAP and non-GAAP financial measures include adjustments, net of any tax effect, for amortization of purchased intangibles, stock-based compensation, restructuring, acquisition related compensation, and litigation reserves. The accompanying schedules provide a reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis.

Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, "For the third quarter of 2010, we are extremely pleased with our strong back-to-school performance in North America, which helped generate 62% year-on-year growth in that region. We also continue to experience a recovery in demand among small business customers worldwide, as reflected in our strong third quarter SMB revenue. Net revenue from service providers was approximately 19% of total net revenue in the third quarter of 2010, as compared to 25% in the third quarter of 2009, and 16% in the second quarter of 2010. We expect our service provider net revenue to continue to increase sequentially in the fourth quarter of 2010 as our service provider customers continue to phase in Docsis 3.0 equipment.

"We continue to achieve worldwide market share gains primarily due to the strength of our existing product lineup and our rapid pace of exciting new product introductions. We are the market share leader in networking in U.S. and European retail, and our goal is to become the market share leader in the rest of the world in the coming years.  In the third quarter of 2010, we introduced 21 new products into the market. Notable new products introduced during the quarter include the new NETGEAR Roku Player and the ReadyNAS® Ultra series of home network storage devices. We feel that the home consumer market is moving towards a network that revolves around the television via both streaming and recording of shows on demand over the Internet. Thus, we believe that our products are uniquely situated to take advantage of these market trends. In the SMB category we introduced a wireless controller that brings simplified enterprise-class WiFi setup at a very competitive price. Also, we introduced the UTM50, a Unified Threat Management appliance which provides comprehensive network security to 50 users, joining our UTM 5, 10 and 25 user models."

Christine Gorjanc, Chief Financial Officer of NETGEAR, said, "We ended the third quarter of 2010 with $243.5 million in cash, cash equivalents and short-term investments, compared to $234.5 million at the end of the third quarter of 2009, and $231.0 million at the end of the second quarter of 2010.  Our net inventory ended at $110.4 million, compared to $73.9 million at the end of the third quarter of 2009, and $125.7 million at the end of the second quarter of 2010."

Net revenue by geography comprises gross revenue less such items as marketing incentives paid to customers, sales returns and price protection. The following table shows net revenue by geography for the periods indicated:

Net revenue by geography:

Three months ended

October 3, 2010

June 27, 2010

September 27, 2009

North America

$121,956

52%

$102,471

52%

$  75,408

44%

Europe, Middle-East and Africa

89,120

38%

68,598

35%

72,590

42%

Asia Pacific

24,941

10%

24,880

13%

23,073

14%

$236,017

100%

$195,949

100%

$171,071

100%

Looking forward, Mr. Lo added, "We expect a strong finish to the year with strong worldwide market demand across all of our product categories.  Our success has been driven by innovative product introductions and we will continue to focus on innovation in the fourth quarter with another 20+ new product introductions. Specifically, for the fourth quarter 2010, we expect net revenue in the range of approximately $240 million to $250 million, with non-GAAP operating margin to be in the range of 11% to 12%."

Investor Conference Call / Webcast Details

NETGEAR will review the third quarter 2010 results and discuss management's expectations for the fourth quarter of 2010 today, Tuesday, October 26, 2010 at 5 p.m. EDT (2 p.m. PDT). The dial-in number for the live audio call is (201) 689-8560. A live webcast of the conference call will be available on NETGEAR's website at www.netgear.com.  A replay of the call will be available 2 hours following the call through midnight EDT (9 p.m. PDT) on Tuesday, November 2, 2010 by telephone at (858) 384-5517 and via the web at www.netgear.com. The conference ID number to access the phone replay is 358821.

About NETGEAR, Inc.

NETGEAR (Nasdaq: NTGR) is a global networking company that delivers innovative products to consumers, businesses and Internet service providers. For consumers, the company makes high performance, dependable and easy home networking, storage and digital media products to connect people with the Internet and their content and devices. For businesses, NETGEAR provides networking, storage and security solutions without the cost and complexity of Big IT. The company also supplies all of the top Internet service providers with retail proven, whole home solutions for their customers. NETGEAR products are built on a variety of proven technologies such as wireless, Ethernet and powerline, with a focus on reliability and ease-of-use. NETGEAR products are sold in over 28,000 retail locations around the globe, and through more than 37,000 value-added resellers. The company's headquarters are in San Jose, Calif., with additional offices in 25 countries. NETGEAR is an ENERGY STAR(R) partner. More information is available at http://www.NETGEAR.com or by calling (408) 907-8000. Connect with NETGEAR at http://twitter.com/NETGEAR and http://www.facebook.com/NETGEAR.

