Netgear 2004 Annual Report Download - page 43

Table of Contents
for our transportation systems to function effectively and without delay. 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. For example, in the second half of 2004, ports on the West Coast have experienced and
continue to experience higher than usual shipping traffic, resulting in congestion and delays in our product shipment schedules. Labor
disputes among freight carriers are common, especially in EMEA, and we expect labor unrest and its effects on shipping our products
to be a continuing challenge for us. Since September11, 2001, the rate of inspection of international freight by governmental entities
has substantially increased, and has become increasingly unpredictable. 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. In
addition, if the recent increases in fuel prices were to continue, our transportation costs would likely further 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 air freight to meet unexpected spikes in demand or to bring new product introductions to market quickly. 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.
If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory, or
lose sales from having too few products.
If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of
products with our wholesale distributors and within our sales channel, we may incur increased and unexpected costs associated with
this inventory. We generally allow wholesale distributors and traditional retailers to return a limited amount of our products in
exchange for other products. Under our price protection policy, if we reduce the list price of a product, we are often required to issue a
credit in an amount equal to the reduction for each of the products held in inventory by our wholesale distributors and retailers. If our
wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products, or
these parties may exchange the products for newer products. Also, during the transition from an existing product to a new replacement
product, we must accurately predict the demand for the existing and the new products.
If we improperly forecast demand for our products we could end up with too many products and be unable to sell the excess inventory
in a timely manner, if at all, or, alternatively we could end up with too few products and not be able to satisfy demand. This problem is
exacerbated because we attempt to closely match inventory levels with product demand leaving limited margin for error. If these events
occur, we could incur increased expenses associated with writing off excessive or obsolete inventory or lose sales and therefore suffer
declining gross margins.
We could become subject to litigation, including litigation regarding intellectual property rights, which could be costly and subject
us to significant liability.
The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation
regarding infringement of patents, trade secrets and other intellectual property rights. In particular, leading companies in the data
communications markets, some of which are competitors, have extensive patent portfolios with respect to networking technology.
From time to time, third parties, including these leading companies, have asserted and may continue to assert exclusive patent,
copyright, trademark and other intellectual property rights against us demanding license or royalty payments or seeking payment for
damages, injunctive relief and other available legal remedies through litigation. These include third parties who claim to own patents or
other intellectual property that cover industry standards that our products comply with. If we are unable to resolve these matters or
obtain licenses on acceptable or commercially reasonable terms, we could be sued. The cost of any necessary licenses could
significantly harm our business, operating results and financial condition. Also, at any time, any of these companies, or any other
third-party could initiate litigation against us, which could divert management attention, be costly to defend, prevent us from using or
selling the challenged technology, require us to design around the challenged
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2005. EDGAR Online, Inc.