Netgear: Fiscal 2Q08 Financial Results

NETGEAR, Inc. reported financial results for the second quarter ended June 29, 2008.

Second Quarter Highlights:

• Net revenue increased to $204.5 million, 24% year-over-year growth
• Non-GAAP net income of $14.5 million, as compared to $13.7 million in the comparable prior year quarter
• Non-GAAP diluted earnings per share of $0.41, as compared to $0.38 in the prior year quarter
• Expect third quarter 2008 net revenue to be in the range of $208
  million to $212 million, with non-GAAP operating margin in the range of
  9.5% to 10.5%

Net revenue for the second quarter ended June 29, 2008 was $204.5 million, a 24% increase as compared to $164.3 million for the second quarter ended July 1, 2007, and a 3% increase as compared to $198.2 million in the first quarter ended March 30, 2008. Net income for the second quarter of 2008 computed in accordance with GAAP was $11.1 million, or $0.31 per diluted share. This compared to net income of $6.1 million for the second quarter of 2007 and to net income of $11.2 million in the first quarter of 2008. Diluted earnings per share, computed in accordance with GAAP, was $0.17 for the second quarter of 2007 and $0.31 for the first quarter of 2008.

Gross margin on a non-GAAP basis in the second quarter of 2008 was 33.2%, as compared to 35.5% in the year ago comparable quarter, and 32.9% in the first quarter of 2008. Non-GAAP operating margin was 11.5% in the second quarter of 2008, as compared to 11.2% in the second quarter of 2007, and 9.5% in the first quarter of 2008. In the second quarter of 2008, non-GAAP operating expenses were 21.7% of net revenue, as compared to 24.2% in the year ago comparable quarter, and 23.4% in the prior quarter.

Net income on a non-GAAP basis for the second quarter of 2008 was $14.5 million, as compared to non-GAAP net income of $13.7 million for the second quarter of 2007, and non-GAAP net income of $14.1 million for the first quarter of 2008. Non-GAAP net income was $0.41 per diluted share in the second quarter of 2008, as compared to $0.38 per diluted share in the second quarter of 2007 and $0.39 per diluted share in the first quarter of 2008. Non- GAAP net income for the second quarter of 2008 excludes $1.1 million of adjustments related to amortization of purchased intangibles and acquisition related retention compensation, net of taxes, related to our recent acquisitions.Non-GAAP net income for the second quarter of 2008 also excludes non-cash, stock-based compensation, net of tax, of $2.4 million. Non-GAAP net income for the second quarter of 2007 excludes $4.6 million of adjustments related to amortization of purchased intangibles and in-process research and development, $814,000 of impact to cost of sales from purchase accounting adjustments to inventory and $179,000 in acquisition related retention compensation, net of taxes, related to our acquisitions. Non-GAAP net income for the second quarter of 2007 also excludes non-cash, stockbased compensation, net of tax, of $1.9 million. Non-GAAP net income for the first quarter of 2008 excludes $762,000 of adjustments related to amortization of purchased intangibles and acquisition related retention compensation, net of taxes, related to our recent acquisitions. Non-GAAP net income for the first quarter of 2008 also excludes non-cash, stock-based compensation, net of tax, of $2.1 million and $31,000 in litigation reserve requirements, net of tax. 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: "This was a solid quarter for us with net revenue increasing 24% from the second quarter of last year. Despite a challenging market and economic environment in the U.S. and U.K., we enjoyed very healthy year on year revenue growth due to a strong performance in Asia Pacific and the successful launch of NETGEAR products in Wal-Mart stores in the U.S. However, we continue to foresee market weakness in both the U.S. and U.K. in the coming quarters. Our operating margin improved in Q2 due to successful product and operating cost reductions, strong sales of ReadyNAS and Smart Switches and the reduction in air freight costs with an increase in our on hand inventory. Looking forward, we believe continuous emphasis in R&D resulting in differentiated new products and efficient supply chain management will enable us to win in competitive and challenging market conditions."

Mr. Lo continued: "Product wise, our ReadyNAS Network Attached Storage and Gigabit Smart Switches continued to enjoy strong reception worldwide in Q2. Among the 11 new products introduced in the second quarter, notable launches include: our low cost, high performance 11n router, an 11n upgrade kit for any installed 11g routers, and our two industry-first Layer 3 Smart Switches. We foresee a strong transition in the market to 11n in the second half of 2008 and our complete line-up of 11n products with the differentiated RangeMax technology will position us for revenue growth and market share gain. In Q2, our service provider net revenue was approximately $55 million, about 27% of our total net revenue, as compared to 24% in the year ago quarter, and 28% in the first quarter of 2008. In Q2, we added TV Cabo in Portugal and Cablemas in Mexico to our service provider customer list."

Christine Gorjanc, Chief Financial Officer of NETGEAR, said: "We ended the second quarter of 2008 with net inventory at $106.4 million, compared to $97.6 million at the end of the first quarter of 2008, and $85.6 million at the end of the second quarter of 2007. Ending inventory turns were 5.2, compared to 5.5 at the end of the first quarter of 2008, and 5.1 at the end of the second quarter of 2007. Days sales outstanding (DSO) were 71 in the second quarter of 2008, compared to 71 days in the first quarter of 2008 and 75 days in the second quarter of 2007. Cash, cash equivalents and short-term investments were $186.8 million at the end of the second quarter of 2008, compared to $200.8 million at the end of the first quarter of 2008, and $155.8 million at the end of the second quarter of 2007.Deferred revenue decreased to $4.3 million at the end of the second quarter of 2008, compared to deferred revenue of $7.5 million at the end of the first quarter of 2008, and $8.7 million at the end of the second quarter of 2007."

The U.S. retail channel inventory ended the second quarter of 2008 at 13.6 weeks, compared to 11.3 weeks in the second quarter of 2007, and 10.0 weeks in the first quarter of 2008. U.S. distribution channel inventory ended the second quarter of 2008 at 5.1 weeks, compared to 5.2 weeks in the second quarter of 2007, and 4.3 weeks in the first quarter of 2008. European distribution channel inventory ended the second quarter of 2008 at approximately 6.0 weeks, compared to approximately 4.8 weeks in the second quarter of 2007, and 5.7 weeks in the first quarter of 2008.Asia Pacific distribution channel inventory ended the second quarter of 2008 at approximately 6.0 weeks, compared to approximately 4.6 weeks in the second quarter of 2007, and 4.7 weeks in the first quarter of 2008.

Net revenue by geography comprises gross revenue less such items as marketing incentives paid to customers, sales returns and price protection.

Looking forward, Mr. Lo added: "The weakness in consumer demand in our top two retail markets, the U.S. and U.K., has and will continue to challenge our execution. Despite such market challenges, we firmly believe our core strategy of continuously driving growth through innovation in product line-up, channel penetration and geographic expansion remains sound. We are prepared to introduce another 11 to 12 new products in Q3. Also, we plan to continue to add new service provider customers in Q3. Finally, we believe we can continue to grow and gain market share in Asia Pacific and other emerging markets. For the third quarter of 2008, we expect a lower than normal back to school demand due to the economic climate in the U.S. and U.K. Specifically, we expect third quarter net revenue to be approximately $208 to $212 million. In the meantime, we will increase our R&D effort and will implement a new ERP system in Q3 to enhance our intermediate and long term competitiveness. The non-GAAP operating margin will be in the range of 9.5% to 10.5%. Lastly, we expect the non-GAAP effective tax rate to be approximately 39.5%."