You should read the following discussion of our financial condition and results of operations together with the audited consolidated financial statements and notes to the financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under "Risk Factors" in Part I, Item 1A above. This section generally discusses the results of our operations for the year endedDecember 31, 2021 ("fiscal 2021") compared to the year endedDecember 31, 2020 ("fiscal 2020"). For a discussion of the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Business and Executive Overview
We are a global company that turns ideas into innovative, high-performance and
premium networking products that connect people, power businesses and service
providers and advance the way people live. Our products are designed to simplify
and improve people's lives. Our goal is to enable people to collaborate and
connect to a world of information and entertainment at or outside of the home.
We are dedicated to delivering innovative and advanced connected solutions
ranging from easy-to-use premium WiFi solutions, performance gaming routers to
enhance console and online-game play, security and support services to protect
and enhance home networks, to switching and wireless solutions to augment
business networks and audio and video over Ethernet for Pro AV applications. We
keep people connected through product and service offerings, including
ultra-premium Orbi Mesh WiFi systems, high-performance Nighthawk routers,
high-speed cable modems, 5G mobile wireless products, cloud-based subscription
services for network management and security, smart networking products and
Video over Ethernet for Pro AV applications. Our products and services are built
on a variety of technologies such as wireless (WiFi and 4G/5G mobile), Ethernet
and powerline, with a focus on reliability and ease-of-use. Additionally, we
continually invest in research and development to create new technologies and
services and to capitalize on technological inflection points and trends, such
as WiFi 6, WiFi 6E, 5G, and audio and video over Ethernet. Our product line
consists of devices that create and extend wired and wireless networks, devices
that attach to the network, such as smart digital canvasses as well as services
that complement and enhance our product line offerings. These products are
available in multiple configurations to address the changing needs of our
customers in each geographic region.
We operate and report in two segments: Connected Home, and Small and Medium
Business ("SMB"). We believe that this structure reflects our current
operational and financial management, and that it provides the best structure
for us to focus on growth opportunities while maintaining financial discipline.
The leadership team of each segment is focused on serving customer needs through
product and service development efforts, both from a product marketing and
engineering standpoint. The Connected Home segment focuses on consumers and
provides high-performance, dependable and easy-to-use WiFi internet networking
solutions such as WiFi 6 and WiFi 6E Tri-band and Quad-band mesh systems,
routers, 4G/5G mobile products, smart devices such as Meural digital canvasses,
and subscription services that provide consumers a range of value-added services
focused on performance, security, privacy and premium support. The SMB segment
focuses on small and medium sized businesses and provides solutions for business
networking, wireless local area network ("LAN"), audio and video over Ethernet
for Pro AV applications, security and remote management providing
enterprise-class functionality at an affordable price. We conduct business
across three geographic regions: Americas ; Europe , Middle East , and Africa
("EMEA"); and Asia Pacific ("APAC").
Business Overview
The markets in which our segments operate are intensely competitive and subject
to rapid technological evolution. We believe that the principal competitive
factors in the consumer and small and medium-sized business markets for
networking products include product breadth, price points, size and scope of the
sales channel, brand recognition, timeliness of new product introductions,
product availability, performance, features, functionality, reliability,
ease-of-installation, maintenance and use, security, as well as customer service
and support. To remain competitive, we believe we must continue to aggressively
invest resources to develop new products and subscription services, enhance our
current products, and expand our channels and direct-to-consumer capabilities,
while increasing engagement and maintaining satisfaction with our customers. Our
investments reflect our steadfast focus on
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cybersecurity of our products and systems, as the rising threat of cyber-attacks
and exploitation of security vulnerabilities in our industry is a significant
consumer concern.
We sell our products through multiple sales channels worldwide, including
traditional and online retailers, wholesale distributors, direct market
resellers ("DMRs"), value-added resellers ("VARs"), broadband service providers,
and through our direct online store at www.netgear.com. Our retail channel
includes traditional retail locations domestically and internationally, such as
Amazon, Best Buy, Wal-Mart , Costco, Staples, Office Depot, Target, Fnac Darty
(Europe ), MediaMarkt (Europe ), JB HiFi (Australia ), Elkjop (Norway ) and Sunning
and Guomei (China) . Online retailers include Amazon.com (worldwide), Newegg.com
(U.S. ), JD.com, Alibaba (China) and Coolblue.com (Netherlands ). Our DMRs include
CDW Corporation, Insight Corporation and PC Connection in domestic markets. Our
main wholesale distributors include Ingram Micro , TD Synnex, and D&H
Distribution Company . In addition, we also sell our products through broadband
service providers, such as multiple system operators ("MSOs"), xDSL, mobile, and
other broadband technology operators domestically and internationally. Some of
these retailers and broadband service providers purchase directly from us, while
others are fulfilled through wholesale distributors around the world. A
substantial portion of our net revenue is derived from a limited number of
wholesale distributors, service providers and retailers. While we expect these
channels to continue to be a significant part of our sales strategy,
increasingly, customers are choosing to purchase products and services directly
from us. We expect revenue through our direct online store or in-app offerings
to continue to increase proportionately to overall revenue in the foreseeable
future.
