| The risks described below are not exhaustive of the risks that might affect our business |
| Other risks, including those we currently deem immaterial, may also impact our business |
| Any of the following risks could materially adversely affect our business operations, results of operations and financial condition and could result in a significant decline in our stock price |
| We expect our operating results to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline |
| Our operating results are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of which are beyond our control |
| If our actual revenue were to fall below our estimates or the expectations of public market analysts or investors, our quarterly and annual results would be negatively impacted and the price of our stock could decline |
| Other factors that could affect our quarterly and annual operating results include those listed in this risk factors section of this Form 10-K and others such as: • changes in the pricing policies of or the introduction of new products by us or our competitors; • changes in the terms of our contracts with customers or suppliers that cause us to incur additional expenses or assume additional liabilities; • slow or negative growth in the networking product, personal computer, Internet infrastructure, home electronics and related technology markets, as well as decreased demand for Internet access; • changes in or consolidation of our sales channels and wholesale distributor relationships or failure to manage our sales channel inventory and warehousing requirements; • delay or failure to fulfill orders for our products on a timely basis; • our inability to accurately forecast product demand; • unanticipated shift in overall product mix from higher to lower margin products which would adversely impact our margins; • delays in the introduction of new products by us or market acceptance of these products; • an increase in price protection claims, redemptions of marketing rebates, product warranty returns or allowance for doubtful accounts; • operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter; • seasonal patterns of higher sales during the second half of our fiscal year, particularly retail-related sales in our fourth quarter; • foreign currency exchange rate fluctuations in the jurisdictions where we transact sales in local currency; • bad debt exposure as we expand into new international markets; and • changes in accounting rules, such as recording expenses for employee stock option grants |
| 10 _________________________________________________________________ [63]Table of Contents As a result, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance |
| In addition, our future operating results may fall below the expectations of public market analysts or investors |
| In this event, our stock price could decline significantly |
| Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our prices or increase our advertising expenditures or other expenses, which could result in reduced margins and loss of market share |
| We compete in a rapidly evolving and highly competitive market, and we expect competition to intensify |
| Our principal competitors in the small business market include 3Com Corporation, Allied Telesyn International, Dell Computer Corporation, D-Link Systems, Inc, Hewlett-Packard Company, the Linksys division of Cisco Systems and Nortel Networks |
| Our principal competitors in the home market include Belkin Corporation, D-Link and the Linksys division of Cisco Systems |
| Our principal competitors in the broadband service provider market include AARIS Group, Inc, Motorola, Inc, Scientific Atlanta, a Cisco company, Thomson Corporation and Terayon Communications Systems, Inc |
| Other current and potential competitors include numerous local vendors such as Siemens Corporation and AVM in Europe, Corega International SA, Melco, Inc |
| /Buffalo Technology in Japan and TP-Link in China, and broadband equipment suppliers such as ARRIS Group, Inc, Motorola, Inc, Scientific Atlanta, a Cisco company, Thomson Corporation and Terayon Communications Systems, Inc |
| Our potential competitors also include consumer electronics vendors who could integrate networking capabilities into their line of products |
| Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources |
| These competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers, and exert more influence on the sales channel than we can |
| We anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets |
| These competitors may have more advanced technology, more extensive distribution channels, stronger brand names, greater access to shelf space in retail locations, bigger promotional budgets and larger customer bases than we do |
| These companies could devote more capital resources to develop, manufacture and market competing products than we could |
| If any of these companies are successful in competing against us, our sales could decline, our margins could be negatively impacted, and we could lose market share, any of which could seriously harm our business and results of operations |
| Unfavorable economic conditions, particularly in Western Europe, and turmoil in the international geopolitical environment may adversely affect our operating results |
| We derive a significant percentage of our revenues from international sales, and a deterioration in global economic and market conditions, particularly in Western Europe, may result in reduced product demand, increased price competition and higher excess inventory levels |
| Turmoil in the global geopolitical environment, including terrorist activities in the United Kingdom and the ongoing tensions in Iraq and the Middle East, have pressured and continue to pressure global economies |
| If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory, or lose sales from having too few products |
| If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our wholesale distributors and within our sales channel, we may incur increased and unexpected costs associated with this inventory |
| We generally allow wholesale distributors and traditional retailers to return a limited amount of our products in exchange for other products |
| Under our price protection policy, if we reduce the list price of a product, we are often required to issue a credit in an amount equal to the reduction for each of the products held in inventory by our wholesale distributors and retailers |
| If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products, or these parties may exchange the products for newer products |
