Netgear 2010 Annual Report Download - page 47

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Table of Contents
customer rebates and other sales incentives, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of
vendor rebates, warranty and overhead costs, inbound freight, conversion costs, and charges for excess or obsolete inventory.
2010 Cost of Revenue and Gross Margin Compared to 2009 Cost of Revenue and Gross Margin
Cost of revenue increased $122.6 million, or 25.5%, to $602.8 million for the year ended December 31, 2010, from $480.2 million for the
year ended December 31, 2009. Our gross margin increased to 33.2% for the year ended December 31, 2010, from 30.1% for the year ended
December 31, 2009.
The increase in gross margin was primarily attributable to a higher percentage of our total revenue coming from higher sales of home and
commercial business products, which generally carry higher gross margins. Additionally, we experienced a lower percentage of our total revenue
derived from sales to service providers, which generally carry lower gross margins.
2009 Cost of Revenue and Gross Margin Compared to 2008 Cost of Revenue and Gross Margin
Cost of revenue decreased $22.1 million, or 4.4%, to $480.2 million for the year ended December 31, 2009, from $502.3 million for the
year ended December 31, 2008. Our gross margin decreased to 30.1% for the year ended December 31, 2009, from 32.4% for the year ended
December 31, 2008.
The decrease in gross margin was primarily attributable to the impact of a relatively stronger U.S. dollar on our foreign currency
denominated revenues. Gross margins were also impacted by sales declines of our switch products as well as supply constraints late in the year,
which resulted in the use of higher cost air freight expense to acquire inventory levels sufficient to support increased demand. These margin
decreases were partially offset by our increased focus on reducing sales incentives that impact net revenue.
Operating Expenses
Research and Development Expense
Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, 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. In the future, we believe that research and development
expenses will increase in absolute dollars as we expand into new networking product technologies and broaden our core competencies.
2010 Research and Development Expense Compared to 2009 Research and Development Expense
Research and development expenses increased $9.9 million, or 33.0%, to $40.0 million for the year ended December 31, 2010, from $30.1
million for the year ended December 31, 2009. The increase was primarily attributable to increased costs of $7.2 million related to an increase in
payroll and other employee expenses principally resulting from increased variable compensation, as well as increased overall research and
development headcount. We note there was minimal variable compensation expense in the year ended
45
Year Ended December 31,
2010
Percentage
Change
2009
Percentage
Change
2008
(In thousands, except percentage data)
Research and development expense
$
39,972
33.0
%
$
30,056
(11.0
%)
33,773
Percentage of net revenue
4.5
%
4.4
%
4.5
%