Financial Overview
During the year ended December 31, 2021 , our net revenue and income from
operations decreased by $87.1 million and $8.9 million , respectively, compared
to the prior year. The decrease in net revenue was due to the Connected Home
segment, with net revenue declining by $154.1 million , partially offset by an
increase in SMB net revenue of $66.9 million . The decline in Connected Home
revenue spanned both consumer and service provider channels, as the heightened
demand brought on by the COVID-19 pandemic in 2020 subsided. The growth in SMB
net revenue was led by increased demand for Pro AV and wireless solutions and
assisted by businesses reopening, new business formation, as well as demand for
flexible working environments. The decrease in income from operation was
primarily driven by the decrease in net revenue.
On a geographic basis, net revenue in the year ended December 31, 2021 decreased
in Americas but increased in EMEA and APAC, respectively, compared to the prior
year. Net revenue from Connected Home products declined while net revenue from
SMB products increased, across all three regions.
COVID-19 Pandemic
The COVID-19 pandemic continues to have widespread, rapidly evolving and unpredictable impacts on global economies, inflation, supply chains, work force participation, and has created significant volatility and disruption in financial markets. Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. We have taken actions by directing most of our worldwide workforce to work from home, allowing only critical business travel, and replacing in-person events with digital events. We continue to actively monitor the situation and will continue to adapt our business operations as necessary. The COVID-19 pandemic has brought about a considerable shift in our business while increasing uncertainty. We have experienced an increase in demand for our products relative to pre-pandemic levels as consumers and businesses seek flexible networking solutions for their day-to-day needs. We expect the shift to remote working to increase relative to the experience pre-pandemic, thus maintaining the demand for high performance and dependable WiFi networks sustaining an increase in our target addressable market. As a result of the ongoing pandemic, our supply chain partners are limited by production capacity, constrained by material availability, factory uptime and freight capacity, resulting in elongated lead times for some of our key components, impeding our ability to accurately forecast and to capitalize fully on end market demand. We expect supply chain constraints to continue to exist for the foreseeable future impacting our ability to fulfill SMB product demand and limiting availability of certain Connected Home products. In fiscal year 2021, supply chain constraints brought about a meaningful increase in the cost of sea transportation and we increased our reliance on airfreight transportation, as we looked to secure supply to offset lengthening sea transit times. Additionally, heightened demand combined with shortages for materials and components have resulted in increased cost of acquisition for our products.
We anticipate net revenue for Connected Home products sold through the consumer
channel to return to a more
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normal seasonal pattern with net revenue rising in the second half of 2022 relative to the first half of 2022 while net revenue from service provider channels is expected to be in line with fiscal 2021. We expect SMB net revenue to continue to be supply constrained for the first half of 2022 with anticipated improvement in the second half of 2022. We expect our premium Tri-band and Quad-band mesh systems and our suite of subscription services to drive performance in the Connected Home segment, while we expect growth in the SMB segment to be powered by Pro AV and Wireless LAN products. We will look to continue to execute on our strategy of capitalizing on technological inflection points of WiFi 6E, WiFi 6, 5G and audio and video over Ethernet, to develop and expand the premium WiFi market through new product introductions and to develop and roll out service offerings to build recurring service revenue streams. While we have been able to manage through COVID-19 related supply chain challenges to date, any further disruption brought about by the COVID-19 pandemic to supply chain partners, production schedules, material availability or freight carriers or any increases to costs associated with supply chain operations could have a significant negative impact on our net revenue, gross and operating margin performance. The extent of the impact of the COVID-19 pandemic on our ongoing operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments. The duration of the pandemic and the broader implications of the macro-economic recovery, any related disruptions to channel partners and restrictions on travel and transport are uncertain and unpredictable. Refer to Item 1A, Risk Factors, of Part I of this Annual Report on Form 10-K for various risks and uncertainties associated with the COVID-19 pandemic.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America and pursuant to the rules and regulations of theU.S. Securities and Exchange Commission ("SEC"). The preparation of these financial statements requires management to make assumptions, judgments and estimates that can have a significant impact on the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. Actual results could differ significantly from these estimates. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. Note 1, The Company and Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the consolidated financial statements. We have listed below our critical accounting estimates that we believe to have the greatest potential impact on our consolidated financial statements. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. We do not expect the estimates and assumptions are likely to change materially.
