If You’re Thinking About Buying Netgear Inc. (NASDAQ/NTGR), Read this First

Netgear stockInvestors were pleased with Netgear Inc.’s (NASDAQ/NTGR) latest quarterly results, but a deeper dive into the company’s report reveals a lot of major problems.

The enthusiasm towards Netgear could come from the company’s share repurchase program. Netgear’s board of directors approved a program that would allow the company to buy back up to three million shares of its common stock. That is almost 10% of the company’s outstanding shares at the end of the reporting quarter. (Source: Netgear Inc., July 23, 2015.)

Patrick Lo, Chairman and CEO of Netgear, was optimistic about the future of the business. “This is the beginning of the age of the connected smart home, one in which we believe we will play a central role. We feel that the growth of WiFi connected devices in the home will be exponential over the next five to ten years, and we are committed to being a market leader in this space.”

Investors cheered on the share buybacks and optimistic rhetoric. As of the middle of the trading session of Friday, July 24th, Netgear shares were trading 20.4% higher at $34.65 apiece!

However, you only have to dig a little deeper to find big problems in this report. For the second quarter of 2015, Netgear’s revenue was $288.8 million, a 14.5% decline from the $337.6 million in the same quarter last year. However, it was better than the $277.8 million expected by analysts.

The company’s profits were down even harder. Netgear’s net income declined a staggering 74.8% from $14.7 million in the prior year’s same period to a mere $3.7 million. This translates to adjusted earnings-per-share (EPS) of just 29 cents, compared to an adjusted EPS of 58 cents in Q2 2014.

The company’s business is shrinking not just in one region, but around the world. In the quarter, Netgear net revenue in the Americas, EMEA (Europe, the Middle East and Africa), and APAC (Asia-Pacific) were all down year-over-year. EMEA experienced the biggest drop, with net revenue plunging 32.3%.

Netgear’s operating margin shrank as well, from 7.3% a year ago to a mere 3.9% in the second quarter of 2015.

Segment-wise, both commercial and service provider businesses were down year-over-year, while retail improved. Net revenue from the retail segment grew almost 20% to $131.8 million.

The bottom line; don’t believe the hype. There were a lot of problems in this report and investors should be skeptical of Netgear’s future.