Netgear Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Netgear (NAS: NTGR) dropped 17% in intraday trading today after an impressive earnings beat was overshadowed by margin deterioration.

So what: Non-GAAP EPS of $0.65 beat the consensus estimate by $0.08 and grew 71% year over year. Last quarter Netgear beat estimates by an even more impressive $0.11. Revenue grew 49% year over year to $291 million, helped by an acquisition and a one-time $10 million order from a service provider customer. GAAP EPS rose 86% year over year to $0.54.

Now what: Netgear is defying years of business school wisdom with its significant diseconomies of scale. Gross margin fell to 31% from 35.5% in the year-ago quarter. Operating margin fell to 9.5% from 10.6% in the year-ago quarter while non-GAAP operating margin fell to 11.9% from 13.1%. Management guided the third quarter to revenue of $290 million-$300 million, up about 25% year over year, with a non-GAAP operating margin of 11% to 12%.

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At the time thisarticle was published Fool contributor Cindy Johnson does not own shares of any company named above. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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