Revenue Recognition
We enter into contracts with customers to sell products and services, and while
some sales agreements contain standard terms and conditions, there are
agreements that contain non-standard terms and conditions and include promises
to transfer multiple goods or services. As a result, significant interpretation
and judgment is sometimes required to determine the appropriate accounting for
these transactions including: (1) whether performance obligations are considered
distinct and required to be accounted for separately or combined, including
allocation of transaction price; (2) combining contracts that may impact the
allocation of the transaction price between product and services; and (3)
estimating and accounting for variable consideration, including rights of
return, sales incentives, and price protection as a reduction of the transaction
price.
Our standard obligation to our direct customers generally provides for a full
refund if such product is not merchantable or is found to be damaged or
defective. In determining estimates for future returns, we estimate variable
consideration at the expected value based on management's analysis of historical
data, channel inventory levels, current economic trends and changes in customer
demand. Sales incentives and price protection are determined based on a
combination of the actual amounts committed and through estimating future
expenditure based upon historical customary business practice. We continue to
assess variable consideration estimates such that it is probable that a
significant reversal of revenue will not occur.
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Provisions for Excess and Obsolete Inventory
On a quarterly basis we assess the value of our inventory and write down its value for estimated excess and obsolete inventory based upon assumptions about the future demand by reviewing inventory quantities on hand and on order under non-cancelable purchase commitments in comparison to our estimated forecast of product demand to determine what inventory, if any, is not saleable at or above cost. Our analysis is based on the demand forecast which takes into account market conditions, product development plans, product life expectancy and other factors. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. As demonstrated during prior years, demand for our products can fluctuate significantly. If actual demand is lower than our forecasted demand and we fail to reduce our manufacturing accordingly, we could be required to write down the value of additional inventory, which would have a negative effect on our gross profit.
Goodwill is not amortized, but instead tested for impairment on an annual basis, or more frequently if certain events or indicators of potential exists, and goodwill is written down when it is determined to be impaired. We completed our annual impairment test of goodwill as of the first day of the fourth fiscal quarter of 2021, orOctober 4, 2021 . We identified the reporting units for the purpose of goodwill impairment testing as Connected Home and SMB and performed a qualitative test. Based upon the results of the qualitative testing, we believed that it was more-likely-than-not that the fair value of each of these reporting units was greater than its respective carrying value and therefore performing the next step of impairment test for these reporting units was unnecessary. No goodwill impairment was recognized for our reporting units in the years endedDecember 31, 2021 , 2020 or 2019. For Connected Home, and SMB reporting units, we do not believe it is likely that there will be a material change in the estimates or assumptions we use to test for impairment losses on goodwill. However, if the actual results are not consistent with our estimates or assumptions, we may be exposed to a future impairment charge that could be material.
Income Taxes
We account for income taxes under an asset and liability approach. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences resulting from different treatments for tax versus accounting of
certain items, such as accruals and allowances not currently deductible for tax
purposes. These differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheets. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not more likely than not,
we must establish a valuation allowance. Our assessment considers the
recognition of deferred tax assets on a jurisdictional basis. Accordingly, in
assessing our future taxable income on a jurisdictional basis, we consider the
effect of its transfer pricing policies on that income. We have recorded a
valuation allowance against certain federal and state deferred tax assets since
the recovery of the assets is uncertain. We believe that all of our other
deferred tax assets are recoverable; however, if there were a change in our
ability to recover our deferred tax assets, we would be required to take a
charge in the period in which we determined that recovery was not more likely
than not.
Uncertain tax provisions are recognized under guidance that provides that a
company should use a more-likely-than-not recognition threshold based on the
technical merits of the income tax position taken. Income tax positions that
meet the more-likely-than-not recognition threshold should be measured in order
to determine the tax benefit to be recognized in the financial statements. We
include interest expense and penalties related to uncertain tax positions as
additional tax expense.
The Company made an accounting policy election related to accounting for the tax
effects of Global Intangible Low-Taxed Income ("GILTI") that was implemented as
part of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), enacted on December
22, 2017 . With regard to GILTI, the Company accounts for the tax effects as a
period cost, if and when incurred.
