Netgear 2012 Annual Report Download - page 46

Table of Contents
products. The increase in APAC net revenue was attributable to increased sales to service provider customers, as well as, increased sales of our retail
and commercial products.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of the following: the cost of finished products from our third party manufacturers; overhead costs, including
purchasing, product planning, inventory control, warehousing and distribution logistics; third-
party software licensing fees; inbound freight; warranty
costs associated with returned goods; write-
downs for excess and obsolete inventory and amortization expense of certain acquired intangibles. We
outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product
costs and gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns,
changes in average selling prices, end-
user customer rebates and other sales incentives, and changes in our cost of goods sold due to fluctuations in
prices paid for components, net of vendor rebates, warranty and overhead costs, inbound freight, conversion costs and charges for excess or obsolete
inventory. The following table presents costs of revenue and gross margin, for the periods indicated:
2012 vs 2011
Cost of revenue increased $76.8 million , or 9.5% , to $888.4 million for the year ended December 31, 2012 , from $811.6 million
for the year
ended December 31, 2011 . Our gross margin decreased to 30.2% for the year ended December 31, 2012 , from 31.3%
for the year ended
December 31, 2011 .
The decrease in gross margin was primarily attributable to relatively faster growth in our revenue from service providers, which generally
carries lower gross margins than our other products. Sales to service providers increased as a percentage of net revenue to 36%
in the year ended
December 31, 2012 , compared to 31% in the year ended December 31, 2011 .
2011 vs 2010
Cost of revenue increased $208.8 million, or 34.6%, to $811.6 million for the year ended December 31, 2011, from $602.8 million for the year
ended December 31, 2010. Our gross margin decreased to 31.3% for the year ended December 31, 2011, from 33.2% for the year ended December
31, 2010.
The decrease in gross margin was primarily attributable to a higher percentage of our total revenue derived from sales to service providers,
which generally carry lower gross margins. For the years ended December 31, 2011 and 2010, the sales from service providers represented 31% and
20% of net revenue, respectively.
42
Year Ended December 31,
2012
% Change 2011 % Change 2010
(In thousands, except percentage data)
Cost of revenue
$
888,368
9.5
%
$
811,572
34.6
%
$
602,805
Gross margin percentage
30.2
%
31.3
%
33.2
%