Netgear 2012 Annual Report Download - page 28

Table of Contents
customer confidential information is accessed without authorization, our business will be harmed. Furthermore, operating an online cloud service is a
new business for us and we may not have the expertise to properly manage risks related to data security and systems security. If we are unable to
successfully prevent breaches of security relating to our VueZone service or customer private information, including customer videos and customer
personal identification information, management would need to spend increasing amounts of time and effort in this area, and our business would be
harmed.
If our products contain defects or errors, we could incur significant unexpected expenses, experience product returns and lost sales,
experience product recalls, suffer damage to our brand and reputation, and be subject to product liability or other claims.
Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released. The
industry standards upon which many of our products are based are also complex, experience change over time and may be interpreted in different
manners. Some errors and defects may be discovered only after a product has been installed and used by the end-
user. For example, in January 2008,
we announced a voluntary recall of a Powerline Ethernet Adapter made for Europe and other countries.
In addition, epidemic failure clauses are found in certain of our customer contracts, especially contracts with service providers. If invoked, these
clauses may entitle the customer to return for replacement or obtain credits for products and inventory, as well as assess liquidated damage penalties
and terminate an existing contract and cancel future or then current purchase orders. In such instances, we may also be obligated to cover significant
costs incurred by the customer associated with the consequences of such epidemic failure, including freight and transportation required for product
replacement and out-of-
pocket costs for truck rolls to end user sites to collect the defective products. Costs or payments we make in connection with
an epidemic failure may materially adversely affect our results of operations and financial condition. If our products contain defects or errors, or are
found to be noncompliant with industry standards, we could experience decreased sales and increased product returns, loss of customers and market
share, and increased service, warranty and insurance costs. In addition, our reputation and brand could be damaged, and we could face legal claims
regarding our products. A product liability or other claim could result in negative publicity and harm to our reputation, resulting in unexpected
expenses and adversely impacting our operating results. For instance, if a third party were able to successfully overcome the security measures in our
products, such a person or entity could misappropriate customer data, third party data stored by our customers and other information, including
intellectual property. In addition, the operations of our end-user customers may be interrupted. If that happens, affected end-
users or others may file
actions against us alleging product liability, tort, or breach of warranty claims.
If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver
our products and our operating expenses could increase.
We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely
match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a
quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation
network in the latter half of a quarter will likely have a more material effect on our business than at the beginning of a quarter.
The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or
terrorism, natural disasters and congestion resulting from higher shipping volumes. Labor disputes among freight carriers and at ports of entry are
common, particularly in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. Our
international freight is regularly subjected to inspection by governmental entities. If our delivery times increase unexpectedly for these or any other
reasons, our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue as well as customer
imposed penalties. In addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our
products by air freight is greater than other methods. From time to time in the past, we have shipped products using extensive air freight to meet
unexpected spikes in demand, shifts in demand between product categories, to bring new product introductions to market quickly and to timely ship
products previously ordered. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A prolonged
transportation disruption or a significant increase in the cost of freight could severely disrupt our business and harm our operating results.
24