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Recent Accounting Pronouncements
For a complete description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, refer to Note 1, The Company and Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Results of Operations
The following table sets forth, for the periods presented, the consolidated
statements of operations data, which is derived from the accompanying
consolidated financial statements:
Year Ended December 31,
2021 2020 2019
(In thousands, except percentage data)
Net revenue $ 1,168,073 100.0 % $ 1,255,202 100.0 % $ 998,763 100.0 %
Cost of revenue 802,236 68.7 % 883,050 70.4 % 704,535 70.5 %
Gross profit 365,837 31.3 % 372,152 29.6 % 294,228 29.5 %
Operating expenses:
Research and
development 92,967 8.0 % 88,788 7.1 % 77,982 7.8 %
Sales and marketing 145,961 12.4 % 147,854 11.7 % 138,150 14.0 %
General and
administrative 59,659 5.1 % 61,148 4.9 % 49,432 4.9 %
Other operating
expenses (income),
net 653 0.1 % (1,182 ) (0.1 )% 2,476 0.2 %
Total operating
expenses 299,240 25.6 % 296,608 23.6 % 268,040 26.9 %
Income from
operations 66,597 5.7 % 75,544 6.0 % 26,188 2.6 %
Other income
(expenses), net (1,093 ) (0.1 )% (4,741 ) (0.4 )% 3,383 0.4 %
Income before income
taxes 65,504 5.6 % 70,803 5.6 % 29,571 3.0 %
Provision for income
taxes 16,117 1.4 % 12,510 1.0 % 3,780 0.4 %
Net income $ 49,387 4.2 % $ 58,293 4.6 % $ 25,791 2.6 %
Net Revenue by
Our net revenue consists of gross product shipments and service revenue, less
allowances for estimated sales returns, price protection, end-user customer
rebates and other channel sales incentives deemed to be a reduction of revenue
per the authoritative guidance for revenue recognition, and net changes in
deferred revenue. For reporting purposes, revenue is generally attributed to
each geographic region based upon the location of the customer.
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
Americas $ 786,326 (12.4 )% $ 897,971 37.5 % $ 653,006
Percentage of net revenue 67.3 % 71.5 % 65.4 %
EMEA $ 229,829 3.7 % $ 221,665 10.8 % $ 200,099
Percentage of net revenue 19.7 % 17.7 % 20.0 %
APAC $ 151,918 12.1 % $ 135,566 (6.9 )% $ 145,658
Percentage of net revenue 13.0 % 10.8 % 14.6 %
Total net revenue $ 1,168,073 (6.9 )% $ 1,255,202 25.7 % $ 998,763
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Table of Contents 2021 vs 2020Americas Net revenue inAmericas decreased in fiscal 2021, compared to the prior year, primarily due to lower demand for Connected Home products, partially offset by higher demand for SMB products. Connected Home net revenue inAmericas declined by 17.3% in fiscal 2021 with declines experienced across all product categories. Demand for Connected Home products subsided in 2021 as the heightened demand from the consumer and service provider channels brought on by the COVID-19 pandemic in 2020 declined, coinciding with the reopening of economies and vaccine rollouts. SMB net revenue inAmericas rose by 22.7% in fiscal 2021, compared to the prior year. The growth in SMB net revenue was led by increased demand for Pro AV and wireless solutions and assisted by businesses reopening, new business formation, as well as demand for flexible working environments.
EMEA
Net revenue in EMEA increased in fiscal 2021, compared to the prior year, mainly due to higher SMB net revenue, partially offset by lower Connected Home net revenue. SMB net revenue in EMEA in fiscal 2021 grew by 28.0%, compared to the prior year, buoyed by business reopening, new business formations, and increased demand for flexible working environments fueling the growth of our switch and wireless products. Connected Home net revenue decreased by 13.5% in fiscal 2021, compared to the prior year, as demand for mobile and wireless products subsided from the heightened demand brought on by the COVID-19 pandemic in 2020.
APAC
Net revenue in APAC increased in fiscal 2021, compared to the prior year, primarily due to higher SMB net revenue, which grew by 35.4%, driven primarily by strong demand for our switch and wireless products. The year-over-year performance improvement was due to increased demand and an improved economic environment as COVID-19 restrictions began to ease. In fiscal 2021, Connected Home net revenue in APAC remained flat, compared to the prior year, as increased net revenue from our mobile products was offset by lower net revenue from our broadband modem and gateway products.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of the following: the cost of finished
products from our third-party manufacturers; overhead costs, including
purchasing, product planning, inventory control, warehousing and distribution
logistics; third-party software licensing fees; inbound freight; import
duties/tariffs; warranty costs associated with returned goods; write-downs for
excess and obsolete inventory; amortization of certain acquired intangibles and
software development costs; and costs attributable to the provision of service
offerings.