(C) 2010 NETGEAR, Inc. NETGEAR, the NETGEAR logo and ReadyNAS are trademarks or registered trademarks of NETGEAR, Inc. in the United States and/or other countries. The information contained herein is subject to change without notice. NETGEAR shall not be liable for technical or editorial errors or omissions contained herein.  All rights reserved.  

Contact:

Joseph Villalta The Ruth Group (646) 536-7003 jvillalta@theruthgroup.com

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 for NETGEAR, Inc.:

This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The words "anticipate", "expect", "believe", "will", "may", "should", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking statements.  However, the absence of these words does not mean that the statements are not forward-looking. The forward-looking statements represent NETGEAR, Inc.'s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements, among others, regarding NETGEAR's expected revenue, earnings, gross and operating margin and operating income on both a GAAP and non-GAAP basis, expectations of larger revenue share from service provider customers, Docsis 3.0 products deployment by our service provider customers, product capabilities, our ability and intent to launch new product offerings and continue product development efforts, current and future demand for the Company's existing and anticipated new products, and our ability to increase market share for the Company's products globally. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including, without limitation, the following: future demand for the Company's products may be lower than anticipated; consumers may choose not to adopt the Company's new product offerings or adopt competing products; product performance may be adversely affected by real world operating conditions; the Company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the Company's products or utilize competing products; the Company may be unable to collect receivables as they become due; the Company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings; channel inventory information reported is estimated based on the average number of weeks of inventory on hand on the last Saturday of the quarter, as reported by certain of NETGEAR's customers; changes in the level of NETGEAR's cash resources and the Company's planned usage of such resources; changes in the Company's stock price and developments in the business that could increase the Company's cash needs, fluctuations in foreign exchange rates, and the actions and financial health of the Company's customers. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Further information on potential risk factors that could affect NETGEAR and its business are detailed in the Company's periodic filings with the Securities and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled "Part II - Item 1A. Risk Factors," pages 36 through 52, in the Company's Quarterly Report on Form 10-Q for the quarter ended June 27, 2010, filed with the Securities and Exchange Commission on August 5, 2010. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Use of Non-GAAP Financial Information:

To supplement our consolidated financial statements presented on a GAAP basis, NETGEAR uses non-GAAP financial measures, which are adjusted to exclude certain expenses and tax benefits, where applicable.  We believe non-GAAP financial measures are appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future. These adjustments to our current period GAAP results are made with the intent of providing both management and investors a more complete understanding of NETGEAR's underlying operational results and trends and our marketplace performance. For example, the non-GAAP results are an indication of our baseline performance before charges that are considered by management to be outside of our core operating results. In addition, these adjusted non-GAAP results are among the primary indicators management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial measures prepared in accordance with generally accepted accounting principles in the United States.

-Financial Tables Attached-

NETGEAR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

October 3,

December 31,

2010

2009

ASSETS

Current assets:

Cash and cash equivalents

$                       98,548

$                 172,202

Short-term investments

144,961

74,898

Accounts receivable, net

175,599

162,853

Inventories

110,394

90,590

Deferred income taxes

18,592

13,347

Prepaid expenses and other current assets

23,286

20,835

Total current assets

571,380

534,725

Property and equipment, net

17,085

16,891

Intangibles, net

7,598

8,298

Goodwill

73,949

64,908

Other non-current assets

11,362

8,299

Total assets

$                     681,374

$                 633,121

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$                       39,902

$                   69,081

Accrued employee compensation

19,546

11,040

Other accrued liabilities

101,709

87,894

Deferred revenue

20,957

22,106

Income taxes payable

2,995

5,488

Total current liabilities

185,109

195,609

Non-current income taxes payable

20,422

17,479

Other non-current liabilities

5,562

5,880

Total liabilities

211,093

218,968

Stockholders' equity:

Common stock

36

35

Additional paid-in capital

299,574

280,256

Cumulative other comprehensive income

201

24

Retained earnings

170,470

133,838

Total stockholders' equity

470,281

414,153

Total liabilities and stockholders' equity

$                     681,374

$                 633,121

NETGEAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three months ended

Nine months ended

October 3,

June 27,

September 27,

October 3,

September 27,

2010

2010

2009

2010

2009

Net revenue

$  236,017

$ 195,949

$          171,071

$  643,521

$          467,763

Cost of revenue

160,310

126,387

115,326

425,428

327,827

Gross profit

75,707

69,562

55,745

218,093

139,936

Operating expenses:

