Netgear 2006 Annual Report Download - page 30

Table of Contents
largest of which are Ingram Micro Inc. and Tech Data Corporation. We expect that these wholesale distributors will
continue to contribute a significant percentage of our net revenue for the foreseeable future.
We have well developed channels in the United States and Europe, Middle-East and Africa, or EMEA, and are
building a strong presence in the Asia Pacific region. We derive the majority of our net revenue from international
sales. International sales as a percentage of net revenue grew from 56% in 2005 to 62% in 2006. Sales in EMEA
grew from $200.0 million in 2005 to $298.2 million in 2006, representing an increase of approximately 49% during
that period. We continue to penetrate new markets such as Brazil, Eastern Europe, India, and the Middle-East.
Our net revenue grew 27.6% during the year ended December 31, 2006, primarily attributable to higher sales of
DSL gateway and powerline products to new and existing service provider customers, especially in Europe, as well
as continued strength in our RangeMax wireless router product line.
The small business and home networking markets are intensely competitive and subject to rapid technological
change. We expect our competition to continue to intensify. We believe that the principal competitive factors in the
small business and home markets for networking products include product breadth, size and scope of the sales
channel, brand name, timeliness of new product introductions, product performance, features, functionality and
reliability, ease-of-installation, maintenance and use, and customer service and support. To remain competitive, we
believe we must invest significant resources in developing new products, enhancing our current products, expanding
our channels and maintaining customer satisfaction worldwide.
Our gross margin improved to 33.8% for the year ended December 31, 2006 from 33.7% for the year ended
December 31, 2005. Our gross margin improvement was primarily due to decreased marketing costs and improved
vendor rebates, offset by increased sales of products carrying lower gross margins to service providers. Operating
expenses for the year ended December 31, 2006 were $134.1 million or 23.4% of net revenue and $99.5 million or
22.1% of net revenue for the year ended December 31, 2005.
Net income increased $7.5 million, to $41.1 million for the year ended December 31, 2006 from $33.6 million
for the year ended December 31, 2005. This increase was due to an increase in gross profit of $42.0 million and an
increase in interest and other income of $7.1 million, offset by an increase in operating expenses of $34.6 million and
an increase in provision for income taxes of $7.0 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires management to
make assumptions, judgments and estimates that can have a significant impact on the reported amounts of assets,
liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions
believed to be applicable and reasonable under the circumstances. Actual results could differ significantly from these
estimates. These estimates may change as new events occur, as additional information is obtained and as our
operating environment changes. On a regular basis we evaluate our assumptions, judgments and estimates and make
changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of
Directors. Note 1 of the Notes to Consolidated Financial Statements describes the significant accounting policies
used in the preparation of the consolidated financial statements. We have listed below our critical accounting policies
which we believe to have the greatest potential impact on our consolidated financial statements. Historically, our
assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from
actual results.
Revenue Recognition
Revenue from product sales is recognized at the time the product is shipped provided that persuasive evidence of
an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable
and collection of the related receivable is reasonably assured. Currently, for some of our customers, title passes to the
customer upon delivery to the port or country of destination, upon their receipt of the product, or upon the customer’
s
resale of the product. At the end of each fiscal quarter, we estimate and defer revenue related to product where title
has not transferred. The revenue continues to be deferred until such time that title passes to the
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