Netgear Shares Tank on Lackluster Results and Disappointing Outlook
Networking equipment maker Netgear (NASDAQ: NTGR) reported second quarter earnings on Wednesday evening, and the results missed expectations on multiple fronts.
The company continues to struggle with supply chain challenges as the global semiconductor shortage persists, impacting countless sectors.
As of 12:15 p.m. on Thursday, Netgear stock had tanked by 10%.
Supply chain bottlenecks held back the top line
Revenue in the second quarter increased 10% to $308.8 million, but analysts were looking for $314.8 million in sales. While the shift to remote work has boosted demand as people upgrade home networking equipment, the logistics bottlenecks limited sales.
“Worldwide supply chain constraints, however, such as component shortages, increased freight costs and transit times, and factory closures due to COVID-19, led to a perfect storm of factors that held back our revenue number and saw us fall short of our operating margin goals,” CEO Patrick Lo commented. “As we continue to navigate through this rapidly changing environment, our long-term thesis that premium WiFi will drive the growth of the consumer networking market and our service subscriber base remains intact.”
Lo expects the consumer networking market to grow 20% above pre-pandemic levels in the second half of the year, and Netgear has a dominant 46% market share in the U.S. consumer WiFi market.
During the quarter, Netgear launched a new subscription service that includes greater parental controls. Nighthawk and Orbi routers support the offering, which allows parents to manage how much time their children spend online as well as providing filters for inappropriate content.
The subscription, which costs $8 per month or $70 per year, joins another existing service, Netgear Armor, which provides cybersecurity to home networks. The company hopes to have 650,000 total subscribers by the end of the year.
That all resulted in adjusted earnings per share of $0.66, also shy of the consensus estimate of $0.71 per share in adjusted profits.
Netgear’s guidance also left a bit to be desired. The company is forecasting revenue of $285 million to $300 million in the third quarter, well below the Street’s models that call for $346.4 million in sales.
Netgear is working with channel partners to optimize inventory levels while expecting the broader networking market’s growth to “moderate further.”
The small- and medium-sized business (SMB) segment will continue to face supply constraints, which is a major factor contributing to the lackluster outlook. The SMB segment comprised roughly 25% of revenue last quarter.
Of course, the COVID-19 pandemic continues to ravage many markets and create ongoing uncertainties around macroeconomic conditions, particularly around the consumer electronics supply chain.
Netgear expects its adjusted operating margin in the third quarter to be in the range of 5% to 6%, in part due to the loss of operating leverage since sales are expected to decline on a sequential basis.
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