NTGR

NETGEAR, Inc. (NTGR)

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Netgear (NTGR)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Christopher Genualdi

C. S. Lo - Co-Founder, Chairman, Chief Executive Officer and Acting General Manager of Commercial Business Unit

Christine M. Gorjanc - Chief Financial Officer

Analysts

Mark Sue - RBC Capital Markets, LLC, Research Division

Lynn Um - Barclays Capital, Research Division

Hamed Khorsand - BWS Financial Inc.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Jonathan Kees - Capstone Investments, Research Division

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Presentation

Operator

Greetings, and welcome to the NETGEAR Third Quarter 2012 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Genualdi, Investor Relations specialist. Thank you. Mr. Genualdi, you may begin.

Christopher Genualdi

Thank you, Jen. Good afternoon, and welcome to NETGEAR's Third Quarter 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 details 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 gain expectations; the market for our products; business prospects; competition; research and development efforts, including software development; sales and marketing efforts; market trends and opportunities, including trends and opportunities in the Smart Home, 21st Century SMB market and Next-Generation Service Provider products; new product features and our product roadmap; our growth strategy; and expectations regarding our recent acquisitions and pace of new product introductions.

Forward-looking statements made during the call are being made as of today. If this 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. First, I hope that you can all join us for our 2012 Analyst Day being held in York City on November 8 where we will update you about the next-generation market opportunities we are targeting for each of our 3 business units. For additional details on this event, please reach out to NETGEAR Investor Relations on the IR portion of our website.

For the third quarter of 2012, NETGEAR generated 4.4% year-over-year net revenue growth. Non-GAAP diluted EPS came in at $0.65 per diluted share. Please see the press release for a full reconciliation of GAAP to non-GAAP financial results. These results are a reflection of the difficult economic climate that continues to proliferate within Europe, as well as into Australia. The European market has weakened more than we had expected when we entered the quarter, and this is evident in our channels throughout the region. However, we offset some of this European weakness with a very strong back-to-school season in the U.S., along with further market share gains.

During the third quarter, Europe, the Middle East and Africa, or EMEA, net revenue was $104.4 million, down 13% year-over-year and down 11% quarter-over-quarter. Unfortunately, the European slowdown, which had, for the most part, been concentrated in Southern Europe, spread into our traditional core markets of the U.K. and Northern Europe. As a result, we experienced a region-wide retreat in demand in Europe.

American net revenue was $177.6 million, up an impressive 19% year-over-year and up 9% quarter-over-quarter. North America showed strength in back-to-school demand, and on top of that, we were able to gain share.

Our Asia Pacific, or APAC, net revenue was $33.2 million, which is flat from the prior year's comparable quarter and down 16% sequentially. The softness in APAC is due to weakness in Australia across all channels, though this softness is offset somewhat by growth in the rest of the APAC region. As recently reported in the news, Australian business confidence is at a near-term low due to concerns over China's demand on Australian exports.

As we have done since we went public in 2003, we continue to focus on the largest market opportunities and run our business for the long run. Our increased R&D spend will continue to drive our product roadmap and should allow us to gain more market share over time. We will not let this cyclical slowdown to disrupt the large opportunities we see ahead of us. As always, we continue to closely manage our expenses, inventory and cash.

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