NETGEAR, INC. 10-Q

Item 1. Financial Statements NETGEAR, INC. UNAUDITED CONDENSED CONS OLIDATED BALANCE SHEETS (In thousands) April 2, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 143,191 $ 146,500 Short-term investments 96,019 80,925 Accounts receivable, net of allowance for doubtful accounts $ 397 as of April 2, 2023 and December 31, 2022, respectively 192,540 277,485 Inventories 337,187 299,614 Prepaid expenses and other current assets 30,487 29,767 Total current assets 799,424 834,291 Property and equipment, net 8,266 9,225 Operating lease right-of-use assets 39,908 40,868 Intangibles, net 1,200 1,329 Goodwill 36,279 36,279 Other non-current assets 103,030 97,793 Total assets $ 988,107 $ 1,019,785 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 79,637 $ 85,550 Accrued employee compensation 21,706 24,132 Other accrued liabilities 190,276 213,476 Deferred revenue 22,439 21,128 Income taxes payable 3,702 1,685 Total current liabilities 317,760 345,971 Non-current income taxes payable 15,214 14,972 Non-current operating lease liabilities 32,372 34,085 Other non-current liabilities 4,199 3,902 Total liabilities 369,545 398,930 Commitments and contingencies (Note 8) Stockholders’ equity: Common stock 29 29 Additional paid-in capital 953,074 946,123 Accumulated other comprehensive income (loss) 53 ( 535 ) Accumulated deficit ( 334,594 ) ( 324,762 ) Total stockholders’ equity 618,562 620,855 Total liabilities and stockholders’ equity $ 988,107 $ 1,019,785 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Table of Contents NETGEAR, INC. UNAUDITED CONDENSED CONSOLIDA TED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended April 2, 2023 April 3, 2022 Net revenue $ 180,908 $ 210,558 Cost of revenue 120,526 151,655 Gross profit 60,382 58,903 Operating expenses: Research and development 22,134 23,821 Sales and marketing 33,879 35,586 General and administrative 16,236 13,602 Goodwill impairment — 44,442 Other operating expenses (income), net 108 ( 3 ) Total operating expenses 72,357 117,448 Loss from operations ( 11,975 ) ( 58,545 ) Other income (expenses), net 1,406 ( 982 ) Loss before income taxes ( 10,569 ) ( 59,527 ) Benefit from income taxes ( 857 ) ( 2,317 ) Net loss $ ( 9,712 ) $ ( 57,210 ) Net loss per share Basic $ ( 0.33 ) $ ( 1.95 ) Diluted $ ( 0.33 ) $ ( 1.95 ) Weighted average shares used to compute net loss per share: Basic 29,040 29,350 Diluted 29,040 29,350 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents NETGEAR, INC. UNAUDITED CONDENSED CONSOLIDATED S TATEMENTS OF COMPREHENSIVE LOSS (In thousands) Three Months Ended April 2, 2023 April 3, 2022 Net loss $ ( 9,712 ) $ ( 57,210 ) Other comprehensive income (loss), before tax: Change in unrealized gains and losses on derivatives 465 45 Change in unrealized gains and losses on available-for-sale investments 241 ( 49 ) Other comprehensive income (loss), before tax 706 ( 4 ) Tax provision related to derivatives ( 59 ) ( 1 ) Tax (provision) benefit related to available-for-sale investments ( 59 ) 12 Other comprehensive income, net of tax 588 7 Comprehensive loss $ ( 9,124 ) $ ( 57,203 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents NETGEAR, INC. UNAUDITED CONDENSED CONSOLIDATED S TATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholder's Equity Balance as of December 31, 2022 28,908 $ 29 $ 946,123 $ ( 535 ) $ ( 324,762 ) $ 620,855 Change in unrealized gains and losses on available-for-sale investments, net of tax — — — 182 — 182 Change in unrealized gains and losses on derivatives, net of tax — — — 406 — 406 Net loss — — — — ( 9,712 ) ( 9,712 ) Stock-based compensation — — 4,665 — — 4,665 Restricted stock unit withholdings ( 6 ) — — — ( 120 ) ( 120 ) Issuance of common stock under stock-based compensation plans 154 — 2,286 — — 2,286 Balance as of April 2, 2023 29,056 $ 29 $ 953,074 $ 53 $ ( 334,594 ) $ 618,562 Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholder's Equity Balance as of December 31, 2021 29,286 $ 29 $ 923,228 $ 149 $ ( 226,591 ) $ 696,815 Change in unrealized gains and losses on available-for-sale investments, net of tax — — — ( 37 ) — ( 37 ) Change in unrealized gains and losses on derivatives, net of tax — — — 44 — 44 Net loss — — — — ( 57,210 ) ( 57,210 ) Stock-based compensation — — 4,697 — — 4,697 Repurchase of common stock ( 354 ) — — — ( 9,377 ) ( 9,377 ) Restricted stock unit withholdings ( 46 ) — — — ( 1,262 ) ( 1,262 ) Issuance of common stock under stock-based compensation plans 275 — 3,351 — — 3,351 Balance as of April 3, 2022 29,161 $ 29 $ 931,276 $ 156 $ ( 294,440 ) $ 637,021 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents NETGEAR, INC. UNAUDITED CONDENSED CONSOLIDA TED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended April 2, 2023 April 3, 2022 Cash flows from operating activities: Net loss $ ( 9,712 ) $ ( 57,210 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,011 2,807 Stock-based compensation 4,665 4,697 (Gain) Loss on investments, net ( 663 ) 622 Goodwill impairment — 44,442 Deferred income taxes ( 4,629 ) ( 7,626 ) Provision for excess and obsolete inventory 1,174 1,460 Changes in assets and liabilities: Accounts receivable, net 84,945 41,247 Inventories ( 38,747 ) ( 13,102 ) Prepaid expenses and other assets ( 1,778 ) 7,889 Accounts payable ( 5,922 ) ( 9,012 ) Accrued employee compensation ( 2,425 ) ( 3,743 ) Other accrued liabilities ( 23,665 ) ( 13,155 ) Deferred revenue 1,609 1,705 Income taxes payable 2,259 273 Net cash provided by operating activities 9,122 1,294 Cash flows from investing activities: Purchases of short-term investments ( 38,733 ) ( 50,202 ) Proceeds from maturities of short-term investments 25,006 417 Purchases of property and equipment ( 870 ) ( 957 ) Purchases of long-term investments — ( 210 ) Net cash used in investing activities ( 14,597 ) ( 50,952 ) Cash flows from financing activities: Repurchases of common stock — ( 9,377 ) Restricted stock unit withholdings ( 120 ) ( 1,262 ) Proceeds from exercise of stock options — 593 Proceeds from issuance of common stock under employee stock purchase plan 2,286 2,758 Net cash provided by (used in) financing activities 2,166 ( 7,288 ) Net decrease in cash and cash equivalents ( 3,309 ) ( 56,946 ) Cash and cash equivalents, at beginning of period 146,500 263,772 Cash and cash equivalents, at end of period $ 143,191 $ 206,826 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents NETGEAR, INC. NOTES TO UNAUDITED CONDENSED CO NSOLIDATED FINANCIAL STATEMENTS Note 1. The Company and Basis of Presentation NETGEAR, Inc. (“NETGEAR” or the “Company”) is a global company, incorporated in Delaware in January 1996. The Company turns ideas into innovative, high-performance and premium networking products that connect people, homes, and power businesses and service providers. The Company's products are designed to simplify and improve people’s lives. The Company is dedicated to delivering innovative and differentiated high performance connected solutions ranging from easy-to-use premium WiFi solutions, 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. The Company's 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, the Company continually invests in research and development to create new technologies and services and to capitalize on technological inflection points and trends, such as WiFi 7, audio and video over Ethernet, non-fungible token (“NFT”) artwork, and future technologies. Its 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 the Company's product line offerings. These products are available in multiple configurations to address the changing needs of the Company's customers in each geographic region. The Company sells networking products through multiple sales channels worldwide, including traditional retailers, online retailers, wholesale distributors, direct market resellers (“DMRs”), value-added resellers (“VARs”), broadband service providers and its direct online store at www.netgear.com . The accompanying unaudited condensed consolidated financial statements include the accounts of NETGEAR, Inc. and its wholly owned subsidiaries. They have been prepared in accordance with established guidelines for interim financial reporting and the instructions of Form 10-Q and Article 10 of Regulation S-X. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet dated December 31, 2022, has been derived from audited financial statements at such date. These unaudited condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments considered necessary to fairly state the Company's financial position, results of operations, comprehensive income (loss), stockholder's equity and cash flows for the periods indicated. These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”). The Company's fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of net revenue and expenses during the reported period. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances. As of the date of issuance of these condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require it to update its estimates, judgments or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ materially from those estimates and operating results for the three months ended April 2, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or any future period. Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 2. Summary of Signif icant Accounting Policies No material changes have been made to the Company’s significant accounting policies disclosed in Note 1, The Company and Summary of Significant Accounting Policies , in its Annual Report. Recent Accounting Pronouncements The Company has considered all recent accounting pronouncements issued, but not yet effective, and does not expect any to have a material effect on the Company’s unaudited condensed consolidated financial statements. Note 3. Rev enue Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Transaction Price Allocated to the Remaining Performance Obligations Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied, which are primarily from hardware and, to a lesser extent, subscription and support services, as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods for which customer purchase orders have been accepted that are scheduled or in the process of being scheduled for shipment, and that are not yet invoiced. The following table summarizes estimated revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of April 2, 2023: (In thousands) 2023 2024 Beyond 2024 Total Performance obligations $ 88,231 $ 2,167 $ 2,046 $ 92,444 Contract Balances The Company records accounts receivable when it has an unconditional right to consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Contract liabilities are mainly classified as Deferred revenue on the unaudited condensed consolidated balance sheets. Payment terms vary by customer. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer. The following table reflects the contract balances: (In thousands) Balance Sheet Location April 2, 2023 December 31, 2022 Accounts receivable, net Accounts receivable, net $ 192,540 $ 277,485 Contract liabilities - current Deferred revenue $ 22,439 $ 21,128 Contract liabilities - non-current Other non-current liabilities $ 4,195 $ 3,897 The difference in the balances of the Company's contract assets and liabilities as of April 2, 2023 and December 31, 2022, primarily results from the timing difference between the Company's performance and the customer’s payment. During the three months ended April 2, 2023 , $ 11.3 million of revenue was deferred primarily due to unsatisfied performance obligations for service contracts, $ 9.7 million of revenue was recognized for the satisfaction of performance obligations and $ 8.5 million of this recognized revenue was included in the contract liability balance at the beginning of the period. 9 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) There were no significant changes in estimates during the period that would affect the contract balances. Disaggregation of Revenue In the following tables, net revenue is disaggregated by geographic region and sales channel. The Company conducts business across three geographic regions: Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific (“APAC”). The tables also include reconciliations of the disaggregated revenue by reportable segment. The Company operates and reports in two segments: Connected Home, and Small and Medium Business (“SMB”). Sales and usage-based taxes are excluded from n et revenue. Three Months Ended April 2, 2023 April 3, 2022 (In thousands) Connected Home SMB Total Connected Home SMB Total Geographic regions (1) : Americas $ 84,001 $ 37,921 $ 121,922 $ 107,347 $ 37,302 $ 144,649 EMEA 12,064 27,114 39,178 9,018 27,847 36,865 APAC 6,681 13,127 19,808 13,977 15,067 29,044 Total $ 102,746 $ 78,162 $ 180,908 $ 130,342 $ 80,216 $ 210,558 Sales channels: Service provider $ 14,027 $ 190 $ 14,217 $ 18,121 $ 729 $ 18,850 Non-service provider 88,719 77,972 166,691 112,221 79,487 191,708 Total $ 102,746 $ 78,162 $ 180,908 $ 130,342 $ 80,216 $ 210,558 (1) No individual foreign country represented more than 10% of the Company's total net revenue in the periods presented. Note 4. Balance Sheet Components Available-for-sale investments Amortized cost and estimated fair market value of investments classified as available-for-sale, excluding cash equivalents, as of April 2, 2023, and December 31, 2022, were as follows: April 2, 2023 (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value U.S. treasury securities $ 88,535 $ — $ ( 78 ) $ 88,457 Convertible debt (1) 346 — — 346 Total $ 88,881 $ — $ ( 78 ) $ 88,803 10 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2022 (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value U.S. treasury securities $ 74,120 $ — $ ( 320 ) $ 73,800 Convertible debt (1) 346 — — 346 Certificates of deposit 6 — — 6 Total $ 74,472 $ — $ ( 320 ) $ 74,152 (1) On the Company’s unaudited condensed consolidated balance sheets, $ 173,000 included in Short-term investments as of April 2, 2023 , and December 31, 2022, respectively, and $ 173,000 included in Other non-current assets as of April 2, 2023 , and December 31, 2022, respectively. The contractual maturities on the U.S. treasury securities as of April 2, 2023, are all due within one year. Accrued interest receivable as of April 2, 2023, was $ 0.1 million and was recorded within Prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet. The