We outsource our manufacturing, warehousing and distribution logistics. We
believe this outsourcing strategy allows us to better manage our product costs
and gross margin. Our gross margin can be affected by a number of factors,
including fluctuation in foreign exchange rates, sales returns, changes in
average selling prices, end-user customer rebates and other channel sales
incentives, changes in our cost of goods sold due to fluctuations and increases
in prices paid for components, net of vendor rebates, royalty and licensing
fees, warranty and overhead costs, inbound freight and duty/tariffs, conversion
costs, charges for excess or obsolete inventory, amortization of acquired
intangibles and capitalized software development costs. The following table
presents costs of revenue and gross margin, for the periods indicated:
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
Cost of revenue $ 802,236 (9.2 )% $ 883,050 25.3 % $ 704,535
Gross margin percentage 31.3 % 29.6 % 29.5 %
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Table of Contents 2021 vs 2020 Gross margin increased in fiscal 2021, compared to the prior year, primarily due to improved product mix with more revenue coming from higher margin SMB products and subscription services. These improvements were partially offset by significant increases in freight expense and proportionality higher costs for channel promotional activities deemed to be a reduction of revenue, compared to the prior year. We expect fiscal 2022 gross margin to decline slightly from fiscal 2021 levels. In 2021, we experienced meaningful increases in costs for sea freight transportation, as well as costs of materials and components for our products. We expect these costs to remain elevated for the foreseeable future, with sea freight transportation costs starting to come down from current highs in the second half of 2022. We believe that through a combination of improved product mix stemming from premium Connected Home and SMB products, higher subscription services and selective increases to the price of our product line, headwinds to margin performance will be partially mitigated. We continue to experience disruptions since the onset of the pandemic, with partners being affected by factory uptime, scarcity of materials and components and limited capacity to transport cargo via sea and air. These disruptions have increased the length of time taken between order to production and transportation of inventory. If such disruptions become more widespread, they could significantly hamper our ability to fulfill the demand for our products, in particular our SMB products and Connected Home mobile products. Forecasting gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels. Our cost of revenue as a percentage of net revenue can vary significantly based upon factors such as: uncertainties surrounding revenue levels, including future pricing and/or potential discounts as a result of the economy or in response to the strengthening of theU.S. dollar in our international markets, competition, the timing of sales, and related production level variances; import customs duties and imposed tariffs; changes in technology; changes in product mix; expenses associated with writing off excessive or obsolete inventory; variability of stock-based compensation costs; royalties to third parties; fluctuations in freight costs; manufacturing and purchase price variances; changes in prices on commodity components; and warranty costs. We expect that revenue derived from paid subscription service plans will continue to increase in the future, which may have a positive impact on our gross margin. However, we may experience fluctuations in our gross margin as a result of the factors discussed above.
Operating Expenses
Research and Development
Research and development expenses consist primarily of personnel expenses,
payments to suppliers for design services, safety and regulatory testing,
product certification expenditures to qualify our products for sale into
specific markets, prototypes, IT and facility allocations, and other consulting
fees. Research and development expenses are recognized as they are incurred. Our
research and development organization is focused on enhancing our ability to
introduce innovative and easy-to-use products and services. The following table
presents research and development expenses, for the periods indicated:
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
Research and development $ 92,967 4.7 % $ 88,788 13.9 % $ 77,982
2021 vs 2020
Research and development expenses increased in fiscal 2021, compared to the
prior year, mainly due to an increase in personnel-related expenditures of $4.3
million . The increased personnel-related expenditures were primarily
attributable to growth of our software engineering team, partially offset by
lower performance-based compensation expense.
We believe that innovation and technological leadership is critical to our
future success, and we are committed to continuing a significant level of
research and development to develop new technologies, products and services. We
continue to invest in research and development to grow our cloud platform
capabilities, our services and mobile applications and to expand our hardware
product offerings focused on premium WiFi 6E, WiFi 6, Advanced 4G/5G mobile and
5G coverage solutions, audio and video over Ethernet, web-managed, 10Gig and PoE
switch and SMB wireless products. We expect research and development expenses as
a percentage of net revenue in fiscal 2022 to be in line with or slightly above
fiscal 2021 levels. Research and development expenses may fluctuate depending on
the timing and number of development activities and could vary significantly as
a percentage of net revenue, depending
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on actual revenues achieved in any given quarter.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising, trade shows,
corporate communications and other marketing expenses, product marketing
expenses, outbound freight costs, amortization of certain intangibles, personnel
expenses for sales and marketing staff, technical support expenses, and IT and
facility allocations. The following table presents sales and marketing expenses,
for the periods indicated:
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
Sales and marketing $ 145,961 (1.3 )% $ 147,854 7.0 % $ 138,150
2021 vs 2020
Sales and marketing expenses decreased in fiscal 2021, compared to the prior
year, primarily due to decreases in amortization of intangibles of $4.0 million
and personnel-related expenditures of $3.9 million , partially offset by
increases in marketing expenditures of $4.4 million and outbound freight costs
of $1.4 million as a result of increasing rates. The year-over-year reduction in
amortization of intangibles was as a result of certain intangibles being fully
amortized by the second fiscal quarter of 2021. The year-over-year decline in
the personnel-related expenditures was mainly due to lower performance-based
compensation expense. The year-over-year increase in marketing spending resulted
from higher investment to raise awareness of our products and services and to
direct customers to our direct online store and in-app offerings.
