Netgear 2006 Annual Report Download - page 37

Table of Contents
Operating Expenses
Research and development expense
Research and development expenses consist primarily of personnel expenses, payments to suppliers for design
services, tooling design costs, safety and regulatory testing, product certification expenditures to qualify our products
for sale into specific markets, prototypes and other consulting fees. Research and development expenses are
recognized as they are incurred. We have invested in building our research and development organization to enhance
our ability to introduce innovative and easy to use products. We expect to continue to add additional employees in
our research and development department. In the future we believe that research and development expenses will
increase in absolute dollars as we expand into new product technologies, enhance the ease-of-use of our products,
and broaden our core competencies.
Research and development expenses increased $5.6 million, or 43.7%, to $18.4 million for the year ended
December 31, 2006, from $12.8 million for the year ended December 31, 2005. The increase was primarily due to
higher salary and related payroll expenses of $2.1 million resulting from research and development related headcount
growth, including $486,000 related to retention bonuses for certain employees associated with the acquisition of
SkipJam. Employee headcount increased by 15% to 62 employees as of December 31, 2006 as compared to 54
employees as of December 31, 2005, in part due to employees obtained from the acquisition of SkipJam. The
increase was also attributable to an increase of $2.1 million in engineering costs. These costs were incurred to
improve the quality of our small business products. Additionally, stock-based compensation expense increased
$826,000 to $1.1 million for the year ended December 31, 2006, from $293,000 for the year ended December 31,
2005, as a result of the adoption of SFAS 123R.
Research and development expenses increased $2.5 million, or 24.4%, to $12.8 million for the year ended
December 31, 2005, from $10.3 million for the year ended December 31, 2004. The increase was primarily due to
increased salary and payroll related expenses of $2.4 million resulting from research and development related
headcount growth. Employee headcount increased by 35% to 54 employees as of December 31, 2005 as compared to
40 employees as of December 31, 2004. These headcount increases were primarily due to the expansion of our
research and development facility in Taiwan and expansion of our focus on the broadband service provider market
which often requires additional certifications and testing. Additionally, stock-based compensation expense decreased
$107,000 to $293,000 for the year ended December 31, 2005, from $400,000 for the year ended December 31, 2004.
Sales and marketing expense
Sales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other
marketing expenses, product marketing expenses, outbound freight costs, personnel expenses for sales and marketing
staff and technical support expenses. We believe that maintaining and building brand awareness is key to both net
revenue growth and maintaining our gross margin. We also believe that maintaining widely available and high
quality technical support is key to building and maintaining brand awareness. Accordingly, we expect sales and
marketing expenses to increase in absolute dollars in the future, related to the planned growth of our business.
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Year Ended December 31,
Percentage
Percentage
2004 Change 2005 Change 2006
(In thousands, except percentage data)
Research and development expense
$
10,316
24.4
%
$
12,837
43.7
%
$
18,443
Percentage of net revenue
2.7
%
2.8
%
3.2
%
Year Ended December 31,
Percentage
Percentage
2004 Change 2005 Change 2006
(In thousands, except percentage data)
Sales and marketing expense
$
62,247
14.6
%
$
71,345
28.8
%
$
91,881
Percentage of net revenue
16.3
%
15.9
%
16.0
%