| Also, during the transition from an 11 _________________________________________________________________ [64]Table of Contents existing product to a new replacement product, we must accurately predict the demand for the existing and the new product |
| If we improperly forecast demand for our products we could end up with too many products and be unable to sell the excess inventory in a timely manner, if at all, or, alternatively we could end up with too few products and not be able to satisfy demand |
| If these events occur, we could incur increased expenses associated with writing off excessive or obsolete inventory or lose sales or have to ship products by air freight to meet immediate demand incurring incremental freight costs above the costs of transporting product via boat, a preferred method, and suffering a corresponding decline in gross margins |
| During the fourth quarter of 2005, we had a shift in our demand forecast which resulted in lower than expected revenues due to our inability to ship to the revised forecast and higher than planned freight charges due to shipping products by air freight to attempt to mitigate the change in demand |
| We are currently involved in various litigation matters and may in the future become involved in additional litigation, including litigation regarding intellectual property rights, which could be costly and subject us to significant liability |
| The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding infringement of patents, trade secrets and other intellectual property rights |
| In particular, leading companies in the data communications markets, some of which are competitors, have extensive patent portfolios with respect to networking technology |
| From time to time, third parties, including these leading companies, have asserted and may continue to assert exclusive patent, copyright, trademark and other intellectual property rights against us demanding license or royalty payments or seeking payment for damages, injunctive relief and other available legal remedies through litigation |
| These include third parties who claim to own patents or other intellectual property that cover industry standards that our products comply with |
| If we are unable to resolve these matters or obtain licenses on acceptable or commercially reasonable terms, we could be sued or we may be forced to initiate litigation to protect our rights |
| The cost of any necessary licenses could significantly harm our business, operating results and financial condition |
| Also, at any time, any of these companies, 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, may initiate litigation against our manufacturers, suppliers or members of our sales channel, 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 |
| If we do not resolve these claims on a favorable basis, our business, operating results and financial condition could be significantly harmed |
| The average selling prices of our products typically decrease rapidly over the sales cycle of the product, which may negatively affect our gross margins |
| Our products typically experience price erosion, a fairly rapid reduction in the average selling prices over their respective sales cycles |
| In order to sell products that have a falling average selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs |
| To manage manufacturing costs, we must collaborate with our third-party manufacturers to engineer the most cost-effective design for our products |
| In addition, we must carefully manage the price paid for components used in our products |
| We must also successfully manage our freight and inventory costs to reduce overall product costs |
| We also need to continually introduce new products with higher sales prices and gross margins in order to maintain our overall gross margins |
| If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our net revenue and overall gross margin would likely decline |
| 12 _________________________________________________________________ [65]Table of Contents Our future success is dependent on the acceptance of networking products in the small business and home markets into which we sell substantially all of our products |
| If the acceptance of networking products in these markets does not continue to grow, we will be unable to increase or sustain our net revenue, and our business will be severely harmed |
| We believe that growth in the small business market will depend, in significant part, on the growth of the number of personal computers purchased by these end users and the demand for sharing data intensive applications, such as large graphic files |
| We believe that acceptance of networking products in the home will depend upon the availability of affordable broadband Internet access and increased demand for wireless products |
| Unless these markets continue to grow, our business will be unable to expand, which could cause the value of our stock to decline |
| Moreover, if networking functions are integrated more directly into personal computers and other Internet-enabled devices, such as electronic gaming platforms or personal video recorders, and these devices do not rely upon external network-enabling devices, sales of our products could suffer |
| In addition, if the small business or home markets experience a recession or other cyclical effects that diminish or delay networking expenditures, our business growth and profits would be severely limited, and our business could be more severely harmed than those companies that primarily sell to large business customers |
| If we fail to continue to introduce new products that achieve broad market acceptance on a timely basis, we will not be able to compete effectively and we will be unable to increase or maintain net revenue and gross margins |
| We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products that achieve broad market acceptance in the small business and home markets |
| Our future success will depend in large part upon our ability to identify demand trends in the small business and home markets and quickly develop, manufacture and sell products that satisfy these demands in a cost effective manner |
| Successfully predicting demand trends is difficult, and it is very difficult to predict the effect introducing a new product will have on existing product sales |
| We will also need to respond effectively to new product announcements by our competitors by quickly introducing competitive products |