We expect our sales and marketing expenses as a percentage of net revenue in
fiscal 2022 to be similar to fiscal 2021 levels. Expenses may fluctuate
depending on revenue levels achieved as certain expenses, such as commissions,
are determined based upon the revenues achieved. Forecasting sales and marketing
expenses is highly dependent on expected revenue levels and could vary
significantly depending on actual revenue achieved in any given quarter.
Marketing expenses may also fluctuate depending upon the timing, extent and
nature of marketing programs. Marketing expenditure committed with a customer is
generally recorded as a reduction of net revenue per authoritative guidance.
General and Administrative
General and administrative expenses consist of salaries and related expenses for
executives, finance and accounting, human resources, information technology,
professional fees, including legal costs associated with defending claims
against us, allowance for doubtful accounts, IT and facility allocations, and
other general corporate expenses. The following table presents general and
administrative expenses, for the periods indicated:
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
General and administrative $ 59,659 (2.4 )% $ 61,148 23.7 % $ 49,432
2021 vs 2020
General and administrative expenses decreased in fiscal 2021, compared to the
prior year, primarily due to a decrease in personnel-related expenditures of
$5.8 million , partially offset by an increase in legal and professional services
spending of $4.8 million . The year-over-year decline in the personnel-related
expenditures was mainly due to headcount reduction and lower performance-based
compensation expense. The year-over-year increase in legal expenses was mainly
attributable to higher litigation activity associated with patent litigation
claims.
We expect our general and administrative expenses as a percentage of net revenue
in fiscal 2022 to be in line with fiscal 2021 levels. General and administrative
expenses could fluctuate depending on a number of factors, including the level
and timing of expenditures associated with litigation defense costs in
connection with the litigation matters described in Note 8, Commitments and
Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part
II of this Annual Report on Form 10-K. Future general and administrative expense
increases or decreases in
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absolute dollars are difficult to predict due to the lack of visibility of
certain costs, including legal costs associated with defending claims against
us, as well as legal costs associated with asserting and enforcing our
intellectual property portfolio and other factors.
Other operating expenses (income), net
Other operating expenses (income), net consists of restructuring and other
charges, litigation reserves, net, and change in the fair value of contingent
consideration. The following table presents Other operating expenses (income),
net for the periods indicated:
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
Other operating expenses (income), net $ 653 ** $ (1,182 )
**
___________________
** Percentage change not meaningful.
2021 vs 2020
The change in Other operating expenses (income), net in fiscal 2021, compared to the prior year, mainly resulted from higher restructuring and other charges of$1.6 million associated with the consolidation of our offices in the APAC region, as well as the reorganization of our supply chain function. For a detailed discussion of restructuring and other charges, refer to Note 13. Restructuring and Other Charges, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Other Income (Expenses), Net
Other income (expenses), net consists of interest income, which represents
amounts earned and incurred on our cash, cash equivalents and short-term
investments, and other income and expenses, which primarily represents gains and
losses on transactions denominated in foreign currencies, gains and losses on
investments, and other non-operating income and expenses. The following table
presents other income (expenses), net for the periods indicated:
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
Other income (expenses), net $ (1,093 ) (76.9 )% $ (4,741 ) ** $ 3,383
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** Percentage change not meaningful.
2021 vs 2020
The change in Other income (expenses), net in fiscal 2021, compared to the prior year, was primarily due to lower net loss of$4.9 million on our privately held investments, partially offset by fluctuations of foreign currency transaction and contracts. We incurred net losses of$1.4 million and$6.2 million on our investments in fiscal 2021 and fiscal 2020, respectively. For details on the changes in Other income (expenses), net, refer to Note 6, Other Income (Expenses), Net, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Provision for Income Taxes
Year Ended December 31,
2021 % Change 2020 % Change 2019
(In thousands, except percentage data)
Provision for income taxes $ 16,117 28.8 % $ 12,510 ** $ 3,780
Effective tax rate 24.6 % 17.7 % 12.8 %
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** Percentage change not meaningful.
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Table of Contents 2021 vs 2020 The increase in tax expense in fiscal 2021, compared to the prior year, resulted primarily from the increase in tax fromU.S. Base Erosion and Anti-abuse Tax ("BEAT") in 2021. The lower tax in 2020 resulted from the release of a valuation allowance onCalifornia deferred tax and the favorable impact of the international operations. During fiscal 2021, we evaluated the impact of the Global Intangible Low-Tax Income ("GILTI"), Foreign Derived Intangible Income ("FDII") and BEAT provisions. These provisions resulted in a net addition of tax of$1.1 million . This amount was comprised of BEAT of$2.4 million , particularly offset by the impact of GILTI and FDII of$1.3 million . We are subject to income taxes in theU.S. and numerous foreign jurisdictions. Our future foreign tax rate could be affected by changes in the composition in earnings in countries with tax rates differing from theU.S. federal rate. We are currently under examination by the Internal Revenue Service ("IRS") for our fiscal year endedDecember 31, 2018 . We are also under examination in various otherU.S. and foreign jurisdictions.
