Netgear 2004 Annual Report Download - page 40

Table of Contents
personal computers and other Internet-enabled devices, such as electronic gaming platforms or personal video recorders, and these
devices do not rely upon external network-enabling devices, sales of our products could suffer. In addition, if the small business or
home markets experience a recession or other cyclical effects that diminish or delay networking expenditures, our business growth and
profits would be severely limited, and our business could be more severely harmed than those companies that primarily sell to large
business customers.
Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our
prices or increase our advertising expenditures or other expenses, which could result in reduced margins and loss of market share.
We compete in a rapidly evolving and highly competitive market, and we expect competition to intensify. Our principal competitors in
the small business market include 3Com Corporation, Allied Telesyn International, Dell Computer Corporation, D-Link Systems, Inc.,
Hewlett-Packard Company, the Linksys division of Cisco Systems and Nortel Networks. Our principal competitors in the home market
include Belkin Corporation, D-Link and the Linksys division of Cisco Systems. Other current and potential competitors include
numerous local vendors such as Siemens Corporation in Europe, Corega International SA and Melco, Inc./ Buffalo Technology in
Japan and TP-Link in China. Our potential competitors also include consumer electronics vendors who could integrate networking
capabilities into their line of products.
Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater
financial, technical, sales, marketing and other resources. These competitors may, among other things, undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers and exert
more influence on the sales channel than we can. In June 2003, Cisco Systems acquired The Linksys Group, a major competitor of ours.
Cisco Systems has substantial resources that it may direct to developing or purchasing advanced technology, which might be superior
to ours. In addition, it may direct substantial resources to expand its Linksys division’s distribution channel and to increase its
advertising expenditures or otherwise use its resources to successfully compete. Any of these actions could cause us to materially
increase our expenses, and could result in our being unable to successfully compete, which would harm our results of operations. We
anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets. These competitors may
have more advanced technology, more extensive distribution channels, stronger brand names, greater access to shelf space in retail
locations, bigger promotional budgets and larger customer bases than we do. These companies could devote more capital resources to
develop, manufacture and market competing products than we could. If any of these companies are successful in competing against
us, our sales could decline, our margins could be negatively impacted, and we could lose market share, any of which could seriously
harm our business and results of operations.
The average selling prices of our products typically decrease rapidly over the sales cycle of the product, which may negatively affect
our gross margins.
Our products typically experience price erosion, a fairly rapid reduction in the average selling prices over their respective sales cycles.
In order to sell products that have a falling average selling price and maintain margins at the same time, we need to continually reduce
product and manufacturing costs. To manage manufacturing costs, we must collaborate with our third-party manufacturers to engineer
the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our
products. We must also successfully manage our freight and inventory costs to reduce overall product costs. We also need to
continually introduce new products with higher sales prices and gross margins in order to maintain our overall gross margins. If we are
unable to manage the cost of older products or successfully introduce new products with higher gross margins, our net revenue and
overall gross margin would likely decline.
27

2005. EDGAR Online, Inc.