following table summarizes investments classified as available-for-sale in a continuous unrealized loss position for which an allowance for credit losses was not recorded as of April 2, 2023 and December 31, 2022: April 2, 2023 Less Than 12 Months 12 Months or Longer Total (In thousands) Estimated Fair Market Value Gross Unrealized Losses Estimated Fair Market Value Gross Unrealized Losses Estimated Fair Market Value Gross Unrealized Losses U.S. treasury securities $ 88,457 $ ( 78 ) $ — $ — $ 88,457 $ ( 78 ) Total $ 88,457 $ ( 78 ) $ — $ — $ 88,457 $ ( 78 ) December 31, 2022 Less Than 12 Months 12 Months or Longer Total (In thousands) Estimated Fair Market Value Gross Unrealized Losses Estimated Fair Market Value Gross Unrealized Losses Estimated Fair Market Value Gross Unrealized Losses U.S. treasury securities $ 73,800 $ ( 320 ) $ — $ — $ 73,800 $ ( 320 ) Total $ 73,800 $ ( 320 ) $ — $ — $ 73,800 $ ( 320 ) In the three months ended April 2, 2023, and April 3, 2022 , no unrealized losses on available-for-sale securities were recognized in income. The Company does not intend to sell, and it is unlikely that it will be required to sell the investments in an unrealized loss position prior to their anticipated recovery. The investments are high quality U.S. treasury securities and the decline in fair value is largely due to changes in interest rates and other market conditions with the fair value expected to recover as they reach maturity. There were no other-than-temporary impairments for these securities during the three months ended April 2, 2023, and April 3, 2022. Refer to Note 12, Fair Value Measurements, for detailed disclosures regarding fair value measurements. Inventories (In thousands) April 2, 2023 December 31, 2022 Raw materials $ 4,732 $ 4,549 Finished goods 332,455 295,065 Total $ 337,187 $ 299,614 11 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company records provisions for excess and obsolete inventory based on assumptions about future demand and market conditions and the amounts incurred we re $ 1.2 million an d $ 1.5 million for the three months ended April 2, 2023, and April 3, 2022, respectively. While management believes the estimates and assumptions underlying its current forecasts are reasonable, there is risk that additional charges may be necessary if current forecasts are greater than actual demand. Property and equipment, net (In thousands) April 2, 2023 December 31, 2022 Computer equipment $ 9,639 $ 9,648 Furniture, fixtures, and leasehold improvements 19,002 18,642 Software 30,724 30,610 Machinery and equipment 77,069 76,806 Total property and equipment, gross 136,434 135,706 Accumulated depreciation ( 128,168 ) ( 126,481 ) Total $ 8,266 $ 9,225 Intangibles, net April 2, 2023 December 31, 2022 (In thousands) Gross Accumulated Amortization Net Gross Accumulated Amortization Net Technology $ 59,799 $ ( 58,799 ) $ 1,000 $ 59,799 $ ( 58,692 ) $ 1,107 Other 10,345 ( 10,145 ) 200 10,345 ( 10,123 ) 222 Total $ 70,144 $ ( 68,944 ) $ 1,200 $ 70,144 $ ( 68,815 ) $ 1,329 Amortization of purchased intangibles was $ 0.1 million for the three months ended April 2, 2023, and April 3, 2022, respectively. Other non-current assets (In thousands) April 2, 2023 December 31, 2022 Non-current deferred income taxes $ 90,275 $ 85,704 Long-term investments 7,860 7,879 Other 4,895 4,210 Total $ 103,030 $ 97,793 Long-term equity investments The Company's long-term investments are comprised of equity investments without readily determinable fair values, investments in convertible debt securities and investments in limited partnership funds. The changes in the carrying value of equity investments without readily determinable fair values were as follows: Three Months Ended (In thousands) April 2, 2023 April 3, 2022 Carrying value as of the beginning of the period (1) $ 6,053 $ 6,303 Impairment — ( 250 ) Carrying value as of the end of the period (1) $ 6,053 $ 6,053 (1) The balances excluded an investment in limited partnership fund s of $ 1.6 million as of April 2, 2023 , $ 1.2 million as of April 3, 2022 , $ 1.7 million as of December 31, 2022, and $ 0.9 million as of December 31, 2021. Additionally, the balance excluded an investment in convertible debt securities of $ 0.2 million as of April 2, 2023 , and December 31, 2022, respectively, $ 0.3 million as of April 3, 2022 , and December 31, 2021, respectively. For such equity investments without readily determinable fair values still held at April 2, 2023, there were no cumulative downward adjustments for price changes and impairment and the cumulative upward adjustments for price changes was $ 0.3 million. 