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Q4 2012 Earnings Call

February 12, 2012, 5:00 p.m. ET


Christopher Genualdi

Patrick C. S. Lo - Co-Founder, Chairman, CEO and Acting GM of Commercial Business Unit

Christine M. Gorjanc - CFO


Ryan Hutchinson – Lazard Capital

Mark Sue - RBC Capital Markets, LLC

Hamed Khorsand - BWS Financial Inc.

Kent Schofield - Goldman Sachs

Rohit N. Chopra - Wedbush Securities Inc.

Shaw Wu – Sterne Agee



Greetings and welcome to the NETGEAR Incorporated fourth quarter and full year 2012 earnings conference call. (Operator Instructions)

It is now my pleasure to introduce your host, Christopher Genualdi, Investor Relations Specialist. Thank you, Sir. You may begin.

Christopher Genualdi

Thank you, Operator. Good afternoon, and welcome to NETGEAR's Fourth Quarter and full year 2012 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO and Ms. Christine Gorjanc, CFO. The format of the call will be a brief business review by Patrick, followed by Christine providing detail on the financials and other information. We will then have time for any questions. If you have not received a copy of today's release, please call NETGEAR Investor Relations or go to NETGEAR's corporate website at www.netgear.com.

Before we begin the formal remarks, the company advises that today's conference call contains forward-looking statements. Forward-looking statements include statements, among others, regarding expected revenue, earnings growth, operating income and margins, tax rates, and other projected financial results, share gains expectations, the market and market size for our products, business prospects, competition, research and development efforts, sales and marketing efforts, market trends and opportunities, service provider expectations, new product features, and our product roadmap, our growth strategy, and expectations regarding our recent AirCard acquisition announcement, and pace of new product introductions.

Forward-looking statements made during the call are being made as of today. If the call is replayed or reviewed after today, the information presented in the call may not contain current or accurate information. Further, certain forward-looking statements are subject to certain risks and uncertainties and 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 expected or forecast in such forward-looking statements.

Information on potential risk factors are detailed in the company's periodic filings with the SEC, including, but not limited to, those risks and uncertainties listed in the company's most recent Form 10-Q filed with the SEC. 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 accuracy of unanticipated events.

In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures as well as a reconciliation of the non-GAAP measures and GAAP measures can be found in our press release on the Investor Relations website at www.netgear.com.

At this time, I would like to now turn the call over to Mr. Patrick Lo. Please go ahead, sir.

C.S. Lo

Thank you Christopher and thank you everyone for joining today's call.

NETGEAR revenues were up 7.7% for the full year of 2012and flat year-over-year for the fourth quarter of 2012. We're extremely pleased with the holiday season's retail performance worldwide. For the fourth quarter of 2012, we had the best fourth quarter sequential growth for retail net revenue in the last three years.

However, the challenging macro-economic environment continued to prove difficult for the commercial segment's revenue growth. We succumbed to seasonal slowdowns due to the short-lived selling period in the fourth quarter. Service provider revenue continues to be lumpy. And we saw a quarter-over-quarter decline.

Non-GAAP diluted EPS came in at $0.55 per diluted share. And was impacted by a higher than expected tax rate. Non-GAAP EPS for the full year of 2012 was $2.57. Please see the press release for a full reconciliation of GAAP to non-GAAP financial results.

During the fourth quarter, America's net revenue was $170 million up 9% year-over-year and down 4% quarter-over-quarter. A strong holiday season for retail was offset by reduced spending amount our first provider customers.

Europe, the Middle East, Africa, or EMEA net revenue was $110.5 million, down 12% year-over-year and up 6% quarter-over-quarter. Europe's economy did not show signs of worsening in the fourth quarter although it remains sluggish.

Our Asia-Pacific or APAC net revenue was $30 million, which is up 9% from the prior year's comparable quarter and down 10% sequentially. We saw a continued softness in service provider revenues in Australia.

In Q4, we maintained a high level of shipments with 6.9 million units shipped. We also introduced 32 new products during the quarter.

Sales channel development continues to be a key focus for the company as our sales channel remains a critical strategic asset. By the end of the fourth quarter of 2012, our products were sold in approximately 35,000 retail outlets around the world. And a number of very [inaudible] stands at over 41,000.

Now let's turn to a review of the fourth quarter results for our three business units, retail, commercial, and service providers. In our retail business unit or RBU, net revenue came in at $138.5 million, up 12% quarter-on-quarter and up 7% year-over-year. It was a record quarter in terms of net revenue driven by strong share gain in the U.S. and international markets. Our retail business unit experienced the best fourth quarter sequential growth in the last three years. We're very pleased with the share gain against our retail competitors worldwide.

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