Netgear 2011 Annual Report Download - page 26

Table of Contents
significant as well. At any time, any of these non-practicing entities, or any other third-party could initiate litigation against us, or we may be
forced to initiate litigation against them, which could divert management attention, be costly to defend or prosecute, prevent us from using or
selling the challenged technology, require us to design around the challenged technology and cause the price of our stock to decline. In addition,
third parties, some of whom are potential competitors, have initiated and may continue to initiate litigation against our manufacturers, suppliers,
members of our sales channels or our service provider customers, alleging infringement of their proprietary rights with respect to existing or
future
products. In the event successful claims of infringement are brought by third parties, and we are unable to obtain licenses or independently
develop alternative technology on a timely basis, we may be subject to indemnification obligations, be unable to offer competitive products, or
be subject to increased expenses. Finally, consumer class-action lawsuits related to the marketing and performance of our home networking
products have been asserted and may in the future be asserted against us. For additional information regarding certain of the lawsuits in which
we are involved, see the information set forth under Note 9, Commitments and Contingencies, in Notes to Consolidated Financial Statements in
Item 8 of Part II of this Annual Report on Form 10-K. If we do not resolve these claims on a favorable basis, our business, operating results and
financial condition could be significantly harmed.
We will be investing increased additional in-house resources on software research and development, which could disrupt our ongoing
business and present risks not originally contemplated.
We plan to continue to evolve our historically hardware-centric business model towards a model that includes more software offerings. As
such, we will further evolve the focus of our organization towards the delivery of more integrated hardware and software solutions for our
customers. While we have invested in software development in the past, we will be expending additional resources in this area in the future.
Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient
revenue to offset liabilities assumed and expenses associated with the strategy, inadequate return on capital, and unidentified issues not
discovered in our due diligence. Software development is inherently risky for a company such as ours with a historically hardware-centric
business model, and accordingly, our efforts in software development may not be successful. This initiative for increased investment in software
research and development may materially adversely affect the Company’s financial condition and operating results.
We may spend a proportionately greater amount on software research and development in the future. If the Company cannot
proportionately decrease our cost structure in response to competitive price pressures, our gross margin and, therefore, our profitability could be
adversely affected. In addition, if our software solutions, pricing and other factors are not sufficiently competitive, or if there is an adverse
reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our revenue and prospects.
Software research and development is complex. We must make long-term investments, develop or obtain appropriate intellectual property
and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products and services.
We must accurately forecast mixes of software solutions and configurations that meet customer requirements, and we may not succeed at doing
so within a given product’s life cycle or at all. Any delay in the development, production or marketing of a new software solution could result in
us not being among the first to market, which could further harm our competitive position. In addition, our regular testing and quality control
efforts may not be effective in controlling or detecting all quality issues and defects. We may be unable to determine the cause, find an
appropriate solution or offer a temporary fix to address defects. Finding solutions to quality issues or defects can be expensive and may result in
additional warranty, replacement and other costs, adversely affecting our profits. If new or existing customers have difficulty with our software
solutions or are dissatisfied with our services, our operating margins could be adversely affected, and we could face possible claims if we fail to
meet our customers’ expectations. In addition, quality issues can impair our relationships with new or existing customers and adversely affect
our brand and reputation, which could adversely affect our operating results.
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