Netgear 2013 Annual Report Download - page 18

Table of Contents
measures. Should the European Union monetary policy measures be insufficient to restore confidence and stability to the financial markets, the recovery
of the global economy, including the U.S. and European Union economies where we have a significant presence, could be hindered or reversed, which
could have a material adverse effect on us. For example, the aggregate number of resellers of our products decreased during the third quarter of 2012;
we believe this was caused by the difficult worldwide economic environment, and especially the difficulties experienced in Europe. There could also be
a number of other follow-
on effects from these economic developments and negative economic trends on our business, including the inability of
customers to obtain credit to finance purchases of our products; customer insolvencies; decreased customer confidence to make purchasing decisions;
decreased customer demand; and decreased customer ability to pay their trade obligations.
If we fail to successfully overcome the challenges associated with managing and profitably growing our broadband service provider sales
channel, our net revenue and gross profit will be negatively impacted.
We sell a substantial portion of our products through broadband service providers worldwide. Our service provider business unit has accounted for
a significant portion of our growth over the last several fiscal quarters. Our service provider business is increasingly becoming a larger proportion of our
business, especially after our recent acquisition of the Sierra Wireless AirCard business. The service provider business is challenging and exceptionally
competitive. We face a number of challenges associated with penetrating, marketing and selling to the broadband service provider channel that differ
from the challenges we have traditionally faced with the other channels. Difficulties and challenges in selling to service providers include a longer sales
cycle, more stringent product testing and validation requirements, a higher level of customization demands, requirements that suppliers take on a larger
share of the risk with respect to contractual business terms, competition from established suppliers, pricing pressure resulting in lower gross margins,
and irregular and unpredictable ordering habits. For example, even if we have a product which a service provider customer may wish to purchase, we
may choose not to supply products to the potential service provider customer if the contract requirements, such as service level requirements, penalties,
and liability provisions, are too onerous. Accordingly, our business may be harmed and our revenues may be reduced. We have, in exceptional limited
circumstances, while still in contract negotiations, shipped products in advance of and subject to agreement on a definitive contract. We do not record
revenue from these shipments until a definitive contract exists. There is risk that we do not ultimately close and sign a definitive contract. It this occurs,
the timing of revenue recognition is uncertain and our business would be harmed. In addition, we often commence building custom-
made products prior
to execution of a contract in order to meet the customer's contemplated launch dates and requirements. Service provider products are generally custom-
made for a specific customer and may not be salable to other customers or in other channels. If we have pre-built custom-
made products but do not come
to agreement on a definitive contract, we may be forced to scrap the custom-made products or re-
work them at substantial cost and our business would
be harmed.
Further, successful engagements with service provider customers requires a constant analysis of technology trends. If we are unable to anticipate
technology trends and service provider customer product needs, and to allocate research and development resources to the right projects, we may not be
successful in continuing to sell products to service provider customers. In addition, because our service provider customers command significant
resources, including for software support, and demand extremely competitive pricing, our ODM's are starting to decline to develop service provider
products on an ODM basis. Accordingly, as our ODM's increasingly limit development of our service provider products, our service provider business
will be harmed if we cannot replace this with in-house development.
Further, as the deployment of DOCSIS 3.0 technology by broadband service providers continues to mature, we anticipate competing in an
extremely price sensitive market and our margins may be affected. Orders from service providers generally tend to be large but sporadic, which causes
our revenues from them to fluctuate and challenges our ability to accurately forecast demand from them. In particular, managing inventory and
production of our products for our service provider customers is a challenge. Many of our service provider customers have irregular purchasing
requirements. These customers may decide to cancel orders for customized products specific to that customer, and we may not be able to reconfigure
and sell those products in other channels. In addition, these customers may issue unforecasted orders for products which we may not be able to produce
in a timely manner and as such, we may not be able to accept and deliver on such unforecasted orders. In certain cases, we may commit to fixed-
price,
long term purchase orders, with such orders priced in foreign currencies which could lose value over time in the event of adverse changes in foreign
exchange rates. Even if we are selected as a supplier, typically a service provider will also designate a second source supplier, which over time will
reduce the aggregate orders that we receive from that service provider. For example, we have been at the forefront of developing and selling DOCSIS
3.0 products to our service provider customers in the past couple of years. As our competitors develop DOCSIS 3.0 products, our service provider
customers may use these competitor products as an alternate source for this technology. Our service provider customers may then require us to lower our
prices or they may choose to purchase more DOCSIS 3.0 products from our competitors. Accordingly, our business may be harmed and our revenues
may be reduced.
If we were to lose a service provider customer for any reason, we may experience a material and immediate reduction in forecasted revenue that
may cause us to be below our net revenue and operating margin expectations for a particular period of
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