Research and development

10,564

9,945

7,353

29,814

22,202

Sales and marketing

34,069

30,358

25,710

95,216

76,076

General and administrative

9,358

8,397

8,502

26,697

24,594

Restructuring

(8)

(81)

104

(76)

798

Litigation reserves, net

-

143

(480)

211

2,060

Total operating expenses

53,983

48,762

41,189

151,862

125,730

Income from operations

21,724

20,800

14,556

66,231

14,206

Interest income

132

100

66

302

548

Other income (expense), net

(326)

132

(266)

(388)

338

Income before income taxes

21,530

21,032

14,356

66,145

15,092

Provision for income taxes

8,435

10,567

5,826

28,858

13,612

Net income

$    13,095

$   10,465

$              8,530

$    37,287

$              1,480

Net income per share:

Basic

$        0.37

$       0.30

$                0.25

$        1.06

$                0.04

Diluted

$        0.36

$       0.29

$                0.24

$        1.04

$                0.04

Weighted average shares outstanding used to compute net income per share:

Basic

35,441

35,237

34,523

35,218

34,425

Diluted

36,009

35,943

34,948

35,891

34,749

Stock-based compensation expense was allocated as follows:

Cost of revenue

$         202

$        227

$                 239

$         708

$                 719

Research and development

556

572

473

1,709

1,505

Sales and marketing

1,134

1,193

1,015

3,539

3,097

General and administrative

1,055

1,131

954

3,255

2,972

NETGEAR, INC.

NON-GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Excluding amortization of purchased intangibles, stock-based compensation, restructuring, acquisition related compensation, and litigation reserves, net of tax.

(In thousands, except per share data)

(Unaudited)

Three months ended

Nine months ended

October 3,

June 27,

September 27,

October 3,

September 27,

2010

2010

2009

2010

2009

Net revenue

$  236,017

$ 195,949

$          171,071

$  643,521

$          467,763

Cost of revenue

158,764

124,835

113,834

420,750

323,348

Gross profit

77,253

71,114

57,237

222,771

144,415

Operating expenses:

Research and development

9,988

9,066

6,880

27,439

20,697

Sales and marketing

32,935

29,165

24,695

91,677

72,979

General and administrative

8,303

7,266

7,548

23,442

21,622

Total operating expenses

51,226

45,497

39,123

142,558

115,298

Income from operations

26,027

25,617

18,114

80,213

29,117

Interest income

132

100

66

302

548

Other income (expense), net

(326)

132

(266)

(388)

338

Income before income taxes

25,833

25,849

17,914

80,127

30,003

Provision for income taxes

9,747

12,121

6,946

33,254

18,142

Net income

$    16,086

$   13,728

$            10,968

$    46,873

$            11,861

Net income per share:

Basic

$        0.45

$       0.39

$                0.32

$        1.33

$                0.34

Diluted

$        0.45

$       0.38

$                0.31

$        1.31

$                0.34

Weighted average shares outstanding used to compute net income per share:

Basic

35,441

35,237

34,523

35,218

34,425

Diluted

36,009

35,943

34,948

35,891

34,749

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES

(In thousands, except per share data)

(Unaudited)

STATEMENT OF OPERATIONS DATA:

Three months ended

Nine months ended

October 3,

June 27,

September 27,

October 3,

September 27,

2010

2010

2009

2010

2009

GAAP gross profit

$    75,707

$ 69,562

$            55,745

$  218,093

$          139,936

Amortization of intangible assets

1,344

1,325

1,253

3,970

3,760

Stock-based compensation expense

202

227

239

708

719

Non-GAAP gross profit

$    77,253

$ 71,114

$            57,237

$  222,771

$          144,415

Non-GAAP gross margin

32.7%

36.3%

33.5%

34.6%

30.9%

GAAP research and development

$    10,564

$   9,945

$              7,353

$    29,814

$            22,202

Stock-based compensation expense

(556)

(572)

(473)

(1,709)

(1,505)

Acquisition related compensation

(20)

(307)

-

(666)

-

Non-GAAP research and development

$      9,988

$   9,066

$              6,880

$    27,439

$            20,697

GAAP sales and marketing

$    34,069

$ 30,358

$            25,710

$    95,216

$            76,076

Stock-based compensation expense

(1,134)

(1,193)

(1,015)

(3,539)

(3,097)

Non-GAAP sales and marketing

$    32,935

$ 29,165

$            24,695

$    91,677

$            72,979

GAAP general and administrative

$      9,358

$   8,397

$              8,502

$    26,697

$            24,594

Stock-based compensation expense

(1,055)