Segment Information
A description of our products and services, as well as segment financial data,
for each segment and a reconciliation of segment contribution income to income
before income taxes can be found in Note 11, Segment Information, in Notes to
Consolidated Financial Statements in Item 8 of Part II of this Annual Report on
Form 10-K.
Connected Home Segment
Year Ended December 31,
2021 % Change 2020 % Change 2019
(in thousands, except percentage data)
Net revenue $ 853,472 (15.3 )% $ 1,007,545 41.6 % $ 711,391
Percentage of net revenue 73.1 % 80.3 % 71.2 %
Contribution income $ 116,889 (23.4 )% $ 152,512 125.0 % $ 67,775
Contribution margin 13.7 % 15.1 % 9.5 %
2021 vs 2020
Connected Home net revenue decreased in fiscal 2021, compared to the prior
year. Demand for Connected Home products subsided as the COVID-19 pandemic
induced surge experienced in both consumer and service provider channels in 2020
declined, coinciding with the reopening of economies and vaccine rollouts. In
fiscal 2021, net revenue from service provider channels fell 33.0% year over
year, primarily due to the decline in mobile products, and net revenue from the
consumer channel also fell 11.1% year over year, primarily due to the decline in
home wireless products. Within home wireless, we continued to experience growth
in premium Tri-band and Quad-band WiFi 6 mesh systems and service revenue in
fiscal 2021. Geographically, net revenue in fiscal 2021 decreased in Americas
and EMEA and remained flat in APAC, compared to the prior year.
Connected Home contribution income decreased in fiscal 2021, compared to the
prior year, mainly attributable to lower net revenue and higher operating
expenses, partially offset by higher gross margin attainment. The higher
operating expenses were mainly attributable to increased product marketing to
heighten brand awareness and increased research and development expenses
associated with software and services. The improved gross margin was primarily
attributable to improved product margin performance and service revenue
comprising a higher percentage of net revenue.
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SMB Segment
Year Ended December 31,
2021 % Change 2020 % Change 2019
(in thousands, except percentage data)
Net revenue $ 314,601 27.0 % $ 247,657 (13.8 )% $ 287,372
Percentage of net revenue 26.9 % 19.7 % 28.8 %
Contribution income $ 62,136 47.3 % $ 42,174 (37.3 )% $ 67,282
Contribution margin 19.8 % 17.0 % 23.4 %
2021 vs 2020
SMB net revenue increased significantly in fiscal 2021, compared to the prior
year, led by increased demand for Pro AV and wireless solutions and assisted by
businesses reopening, new business formations, as well as demand for flexible
working environments. The year-over-year performance was further benefited by
the re-opening of economies while the prior year performance was negatively
impacted by business closures and restrictions from the COVID-19 pandemic.
Geographically, we experienced growth in SMB net revenue across all three
regions in fiscal 2021, compared to the prior year.
SMB contribution income increased in fiscal 2021, compared to the prior year,
primarily due to higher net revenue and lower operating expenses, primarily
attributable to decreased tech support expenses. These improvements were
partially offset by slightly lower gross margin primarily driven by higher
freight expenditure as a percentage of net revenue.
Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents, short-term investments and cash generated from operations. As ofDecember 31, 2021 , we had cash, cash equivalents and short-term investment of$271.5 million , a decrease of$81.8 million fromDecember 31, 2020 . As ofDecember 31, 2021 , approximately 43% of our cash and cash equivalents and short-term investments were outside of theU.S. The cash and cash equivalents and short-term investments balances outside of theU.S. are subject to fluctuation based on the settlement of intercompany balances. As we repatriate these funds in accordance with our designation of funds not permanently reinvested outside of theU.S. , we will be required to pay income taxes in certainU.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. We have recorded deferred taxes for the tax effect of repatriating the funds to theU.S.
Cash Flows
The following table presents our cash flows for the periods presented:
Year Ended December 31,
2021 2020 2019
(In thousands)
Cash provided by (used in) operating activities
$ 13,525 Cash provided by (used in) investing activities (9,985 ) (16,836 )
49,459
Cash used in financing activities (68,124 ) (8,062 ) (73,823 ) Net cash increase (decrease)$ (82,688 ) $ 156,252 $ (10,839 ) 2021 vs 2020 Operating activities Net cash used in operating activities was$4.6 million for fiscal 2021, compared to$181.2 million of cash provided in fiscal 2020, primarily due to unfavorable working capital movements and lower net income. The lower net cash inflow from working capital was mainly driven by higher inventory holding and higher payments to trade suppliers and other non-trade vendors, partially offset by a decrease in account receivable driven primarily by timing 60
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of cash receipts. Inventory holding increased as we rebuilt inventory carrying
levels to support ongoing demand and adjusted for elongation of freight transit
times, which have increased meaningfully.