12 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other accrued liabilities (In thousands) April 2, 2023 December 31, 2022 Current operating lease liabilities $ 12,460 $ 11,012 Sales and marketing 86,008 98,690 Warranty obligations 6,351 6,320 Sales returns (1) 39,675 44,944 Freight and duty 3,749 7,243 Other 42,033 45,267 Total $ 190,276 $ 213,476 (1) Inventory expected to be received from future sales returns amoun ted to $ 18.8 million a nd $ 21.8 million as of April 2, 2023 and December 31, 2022, respectively. Provisions to write down expected returned inventory to net realizable value amount ed to $ 11.1 million and $ 11.8 million as of April 2, 2023 , and December 31, 2022, respectively. Note 5. Derivative F inancial Instruments The Company's subsidiaries have material future cash flows related to revenue and expenses denominated in currencies other than the U.S. dollar, the Company's functional currency worldwide. The Company executes currency forward contracts that typically mature in less than 6 months to mitigate its currency risk, in currencies including Australian dollars, British pounds, euros, Canadian dollars, and Japanese yen. The Company does not enter into derivatives transactions for trading or speculative purposes. The Company's foreign currency forward contracts do not contain any credit-risk-related contingent features. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any individual counterparty. The Company typically executes ten cash flow hedges per quarter with maturities under six months and with an average USD notional amount of approximately $ 6.0 million that are designated as cash flow hedges. The Company enters into non-designated hedges that are generally expected to offset the changes in value of its net non-functional currency asset and liability position resulting from foreign exchange rate fluctuations. The Company adjusts its non-designated hedges monthly and typically executes about ten non-designated forwards per quarter with maturities less than three months and an average USD notional amount of approximately $ 2.0 million. Fair Value of Derivative Instruments The fair values of the Company's derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded were summarized as follows: Balance Sheet Balance Sheet (In thousands) Location April 2, 2023 December 31, 2022 Location April 2, 2023 December 31, 2022 Derivatives not designated as hedging instruments Prepaid expenses and other current assets $ 706 $ 636 Other accrued liabilities $ 227 $ 3,871 Derivatives designated as hedging instruments Prepaid expenses and other current assets 145 16 Other accrued liabilities 16 212 Total $ 851 $ 652 $ 243 $ 4,083 Refer to Note 12, Fair Value Measurements for detailed disclosures regarding fair value measurements. Refer to Note 9, Stockholders' Equity , for details on the accumulated other comprehensive income (loss) activity related to derivatives and refer to Note 11, Segment Information , for details on gain/(loss), net pertaining to derivatives not designated as hedging instruments that were recognized in Other income (expenses), net. 13 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 6. Net Loss Per Share Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include common shares issuable upon exercise of stock options, vesting of Restricted Stock Units (“RSUs”) and performance shares, and issuances of shares under the Employee Stock Purchase Plan (the "ESPP"), which are reflected in diluted net income (loss) per share by application of the treasury stock method. Potentially dilutive common shares are excluded from the computation of diluted net income (loss) per share when their effect is anti-dilutive. Net loss per share consisted of the following: Three Months Ended (In thousands, except per share data) April 2, 2023 April 3, 2022 Numerator: Net loss $ ( 9,712 ) $ ( 57,210 ) Denominator: Weighted average common shares - basic 29,040 29,350 Weighted average common shares - dilutive 29,040 29,350 Basic net loss per share $ ( 0.33 ) $ ( 1.95 ) Diluted net loss per share $ ( 0.33 ) $ ( 1.95 ) Anti-dilutive employee stock-based awards, excluded 1,318 1,179 Note 7. In come Taxes The income tax benefit for the three months ended April 2, 2023 was $ 0.9 million, or an effective tax rate of 8.1 %. The income tax benefit for the three months ended April 3, 2022 was $ 2.3 million, or an effective tax rate of 3.9 %. The change in taxes for the three months ended April 2, 2023, compared to the prior year period, was primarily due to a higher forecasted effective tax rate in the three months ended April 2, 2023, resulting primarily from relatively lower forecasted earnings for 2023. In the three months ended April 3, 2022, the forecasted annual loss was significantly higher (in relative terms) as compared to the forecasted earnings for 2023 due to the impairment of goodwill. The tax benefit on the three months ended April 3, 2022 was partially offset by the tax impact of non-tax-deductible goodwill impairment which substantially reduced the effective tax rate for that period. