Here's Why Netgear's Pain Is Only Temporary


Two weeks ago, Netgearwarned already beaten-down investors not to expect too much from its first quarter of 2013.

More specifically, the relatively small networking hardware specialist said it ran into trouble transitioning its new line of ReadyNAS network storage products. As a result, Netgear lowered its revenue guidance to between $290 and $295 million, down from the previous range of $290 million to $305 million. In addition, Netgear said it was expecting non-GAAP operating margin of just 9.5% to 10%, and non-GAAP earnings for the quarter from $0.45 to $0.50 per diluted share.

Over the course of the next few days, the market naturally punished Netgear for its misstep by pushing the stock down more than 12%, thus helping it set a fresh 52-week low.

Survey says?
As promised, Netgear released its official numbers on Thursday, and net revenue for the quarter came in at $293.4 million, down 9.9% form the year-ago period. Non-GAAP net income was just $19.4 million -- a decrease of 31.5% year over year -- and non-GAAP operating margin was indeed just 10%, down from Netgear's previously expected range of 11% to 12%.

Netgear CEO Patrick Lo also confirmed that the issues were primarily due to a combination of difficulties securing components for the new ReadyNAS line, as well as "some last minute bug fixes" leading to unanticipated delays late in the quarter. At least, however, the company "learned a valuable lesson in engineering and manufacturing planning." On a positive note, the company says its supply is now "in full swing and customer feedback on the new product has been very positive."

In addition, keep in mind while the first quarter revenue numbers were lower than Netgear had hoped, they weren't all that bad and actually came in at the bottom range of Netgear's original guidance provided last quarter.

Netgear ReadyNAS, Netgear stock
Netgear ReadyNAS, Netgear stock

Netgear ReadyNAS storage product. Image source: Netgear.

A world of growth opportunities
As I suggested when the initial warning was issued, it's far better that Netgear makes these mistakes now as a $1 billion company than down the road when it hopes to rival other networking behemoths including the $112 billion Cisco Systems . After all, you can bet investors would be much less forgiving if the mammoth Cisco made the same mistakes.

Luckily, I'm not the only investor who sees it that way as shares of Netgear have risen nearly 9% since setting that 52-week low on April 19.

Of course, while Cisco is deeply entrenched in nearly every market that matters across the globe, Cisco investors also can't look forward to the same growth opportunities offered by Netgear. Remember, Netgear is only just getting started on expanding its presence in China through its recent partnership with Lenovo, and its management also stated that it expects growth in India and Russia to accelerate, thanks largely to newly introduced products in the region created specifically to target the expanding middle-class consumers in both markets.

Finally, Lo also reminded us that Netgear only just closed its acquisition of the AirCard division of Sierra Wireless on April 2, and it's "currently engaged in a very methodical integration of the AirCard business into the Service Provider Business Unit and the larger Netgear family." Even better, Netgear is apparently already busy responding to multiple requests for proposals from service providers eager to see new options for fixed and mobile LTE products from the company.

Foolish final thoughts
Long-term investors should keep a close eye on Netgear, then, to see if any of these proposals find the light of day. If they do, the fast-growing 4G LTE market should give Netgear plenty of ammunition for meeting its goals of increasing annual revenue to $2 billion by the end of 2014. If Netgear can manage to keep it together and truly begin to deliver on its long-term growth promises, patient investors who buy today stand to enjoy massive upside going forward.

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Originally published