| We have experienced delays in releasing new products in the past, which resulted in lower quarterly net revenue than expected |
| In addition, we have experienced unanticipated delays in product introductions beyond announced release dates |
| Any future delays in product development and introduction could result in: • loss of or delay in revenue and loss of market share; • negative publicity and damage to our reputation and brand; • decline in the average selling price of our products; and • adverse reactions in our sales channel, such as reduced shelf space or reduced online product visibility |
| We depend substantially on our sales channel, and our failure to maintain and expand our sales channel 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 channel |
| We sell our products through our sales channel, which consists of traditional retailers, on-line retailers, DMRs, VARs, and broadband service providers |
| Some of these entities purchase our products through our wholesale distributors |
| We sell to small businesses primarily through DMRs, VARs and retail locations, and we sell to our home users primarily through retail locations, online retailers and broadband service providers |
| 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 |
| A competitor with more extensive product lines and stronger brand identity, such as Cisco Systems, may have greater bargaining power with these retailers |
| The competition for retail shelf space may increase, which would require us to increase our marketing expenditures simply to maintain current levels of retail shelf space |
| 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 13 _________________________________________________________________ [66]Table of Contents 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 |
| If we were unable to maintain and expand our sales channel, 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 |
| If we fail to successfully overcome the challenges associated with growing our broadband service provider sales channel, our net revenue and gross profit will be negatively impacted |
| We face a number of challenges associated with penetrating the broadband service provider market that differ from what we have traditionally faced with the retail market |
| These challenges include a longer sales cycle, more stringent product testing and validation requirements, a higher level of customer service and support demands, competition from established suppliers, pricing pressure resulting in lower margins, and our general inexperience in selling to carriers |
| In addition, carriers may choose to prioritize the implementation of other technologies or the roll out of other services than wireless networking |
| Any slowdown in the general economy, over capacity, 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 carrier sales channel and our growth will be slowed |
| We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could harm our financial results and cash flows |
| Although the majority of our international sales are currently invoiced in United States dollars, we have implemented and continue to implement for certain countries both invoicing and payment in local foreign currencies |
| Recently, we have experienced currency exchange losses, and our exposure to losses in foreign currency transactions will likely increase |
| We currently do not engage in any currency hedging transactions |
| Moreover, the costs of doing business abroad may increase as a result of adverse exchange rate fluctuations |
| For example, if the United States dollar declined in value relative to a local currency, we could be required to pay more for our expenditures in that market, including salaries, commissions, local operations and marketing expenses, each of which is paid in local currency |
| In addition, we may lose customers if exchange rate fluctuations, currency devaluations or economic crises increase the local currency price of our products or reduce our customers’ ability to purchase products |
| If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products and our operating expenses could increase |
| We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight |
| Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay |
| On a quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of a quarter will have a more material effect on our business than at the beginning of a quarter |
| The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism, natural disasters and congestion resulting from higher shipping volumes |
| For example, in the second half of 2004, ports on the West Coast experienced and continue to experience higher than usual shipping traffic, resulting in congestion and delays in our product shipment schedules |
| Labor disputes among freight carriers are common, especially in EMEA, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us |
| Since September 11, 2001, the rate of inspection of international freight by governmental entities has substantially increased, and has become increasingly unpredictable |
| If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue |
| In addition, if the recent increases in fuel prices were to continue, our transportation costs would likely further increase |
| From time to time in the past, we have shipped products 14 _________________________________________________________________ [67]Table of Contents using air freight to meet unexpected spikes in demand or to bring new product introductions to market quickly |
| If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase |
| A prolonged transportation disruption or a significant increase in the cost of freight could severely disrupt our business and harm our operating results |
| We rely on a limited number of wholesale distributors for most of our sales, and if they refuse to pay our requested prices or reduce their level of purchases, our net revenue could decline |
| We sell a substantial portion of our products through wholesale distributors, including Ingram Micro, Inc |
| and Tech Data Corporation |
| During the fiscal year ended December 31, 2005, sales to Ingram Micro, Inc |
| and its affiliates accounted for 25prca of our net revenue and sales to Tech Data Corporation and its affiliates accounted for 17prca of our net revenue |
| We expect that a significant portion of our net revenue will continue to come from sales to a small number of wholesale distributors for the foreseeable future |
| In addition, because our accounts receivable are 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 generally have no minimum purchase commitments or long-term contracts with any of these distributors |