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. The future foreign tax rate could be affected by changes in the composition in earnings in countries with tax rates differing from the U.S. federal rate. The Company is under examination in various U.S. and foreign jurisdictions. The Company files income tax returns in the U.S. federal jurisdiction as well as various state, local, and foreign jurisdictions. Due to the uncertain nature of ongoing tax audits, the Company has recorded its liability for uncertain tax positions as part of its long-term liability as payments cannot be anticipated over the next twelve months. The existing tax positions of the Company continue to generate an increase in the liability for uncertain tax positions. The liability for uncertain tax positions may be reduced for liabilities that are settled with taxing authorities or on which the statute of limitations could expire without assessment from tax authorities. The possible reduction in liabilities for uncertain tax positions in multiple jurisdictions in the next twelve months is approximately $ 0.4 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities. The Company is currently under examination in various U.S. and foreign jurisdictions. The Company accounts 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 treatment for tax versus accounting for certain items, such as accruals and allowances not currently deductible for tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of these differences, which will either be taxable or 14 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) deductible when assets and liabilities are recovered or settled, as well as operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company must then assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not more likely than not, the Company must establish a valuation allowance. The Company’s assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing its future taxable income on a jurisdictional basis, the Company considers the effect of its transfer pricing policies on that income. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Company's control, it is at least reasonably possible that the Company’s judgment about the need for a valuation allowance for deferred taxes could change in the near term. Note 8. Commitment s and Contingencies Purchase Obligations The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50 % of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25 % of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. As of April 2, 2023, the Company had approximately $ 88.4 million , as compared to $ 105.1 million as of December 31, 2022, in short-term non-cancelable purchase commitments with suppliers or where the suppliers had procured unique materials and components upon receipts of the Company’s purchase orders. During the height of COVID-19 pandemic, the Company experienced an elongation of the time from order placement to production. In response, the Company issued purchase orders to supply chain partners beyond contractual termination periods. As of April 2, 2023, $ 466.9 million of purchase orders beyond contractual termination periods remained outstanding. Consequently, the Company may incur expenses for materials and components, such as chipsets purchased by the supplier to fulfill the purchase order if the purchase order is cancelled. Expenses incurred in respect of cancelled purchase orders has historically not been significant relative to the original order value. For those orders not governed by master purchase agreements, the commitments are governed by the commercial terms on the Company’s purchase orders subject to acknowledgment from its suppliers. The Company establishes a loss liability for all products it does not expect to sell or orders it anticipates cancelling for which it has committed purchases from suppliers. Such loss liability is included in Other accrued liabilities on the Company’s unaudited condensed consolidated balance sheets. Losses incurred in relation to purchase commitments, including unique materials and components, amou nted to $ 0.5 million a nd $ 1.4 million for the three months ended April 2, 2023 and April 3, 2022, respectively. Non-Trade Commitments As of April 2, 2023, the Company had non-cancellable purchase commitments o f $ 14.8 million per taining to non-trade activities. Warranty Obligations Changes in the Company's warranty obligations, which is included in Other accrued liabilities on the unaudited condensed consolidated balance sheets, were as follows: Three Months Ended (In thousands) April 2, 2023 April 3, 2022 Balance as of beginning of the period $ 6,320 $ 6,861 Provision for warranty liability made 1,417 