Netgear 2013 Annual Report Download - page 19

Table of Contents
time and therefore adversely affect our stock price. For example, many of our competitors in the service provider space aggressively price their products
in order to gain market share. We may not be able to match the lower prices offered by our competitors. Many of the service provider customers will
seek to purchase from the lowest cost provider, notwithstanding that our products may be higher quality or that our products were previously validated
for use on their proprietary network. Accordingly, we may lose customers who have lower, more aggressive pricing and our revenues may be reduced.
In addition, service providers may choose to prioritize the implementation of other technologies or the roll out of other services than home networking.
Weakness in orders from this industry could have a material adverse effect on our business, operating results, and financial condition. We have seen
slowdowns in capital expenditures by certain of our service provider customers in the past, and believe there may be potential for similar slowdowns in
the future. Any slowdown in the general economy, over supply, consolidation among service providers, regulatory developments and constraint on
capital expenditures could result in reduced demand from service providers and therefore adversely affect our sales to them. If we do not successfully
overcome these challenges, we will not be able to profitably grow our service provider sales channel and our growth will be slowed.
We rely on a limited number of retailers, wholesale distributors and service provider customers for a substantial portion of our sales, and our
net revenue could decline if they refuse to pay our requested prices or reduce their level of purchases or if there is significant consolidation in
our customer base which results in fewer customers for our products.
We sell a substantial portion of our products through retailers, including Best Buy Co., Inc. and its affiliates, wholesale distributors, including
Ingram Micro, Inc. and Tech Data Corporation, and service providers, including Virgin Media Limited and AT&T. We expect that a significant portion
of our net revenue will continue to come from sales to a small number of customers for the foreseeable future. In addition, because our accounts
receivable are often concentrated with a small group of purchasers, the failure of any of them to pay on a timely basis, or at all, would reduce our cash
flow. We are also exposed to increased credit risk if any one of these limited numbers of customers fails or becomes insolvent. We generally have no
minimum purchase commitments or long-
term contracts with any of these customers. These purchasers could decide at any time to discontinue, decrease
or delay their purchases of our products. If our customers increase the size of their product orders without sufficient lead-
time for us to process the order,
our ability to fulfill product demands would be compromised. These customers have a variety of suppliers to choose from and therefore can make
substantial demands on us, including demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the
supplier. Accordingly, the prices that they pay for our products are subject to negotiation and could change at any time. Our ability to maintain strong
relationships with our principal customers is essential to our future performance. If any of our major customers reduce their level of purchases or refuse
to pay the prices that we set for our products, our net revenue and operating results could be harmed. Our traditional retail customers have faced
increased and significant competition from online retailers, and some of these traditional retail customers have increasingly become a smaller portion of
our business. If key retail customers continue to reduce their level of purchases, our business could be harmed.
Additionally, if there is consolidation among our customer base, certain customers may be able to command increased leverage in negotiating
prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, customer pressures require
us to reduce our pricing such that our gross margins are diminished, we could decide not to sell our products to a particular customer, which could result
in a decrease in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our products
with those of our competitors and cancellations of orders, each of which would harm our operating results. Consolidation among our service provider
customers worldwide may also make it more difficult to grow our service provider business, given the fierce competition for the already limited number
of service providers worldwide and the long sales cycles to close deals. For example, in June 2013, Liberty Global, a service provider with operations
worldwide, completed its acquisition of Virgin Media Limited, one of our significant customers. Because we have not conducted business with Liberty
Global in the past, Virgin Media may be directed by Liberty Global to develop relationships and business with other Liberty Global vendors, many of
which are our competitors. Similarly, in July 2013 SoftBank Corp. acquired majority ownership of Sprint Nextel Corp., the parent company of one of
our significant customers for AirCard products. If consolidation among our customer base becomes more prevalent, our operating results may be
harmed.
We depend on large, recurring purchases from certain significant customers, and a loss, cancellation or delay in purchases by these customers
could negatively affect our revenue.
The loss of recurring orders from any of our more significant customers could cause our revenue and profitability to suffer. Our ability to attract
new customers will depend on a variety of factors, including the cost-
effectiveness, reliability, scalability, breadth and depth of our products. In addition,
a change in the mix of our customers, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margins.
Although our financial performance may depend on large, recurring orders from certain customers and resellers, we do not generally have binding
commitments from them. For example:
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