Netgear 2006 Annual Report Download - page 22

Table of Contents
containing that technology would be severely limited. If we are shipping products which 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. Our licenses often require royalty payments or other consideration to third parties. Our success will
depend in part on our continued ability to have access to these technologies, and we do not know whether these third-
party technologies will continue to be licensed to us on commercially acceptable terms or 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. This 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 that we require of them, we may experience delays in releasing new products or difficulties with
supporting existing products and customers.
If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed.
We rely upon third parties for a substantial portion of the intellectual property we use in our products. At the
same time, we rely on a combination of copyright, trademark, patent and trade secret laws, nondisclosure agreements
with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our
intellectual property rights. Despite efforts to protect our intellectual property, unauthorized third parties may attempt
to design around, copy aspects of our product design or obtain and use technology or other intellectual property
associated with our products. For example, one of our primary intellectual property assets is the NETGEAR name,
trademark and logo. We may be unable to stop third parties from adopting similar names, trademarks and logos,
especially in those international markets where our intellectual property rights may be less protected. Furthermore,
our competitors may independently develop similar technology or design around our intellectual property. Our
inability to secure and protect our intellectual property rights could significantly harm our brand and business,
operating results and financial condition.
Our sales and operations in international markets expose us to operational, financial and regulatory risks.
International sales comprise a significant amount of our overall net revenue. International sales were 62% of
overall net revenue in fiscal 2006. We anticipate that international sales may grow as a percentage of net revenue.
We have committed resources to expanding our international operations and sales channels and these efforts may not
be successful. International operations are subject to a number of other risks, including:
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• political and economic instability, international terrorism and anti-American sentiment, particularly in
emerging markets;
•
preference for locally branded products, and laws and business practices favoring local competition;
•
exchange rate fluctuations;
•
increased difficulty in managing inventory;
•
delayed revenue recognition;
•
less effective protection of intellectual property;
• stringent consumer protection and product compliance regulations, including but not limited to the recently
enacted Restriction of Hazardous Substances directive and the Waste Electrical and Electronic Equipment, or
WEEE directive in Europe, that may vary from country to country and that are costly to comply with; and
•
difficulties and costs of staffing and managing foreign operations.