1,423 Settlements made ( 1,386 ) ( 1,505 ) Balance as of the end of the period $ 6,351 $ 6,779 Litigation and Other Legal Matters The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a 15 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrues for the amount, or if a range, the Company accrues the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position within the next twelve months , or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses. Huawei v. NETGEAR Inc., NETGEAR Deutschland GmbH, and Exertis-Connect GmbH On or around March of 2022, Huawei filed two patent infringement lawsuits at the District Court of Dusseldorf, Germany, against NETGEAR Inc., NETGEAR Deutschland GmbH, and Exertis-Connect GmbH, a third-party webstore selling NETGEAR products in Germany. Huawei asserts one EU patent in each suit, EP 3 337 077 B1 (the ’077 Patent) in case no. 08/22 and EP 3 143 741 B1 (the ’741 Patent) in case no. 09/22. In its complaints, Huawei alleges that the Company’s WiFi 6 products infringe the two patents, which Huawei further claims are standard-essential patents. On or around May 10, 2022, the Company was served with two suits that Huawei filed before the Jinan Intermediate People’s Court of China asserting Patent Nos. ZL 201811536087.9 (case no 407) and ZL 201810757332.2 (case no. 408) against the Company’s WiFi 6 products. The Company’s challenge of the Jinan Court’s jurisdiction in both cases has been denied by the Supreme Court of China. In the German cases, on or around February 9, 2023, the Federal Patent Court issued preliminary opinions finding both asserted patents invalid. These proceedings are ongoing. The Company attended the scheduled oral hearing for both infringement cases on March 21, 2023 before the Dusseldorf District Court and is awaiting the Court’s decisions. The Company, at this time, is not able to reasonably estimate any financial impact to the Company resulting from these litigation matters. The Company does not believe that it is reasonably possible that a material loss has been incurred for any of the matters disclosed above, and consequently has not established any loss provisions. Note 9. Stock holders' Equity Stock Repurchases From time to time, the Company's Board of Directors has authorized programs under which the Company may repurchase shares of its common stock, depending on market conditions, in the open market or through privately negotiated transactions. 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 the Company's common stock. The Company did no t repurchase any shares of common stock during the three months ended April 2, 2023. During the three months ended April 3, 2022 , the Company repurchased, reported based on trade date, approximately 0.4 million shares of common stock at a cost of approximately $ 9.4 million under the repurchase authorizations. As of April 2, 2023 , 2.5 million shares remained authorized for repurchase under the repurchase program. The Company repurchased, reported based on trade date, approximately 6,000 and 46,000 shares of common stock, at a cost of approximately $ 0.1 million and $ 1.3 million, during the three months ended April 2, 2023, and April 3, 2022, respectively, to administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving RSUs. 16 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) These shares were retired upon repurchase. The Company's policy related to repurchases of its common stock is to charge the excess of cost over par value to retained earnings. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Accumulated Other Comprehensive Income The following tables set forth the changes in accumulated other comprehensive income ("AOCI") by component: (In thousands) Unrealized gains (losses) on available -for-sale investments Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total Balance as of December 31, 2022 $ ( 322 ) $ ( 338 ) $ 125 $ ( 535 ) Other comprehensive income (loss) before reclassifications 241 1,046 ( 240 ) 1,047 Less: Amount reclassified from accumulated other comprehensive income (loss) — 581 ( 122 ) 459 Net current period other comprehensive income (loss) 241 465 ( 118 ) 588 Balance as of April 2, 2023 $ ( 81 ) $ 127 $ 7 $ 53 (In thousands) Unrealized gains (losses) on available -for-sale investments Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total Balance as of December 31, 2021 $ ( 2 ) $ 173 $ ( 22 ) $ 149 Other comprehensive income (loss) before reclassifications ( 49 ) 369 ( 57 ) 263 Less: Amount reclassified from accumulated other comprehensive income (loss) — 324 ( 68 ) 256 Net current period other comprehensive income (loss) ( 49 ) 45 11 7 Balance as of April 3, 2022 $ ( 51 ) $ 218 $ ( 11 ) $ 156 The following table provides details about significant amounts reclassified out of each component of AOCI: Three