| These purchasers could decide at any time to discontinue, decrease or delay their purchases of our products |
| In addition, the prices that they pay for our products are subject to negotiation and could change at any time |
| If any of our major wholesale distributors 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 |
| If our wholesale distributors 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 |
| If our products contain defects or errors, we could incur significant unexpected expenses, experience product returns and lost sales, experience product recalls, suffer damage to our brand and reputation, and be subject to product liability or other claims |
| Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released |
| Some errors and defects may be discovered only after a product has been installed and used by the end user |
| If our products contain defects or errors, we could experience decreased sales and increased product returns, loss of customers and market share, and increased service, warranty and insurance costs |
| In addition, our reputation and brand could be damaged, and we could face legal claims regarding our products |
| A successful product liability or other claim could result in negative publicity and harm our reputation, result in unexpected expenses and adversely impact our operating results |
| If the redemption rate for our end-user promotional programs is higher than we estimate, then our net revenue and gross margin will be negatively affected |
| From time to time we offer promotional incentives, including cash rebates, to encourage end users to purchase certain of our products |
| Purchasers must follow specific and stringent guidelines to redeem these incentives or rebates |
| Often qualified purchasers choose not to apply for the incentives or fail to follow the required redemption guidelines, resulting in an incentive redemption rate of less than 100prca |
| Based on historical data, we estimate an incentive redemption rate for our promotional programs |
| If the actual redemption rate is higher than our estimated rate, then our net revenue and gross margin will be negatively affected |
| Stringent securities laws and related regulations affecting public companies are resulting in increased costs to us |
| Stringent laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and related rules enacted and proposed by the SEC and the NASDAQ National Market, are resulting in increased costs to us as we respond to their requirements |
| In particular, complying with the internal control audit requirements of Sarbanes-Oxley Section 404 is resulting in increased internal efforts and higher fees from our independent registered public accounting firm and compliance consultants |
| These rules could make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar 15 _________________________________________________________________ [68]Table of Contents coverage |
| The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, on committees of our Board of Directors, or as executive officers |
| We are required to evaluate our internal control under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could impact investor confidence in the reliability of our internal controls over financial reporting |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting |
| Such report must contain among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective |
| This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management |
| Such report must also contain a statement that our independent registered public accounting firm has issued an audit report on management’s assessment of such internal controls |
| We will continue to perform the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging |
| During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective |
| If we are unable to assert that our internal control over financial reporting is effective as of the end of a fiscal year, or if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price |
| We depend on a limited number of third-party contract manufacturers for substantially all of our manufacturing needs |
| If these contract 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 original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs |
| We rely on our contract manufacturers to procure components and, in some cases, subcontract engineering work |
| Some of our products are manufactured by a single contract manufacturer |
| We do not have any long-term contracts with any of our third-party contract manufacturers |
| Some of these third-party contract manufacturers produce products for our competitors |
| The loss of the services of any of our primary third-party contract manufacturers could cause a significant disruption in operations and delays in product shipments |
| Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming |
| Our reliance on third-party contract manufacturers also exposes us to the following risks over which we have limited control: • unexpected increases in manufacturing and repair costs; • inability to control the quality of finished products; • inability to control delivery schedules; and • potential lack of adequate capacity to manufacture all or a part of the products we require |
| All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications |
| Our ODM and OEM contract manufacturers are primarily responsible for obtaining most regulatory approvals for our products |
| If our ODMs and OEMs fail to obtain timely domestic or foreign regulatory approvals or certificates, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with our sales channel could be harmed, and our reputation and brand would suffer |
| 16 _________________________________________________________________ [69]Table of Contents If we are unable to provide our third-party contract manufacturers an accurate forecast of our component and material requirements, we may experience delays in the manufacturing of our products and the costs of our products may increase |
| We provide our third-party contract manufacturers with a rolling forecast of demand, which they use to determine our material and component requirements |
| Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand and supply for a component at a given time |
| Some of our components have long lead times, such as wireless local area network chipsets, switching fabric chips, physical layer transceivers, connector jacks and metal and plastic enclosures |
