Netgear 2012 Annual Report Download - page 25

Table of Contents
disrupt our business. Although our largest customers may vary from period to period, we anticipate that our operating results for any given period
will continue to depend on large orders from a small number of customers.
We depend substantially on our sales channels, and our failure to maintain and expand our sales channels would result in lower sales and
reduced net revenue.
To maintain and grow our market share, net revenue and brand, we must maintain and expand our sales channels. Our sales channels consist of
traditional retailers, online retailers, DMRs, VARs, and broadband service providers. Some of these entities purchase our products through our
wholesale distributor customers. We generally have no minimum purchase commitments or long-term contracts with any of these third parties.
Traditional retailers have limited shelf space and promotional budgets, and competition is intense for these resources. If the networking sector
does not experience sufficient growth, retailers may choose to allocate more shelf space to other consumer product sectors. A competitor with more
extensive product lines and stronger brand identity, such as Cisco Systems, may have greater bargaining power with these retailers. Any reduction in
available shelf space or increased competition for such shelf space would require us to increase our marketing expenditures simply to maintain
current levels of retail shelf space, which would harm our operating margin. Our traditional retail customers have faced increased and significant
competition from online retailers. If we cannot effectively manage our business amongst our online customers and traditional retail customers, our
business would be harmed. The recent trend in the consolidation of online retailers and DMR channels has resulted in intensified competition for
preferred product placement, such as product placement on an online retailer's Internet home page. Expanding our presence in the VAR channel may
be difficult and expensive. We compete with established companies that have longer operating histories and longstanding relationships with VARs
that we would find highly desirable as sales channel partners. We also sell products to broadband service providers. Competition for selling to
broadband service providers is fierce and intense. Penetrating service provider accounts typically involves a long sales cycle and the challenge of
displacing incumbent suppliers with established relationships and field-
deployed products. During the third quarter of 2012, the aggregate number of
resellers of our products decreased from approximately 42,000 to approximately 40,000; we believe this was caused by the difficult worldwide
economic environment, and especially the difficulties experienced in Europe. If we are unable to maintain and expand our sales channels, our growth
would be limited and our business would be harmed.
We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing sales
channel, our business could be harmed.
We depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-
party
manufacturers experience any delay, disruption or quality control problems in their operations, we could lose market share and our brand
may suffer.
All of our products are manufactured, assembled, tested and generally packaged by a limited number of third party manufacturers, including
original design manufacturers (“ODMs”) and original equipment manufacturers (“OEMs”),
as well as contract manufacturers. In most cases, we rely
on these manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are manufactured by a single
manufacturer. We do not have any long-term contracts with any of our third-party manufacturers. Some of these third-
party manufacturers produce
products for our competitors. Due to weak economic conditions, the viability of some of these third-
party manufacturers may be at risk. Our ODM's
are increasingly refusing to work with us on certain projects, such as projects for manufacturing products for our service provider customers. Because
our service provider customers command significant resources, including for software support, and demand extremely competitive pricing, our
ODMs are starting to refuse to engage on service provider terms. The loss of the services of any of our primary third-
party manufacturers could cause
a significant disruption in operations and delays in product shipments. Qualifying a new manufacturer and commencing volume production is
expensive and time consuming. For example, as a result of our July 2012 acquisition of AVAAK, Inc., we have commenced doing business with a
new contract manufacturer. Ensuring that the contract manufacturer is qualified to manufacture our products to our standards is time consuming. In
addition, there is no assurance that the contract manufacturer can scale its production of our products at the volumes and in the quality that we
require. If the contract manufacturer is unable to do these things, we may have to move production for the products to a new or existing third party
manufacturer which would take significant effort and our business may be harmed. In addition, as we contemplate moving manufacturing into
different jurisdictions, we will be subject to additional significant challenges in ensuring that quality, processes and costs, among other issues, are
consistent with our expectations. For example, while we expect our manufacturers to be responsible for penalties assessed on us because of excessive
failures of the products, there is no assurance that we will be able to collect such reimbursements from these manufacturers, which causes us to take
on additional risk for potential failures of our products.
Our reliance on third-party manufacturers also exposes us to the following risks over which we have limited control:
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