(1,131)

(954)

(3,255)

(2,972)

Non-GAAP general and administrative

$      8,303

$   7,266

$              7,548

$    23,442

$            21,622

GAAP total operating expenses

$    53,983

$ 48,762

$            41,189

$  151,862

$          125,730

Stock-based compensation expense

(2,745)

(2,896)

(2,442)

(8,503)

(7,574)

Restructuring

8

81

(104)

76

(798)

Acquisition related compensation

(20)

(307)

-

(666)

-

Litigation reserves

-

(143)

480

(211)

(2,060)

Non-GAAP total operating expenses

$    51,226

$ 45,497

$            39,123

$  142,558

$          115,298

NETGEAR, INC.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)

(In thousands, except per share data)

(Unaudited)

STATEMENT OF OPERATIONS DATA (CONTINUED):

Three months ended

Nine months ended

October 3,

June 27,

September 27,

October 3,

September 27,

2010

2010

2009

2010

2009

GAAP operating income

$    21,724

$ 20,800

$            14,556

$    66,231

$            14,206

Amortization of intangible assets

1,344

1,325

1,253

3,970

3,760

Stock-based compensation expense

2,947

3,123

2,681

9,211

8,293

Restructuring

(8)

(81)

104

(76)

798

Acquisition related compensation

20

307

-

666

-

Litigation reserves

-

143

(480)

211

2,060

Non-GAAP operating income

$    26,027

$ 25,617

$            18,114

$    80,213

$            29,117

Non-GAAP operating margin

11.0%

13.1%

10.6%

12.5%

6.2%

GAAP net income

$    13,095

$ 10,465

$              8,530

$    37,287

$              1,480

Amortization of intangible assets

1,344

1,325

1,253

3,970

3,760

Stock-based compensation expense

2,947

3,123

2,681

9,211

8,293

Restructuring

(8)

(81)

104

(76)

798

Acquisition related compensation

20

307

-

666

-

Litigation reserves

-

143

(480)

211

2,060

Tax effect

(1,312)

(1,554)

(1,120)

(4,396)

(4,530)

Non-GAAP net income

$    16,086

$ 13,728

$            10,968

$    46,873

$            11,861

NET INCOME PER DILUTED SHARE:

Three months ended

Nine months ended

October 3,

June 27,

September 27,

October 3,

September 27,

2010

2010

2009

2010

2009

GAAP net income per diluted share

$        0.36

$     0.29

$                0.24

$        1.04

$                0.04

Amortization of intangible assets

0.04

0.04

0.04

0.11

0.11

Stock-based compensation expense

0.08

0.09

0.08

0.26

0.24

Restructuring

(0.00)

(0.00)

0.00

(0.00)

0.02

Acquisition related compensation

0.00

0.01

-

0.02

-

Litigation reserves

-

0.00

(0.01)

0.01

0.06

Tax effect

(0.03)

(0.05)

(0.04)

(0.13)

(0.13)

Non-GAAP net income per diluted share

$        0.45

$     0.38

$                0.31

$        1.31

$                0.34

NETGEAR, INC.

SUPPLEMENTAL FINANCIAL INFORMATION

(In thousands, except per share data)

(Unaudited)

Three months ended

October 3,

June 27,

March 28,

December 31,

September 27,

2010

2010

2010

2009

2009

Cash, cash equivalents and short-term investments

$  243,509

$ 231,030

$ 240,947

$        247,100

$          234,540

Cash, cash equivalents and short-term investments per diluted share

$        6.76

$       6.43

$       6.75

$              7.01

$                6.71

Accounts receivable, net

$  175,599

$ 138,730

$ 150,140

$        162,853

$          123,529

Days sales outstanding (DSO)

73

64

62

71

66

Inventories

$  110,394

$ 125,687

$ 109,934

$          90,590

$            73,858

Ending inventory turns

5.8

4.0

5.0

6.7

6.2

Weeks of channel inventory:

U.S. retail channel

10.0

9.9

9.8

6.9

10.0

U.S. distribution channel

6.7

6.1

5.7

4.4

5.2

EMEA distribution channel

4.5

6.0

5.7

3.4

4.3

APAC distribution channel

5.9

4.9

4.5

3.8

5.0

Deferred revenue

$    20,957

$   17,405

$   15,917

$          22,106

$            11,355

Headcount

646

625

607

586

574

Non-GAAP Diluted shares

36,009

35,943

35,716

35,271

34,948

SOURCE NETGEAR, Inc.



RELATED LINKS

http://www.netgear.com