Netgear 2013 Annual Report Download - page 32

Table of Contents
We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could harm our
financial results and cash flows.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our results of
operations, financial position and cash flows. Although a portion of our international sales are currently invoiced in United States dollars, we have
implemented and continue to implement for certain countries and customers both invoicing and payment in foreign currencies. Our primary exposure to
movements in foreign currency exchange rates relates to non-
U.S. dollar denominated sales in Europe, Japan and Australia as well as our global
operations, and non-
U.S. dollar denominated operating expenses and certain assets and liabilities. In addition, weaknesses in foreign currencies for U.S.
dollar denominated sales could adversely affect demand for our products. Conversely, a strengthening in foreign currencies against the U.S. dollar could
increase foreign currency denominated costs. As a result we may attempt to renegotiate pricing of existing contracts or request payment to be made in
U.S. dollars. We cannot be sure that our customers would agree to renegotiate along these lines. This could result in customers eventually terminating
contracts with us or in our decision to terminate certain contracts, which would adversely affect our sales.
We implemented a hedging program in November 2008 to hedge exposures to fluctuations in foreign currency exchange rates as a response to the
risks of changes in the value of foreign currency denominated assets and liabilities. We may enter into foreign currency forward contracts or other
instruments, the majority of which mature within approximately five months. Our foreign currency forward contracts reduce, but do not eliminate, the
impact of currency exchange rate movements. For example, we do not execute forward contracts in all currencies in which we conduct business. In
addition, in the second fiscal quarter of 2009, we commenced implementation of a hedging program to reduce the impact of volatile exchange rates on
net revenues, gross profit and operating profit for limited periods of time. However, the use of such hedging activities may only offset a portion of the
adverse financial effect resulting from unfavorable movements in foreign exchange rates.
We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology and future
technology, our ability to develop, sell, maintain and support technologically innovative products would be limited.
We rely on third parties to obtain non-
exclusive patented hardware and software license rights in technologies that are incorporated into and
necessary for the operation and functionality of most of our products. In these cases, because the intellectual property we license is available from third
parties, barriers to entry into certain markets may be lower for potential or existing competitors than if we owned exclusive rights to the technology that
we license and use. Moreover, if a competitor or potential competitor enters into an exclusive arrangement with any of our key third-
party technology
providers, or if any of these providers unilaterally decide not to do business with us for any reason, our ability to develop and sell products containing
that technology would be severely limited. If we are shipping products that contain third-
party technology that we subsequently lose the right to license,
then we will not be able to continue to offer or support those products. In addition, these licenses often require royalty payments or other consideration
to the third party licensor. Our success will depend, in part, on our continued ability to access these technologies, and we do not know whether these
third-
party technologies will continue to be licensed to us on commercially acceptable terms, if at all. If we are unable to license the necessary
technology, we may be forced to acquire or develop alternative technology of lower quality or performance standards, which would limit and delay our
ability to offer new or competitive products and increase our costs of production. As a result, our margins, market share, and operating results could be
significantly harmed.
We also utilize third-
party software development companies to develop, customize, maintain and support software that is incorporated into our
products. If these companies fail to timely deliver or continuously maintain and support the software, as we require of them, we may experience delays
in releasing new products or difficulties with supporting existing products and customers. In addition, if these third-
party licensors fail or experience
instability, then we may be unable to continue to sell products that incorporate the licensed technologies in addition to being unable to continue to
maintain and support these products. We do require escrow arrangements with respect to certain third-
party software which entitle us to certain limited
rights to the source code, in the event of certain failures by the third party, in order to maintain and support such software. However, there is no
guarantee that we would be able to understand and use the source code, as we may not have the expertise to do so. We are increasingly exposed to these
risks as we continue to develop and market more products containing third-
party software, such as our TV connectivity, security and network attached
storage products.
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