Our days sales outstanding ("DSO") increased to 93 days as of December 31, 2021
as compared to 87 days as of December 31, 2020 . The increase in DSO for 2021
compared with 2020 was primarily attributable to the timing of shipments and
cash receipts, as well as mix of receivable balances. Our accounts payable
decreased from $90.9 million as of December 31, 2020 to $73.7 million as of
December 31, 2021 due to timing of inventory receipts and supplier payments.
Inventory increased from $172.1 million as of December 31, 2020 to $315.7
million as of December 31, 2021 as we rebuilt inventory carrying levels as
discussed above.
Investing activities
Net cash used in investing activities decreased by
compared to fiscal 2020, mainly due to lower purchases of long-term investments.
Financing activities
Net cash used in financing activities increased by$60.1 million in fiscal 2021 as compared to fiscal 2020, due to higher stock repurchase activity, lower proceeds from transactions under our equity plans and higher payments relating to restricted stock unit tax withholdings. Based on our current plans and market conditions, we believe that our existing cash, cash equivalents and short-term investments, together with cash generated from operations, will be sufficient to satisfy our anticipated cash requirements for the next twelve months and the foreseeable future. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology.
Stock Repurchase Program
From time to time, our Board of Directors has authorized programs under which we may repurchase shares of our common stock. Under the authorizations, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of our common stock. OnOctober 24, 2021 , our Board of Directors authorized the management to repurchase up to 3.0 million shares of our outstanding common stock, incremental to the remaining shares under our previous repurchase program. As ofDecember 31, 2021 , approximately 3.5 million shares remained authorized for repurchase under the repurchase program. During the years endedDecember 31, 2021 and 2020, we repurchased and retired, and reported based on trade date, approximately 2.1 million and 0.9 million shares of common stock at a cost of$75.0 million and$23.8 million , respectively, under the repurchase authorizations. We also repurchased and retired, reported based on trade date, approximately 204,000 and 198,000 shares of common stock at a cost of$7.7 million and$5.1 million , respectively, to help administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving Restricted Stock Units. For a detailed discussion of our common stock repurchases, refer to Note 9, Stockholders' Equity, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. We remain confident in our ability to generate meaningful levels of cash, and plan to continue to opportunistically repurchase shares in the future. 61
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Contractual and Other Obligations
The following table summarizes our non-cancelable short-term and long-term
contractual and other obligations as of
Short-term Long-term Total
(In thousands)
Purchase obligations (1) (6) $ 94,762 $ - $ 94,762
Operating leases (2) (5) 10,122 19,696 29,818
Other non-trade purchase commitments (3) (6) 951 14,841 15,792
Tax Act payables (4) (5) 1,202 9,015 10,217
$ 107,037 $ 43,552 $ 150,589
(1) Represent non-cancellable inventory-related purchase agreements with
suppliers. A further $882.6 million of purchase orders beyond contractual
termination periods have been issued to supply chain partners in anticipation of
demand expectations for the forthcoming 21 months. These purchases orders may be
cancelled by either party, however we may incur expenses for materials and
components, such as chipsets purchased by the supplier to fulfill the purchase
order, in the event of cancellation. Expenses incurred in respect of cancelled
purchase orders has historically not been significant relative to the original
order value. Our commitments for property and equipment purchases as of December
31, 2021 was not material.
(2) Represent undiscounted non-cancellable remaining lease payments. For a
detailed discussion on our operating leases, refer to Note 14, Leases, in Notes
to Consolidated Financial Statements in Item 8 of Part II of this Annual Report
on Form 10-K. The amounts presented are consistent with contractual terms and
are not expected to differ significantly, unless a substantial change in our
headcount needs requires us to exit an office facility early or expand our
occupied space.
(3) Represent non-cancellable purchase commitments pertaining to non-trade
activities.
(4) Represent estimated liability related to a one-time transaction tax that
resulted from the passage of the Tax Act.
(5) Included on our consolidated balance sheets.
(6) For a detailed discussion, refer to Note 8, Commitments and
Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part
II of this Annual Report on Form 10-K.
In addition, as ofDecember 31, 2021 , we had$10.0 million of total gross unrecognized tax benefits and related interest and penalties. The timing of any payments that could result from these unrecognized tax benefits will depend upon a number of factors. The unrecognized tax benefits have been excluded from the contractual obligations table because reasonable estimates cannot be made of whether, or when, any cash payments for such items might occur. The possible reduction in liabilities for uncertain tax positions in multiple jurisdictions that may impact the statements of operations in the next 12 months is approximately$0.5 million , excluding the interest, penalties and the effect of any related deferred tax assets or liabilities. Our contractual and other obligations are expected to be funded by our existing cash, cash equivalents and short-term investments, together with cash generated from operations. 62
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