| If our forecasts are less than our actual requirements, our contract manufacturers may be unable to manufacture products in a timely manner |
| If our forecasts are too high, our contract manufacturers will be unable to use the components they have purchased on our behalf |
| The cost of the components used in our products tends to drop rapidly as volumes increase and the technologies mature |
| Therefore, if our contract manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an over supply of higher-priced components |
| Moreover, if they are unable to use components ordered at our direction, we will need to reimburse them for any losses they incur |
| We obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements, we may lose sales and experience increased component costs |
| Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries |
| Many of the semiconductors used in our products are specifically designed for use in our products and are obtained from sole source suppliers on a purchase order basis |
| In addition, some components that are used in all our products are obtained from limited sources |
| These components include connector jacks, plastic casings and physical layer transceivers |
| We also obtain switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products, and wireless local area network chipsets, which are used in all of our wireless products, from a limited number of suppliers |
| Semiconductor suppliers have experienced and continue to experience component shortages themselves, such as with substrates used in manufacturing chipsets, which in turn adversely impact our ability to procure semiconductors from them |
| Our contract manufacturers purchase these components on our behalf on a purchase order basis, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers |
| If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner |
| In addition, if our suppliers experience financial or other difficulties or if worldwide demand for the components they provide increases significantly, the availability of these components could be limited |
| It could be difficult, costly and time consuming to obtain alternative sources for these components, or to change product designs to make use of alternative components |
| In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill orders for our products |
| If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product shipments could be reduced or delayed |
| This would affect our ability to meet scheduled product deliveries, damage our brand and reputation in the market, and cause us to lose market share |
| We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology and future technology, our ability to develop, sell, maintain and support technologically advanced products would be limited |
| We rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies that are incorporated into and necessary for the operation and functionality of our products |
| Because the intellectual property we license is available from third parties, barriers to entry may be lower than if we owned exclusive rights to the technology we license and use |
| On the other hand, if a competitor or potential competitor enters into an exclusive arrangement with any of our key third-party technology providers, or if any of these providers unilaterally decide not to do business with us for any reason, our ability to develop and sell products containing that technology would be severely limited |
| Our licenses often require royalty payments or other consideration to third parties |
| Our success will depend in part on our continued ability to have access to these technologies, and we do not know whether these third-party technologies will continue to be licensed to us on commercially acceptable terms or at all |
| 17 _________________________________________________________________ [70]Table of Contents If we are unable to license the necessary technology, we may be forced to acquire or develop alternative technology of lower quality or performance standards |
| This would limit and delay our ability to offer new or competitive products and increase our costs of production |
| As a result, our margins, market share, and operating results could be significantly harmed |
| We also utilize third party software development companies to develop, customize, maintain and support software that is incorporated into our products |
| If these companies fail to timely deliver or continuously maintain and support the software that we require of them, we may experience delays in releasing new products or difficulties with supporting existing products and customers |
| If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed |
| We rely upon third parties for a substantial portion of the intellectual property we use in our products |
| At the same time, we rely on a combination of copyright, trademark, patent and trade secret laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our intellectual property rights |
| Despite efforts to protect our intellectual property, unauthorized third parties may attempt to design around, copy aspects of our product design or obtain and use technology or other intellectual property associated with our products |
| For example, one of our primary intellectual property assets is the NETGEAR name, trademark and logo |
| We may be unable to stop third parties from adopting similar names, trademarks and logos, especially in those international markets where our intellectual property rights may be less protected |
| Furthermore, our competitors may independently develop similar technology or design around our intellectual property |
| Our inability to secure and protect our intellectual property rights could significantly harm our brand and business, operating results and financial condition |
| Our sales and operations in international markets expose us to operational, financial and regulatory risks |
| International sales comprise a significant amount of our overall net revenue |
| International sales were 56prca of overall net revenue in fiscal 2005 |
| We anticipate that international sales may grow as a percentage of net revenue |
| We have committed resources to expanding our international operations and sales channels and these efforts may not be successful |
| International operations are subject to a number of other risks, including: • political and economic instability, international terrorism and anti-American sentiment, particularly in emerging markets; • preference for locally branded products, and laws and business practices favoring local competition; • exchange rate fluctuations; • increased difficulty in managing inventory; • delayed revenue recognition; • less effective protection of intellectual property; • stringent consumer protection and product compliance regulations, including but not limited to the recently enacted Restriction of Hazardous Substances directive and the Waste Electrical and Electronic Equipment, or WEEE directive in Europe, that may vary from country to country and that are costly to comply with; and • difficulties and costs of staffing and managing foreign operations |
| We intend to expand our operations and infrastructure, which may strain our operations and increase our operating expenses |
| We intend to expand our operations and pursue market opportunities domestically and internationally to grow our sales |
| We expect that this attempted expansion will strain our existing management information systems, and operational and financial controls |
| In addition, if we continue to grow, our expenditures will likely be significantly higher than our historical costs |
| We may not be able to install adequate controls in an efficient and timely manner as our business grows, and our current systems may not be adequate to support our future operations |
| The difficulties associated with installing and implementing these new systems, procedures and controls may place a significant burden on our management, operational and financial resources |
| In addition, if we grow internationally, we will have to expand and enhance our communications infrastructure |
| If we fail to continue to improve our management 18 _________________________________________________________________ [71]Table of Contents information systems, procedures and financial controls or encounter unexpected difficulties during expansion, our business could be harmed |
| We are implementing an international reorganization, which may strain our resources and increase our operating expenses |
| We are reorganizing our foreign subsidiaries and entities to better manage and optimize our international operations |
| Our implementation of this project will require substantial efforts by our staff and will result in increased staffing requirements and related expenses |
| Failure to successfully execute the reorganization or other factors outside of our control could negatively impact the timing and extent of any benefit we receive from the reorganization |
| As part of the reorganization, we will be implementing new information technology systems, including new forecasting and order processing systems |
| If we fail to successfully and timely integrate these new systems, we will suffer disruptions to our operations |
| The reorganization will also require us to amend a number of our customer and supplier agreements, which will require the consent of our third-party customers and suppliers |
| In addition, there could be unanticipated interruptions in our business operations as a result of implementing these changes that could result in loss or delay in revenue causing an adverse effect on our financial results |
| Our stock price may be volatile and your investment in our common stock could suffer a decline in value |
| With the continuing uncertainty about economic conditions in the United States, there has been significant volatility in the market price and trading volume of securities of technology and other companies, which may be unrelated to the financial performance of these companies |
| These broad market fluctuations may negatively affect the market price of our common stock |
| Some specific factors that may have a significant effect on our common stock market price include: • actual or anticipated fluctuations in our operating results or our competitors’ operating results; • actual or anticipated changes in our growth rates or our competitors’ growth rates; • conditions in the financial markets in general or changes in general economic conditions; • our ability to raise additional capital; and • changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally |
| Natural disasters, mischievous actions or terrorist attacks could delay our ability to receive or ship our products, or otherwise disrupt our business |
| Our corporate headquarters are located in Northern California and one of our warehouses is located in Southern California, regions known for seismic activity |
| In addition, substantially all of our manufacturing occurs in two geographically concentrated areas in mainland China, where disruptions from natural disasters, health epidemics and political, social and economic instability may affect the region |
| If our manufacturers or warehousing facilities are disrupted or destroyed, we would be unable to distribute our products on a timely basis, which could harm our business |
| Moreover, if our computer information systems or communication systems, or those of our vendors or customers, are subject to disruptive hacker attacks or other disruptions, our business could suffer |
| We have not established a formal disaster recovery plan |
| Our back-up operations may be inadequate and our business interruption insurance may not be enough to compensate us for any losses that may occur |
| A significant business interruption could result in losses or damages and harm our business |
| For example, much of our order fulfillment process is automated and the order information is stored on our servers |
| If our computer systems and servers go down even for a short period at the end of a fiscal quarter, our ability to recognize revenue would be delayed until we were again able to process and ship our orders, which could cause our stock price to decline significantly |
| If we lose the services of our Chairman and Chief Executive Officer, Patrick CS Lo, or our other key personnel, we may not be able to execute our business strategy effectively |
| Our future success depends in large part upon the continued services of our key technical, sales, marketing and senior management personnel |
| In particular, the services of Patrick CS Lo, our Chairman and Chief Executive Officer, who has led our company since its inception, are very important to our business |
| The 19 _________________________________________________________________ [72]Table of Contents loss of any of our senior management or other key research, development, sales or marketing personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of the small business and home markets |