Months Ended (In thousands) April 2, 2023 April 3, 2022 Amount Reclassified from AOCI Gains (losses) on cash flow hedge: Foreign currency forward contracts Affected line item in the statement of operations Net revenue $ 689 $ 385 Cost of revenue ( 1 ) 3 Research and development ( 8 ) ( 15 ) Sales and marketing ( 83 ) ( 43 ) General and administrative ( 16 ) ( 6 ) Total before tax 581 324 Tax impact ( 122 ) ( 68 ) Total, net of tax $ 459 $ 256 Note 10. Employe e Benefit Plans The Company grants options, RSUs and performance shares under the 2016 Incentive Plan (the "2016 Plan"), under which awards may be granted to all employees. Vesting periods under this plan are generally four years for options and RSUs and three years for performance shares. As of April 2, 2023 , approximately 1.2 million shares were reserved for future grants under the 2016 Plan. 17 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Additionally, the Company sponsors an Employee Stock Purchase Plan (the “ESPP”), pursuant to which eligible employees may contribute up to 10 % of compensation, subject to certain income limits, to purchase shares of the Company's common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85 % of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six-months. As of April 2, 2023 , approximately 0.9 million shares were available for issuance under the ESPP. Option Activity Stock option activity was as follows: (In thousands, except per share amounts) Number of Shares Weighted Average Exercise Price Per Share (In thousands) (In dollars) Outstanding as of December 31, 2022 872 $ 30.64 Expired ( 6 ) $ 21.86 Outstanding as of April 2, 2023 866 $ 30.70 RSU Activity RSU activity was as follows: (In thousands, except per share amounts) Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of December 31, 2022 1,546 $ 27.82 Granted 11 $ 20.22 Vested ( 16 ) $ 28.98 Cancelled ( 8 ) $ 27.07 Outstanding as of April 2, 2023 1,533 $ 27.75 Performance Shares Activity In July 2020, July 2021 and April 2022, the Company's executive officers were granted performance shares with vesting occurring at the end of a three-year period if performance conditions are met. The number of performance shares earned and eligible to vest are determined based on achievement of the pre-determined performance conditions and the recipients’ continued service with the Company. The number of performance shares to vest could range from 0 % to 150 % of the target shares granted. At the end of each reporting period, the Company evaluates the probability of achieving the performance conditions and records the related stock-based compensation expense based on performance to date over the servic e period. Performance shares activity was as follows: (In thousands, except per share amounts) Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of December 31, 2022 430 $ 29.38 Granted — — Vested — — Cancelled ( 141 ) $ 28.22 Outstanding as of April 2, 2023 289 $ 29.94 18 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Valuation and Expense Information The following table sets forth the stock-based compensation expense resulting from stock options, RSUs, performance shares and the ESPP included in the Company's unaudited condensed consolidated statements of operations: Three Months Ended (In thousands) April 2, 2023 April 3, 2022 Cost of revenue $ 351 $ 386 Research and development 1,065 1,087 Sales and marketing 1,431 1,456 General and administrative 1,818 1,768 Total $ 4,665 $ 4,697 As of April 2, 2023 , $ 0.2 million of unrecognized compensation cost related to stock options was expected to be recognized over a weighted-average period of 0.3 years and $ 28.7 million of unrecognized compensation cost related to unvested RSUs and performance shares was expected to be recognized over a weighted-average period of 2.0 years. Note 11. Segme nt Information Operating segments are components of an enterprise about which separate financial information is available and is evaluated quarterly by management, namely the Chief Operating Decision Maker (“CODM”) of an organization, in order to determine operating and resource allocation decisions. By this definition, the Company has identified its CEO as the CODM. The Company operates and reports in two segments: Connected Home and SMB: • Connected Home: Focuses on consumers and provides high-performance, dependable and easy-to-use premium 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 security, performance, privacy, and premium support; and • SMB: 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. The Company believes that this structure reflects its current operational and financial management, and that it provides the best structure for the Company to focus on growth opportunities while maintaining financial discipline. The leadership team of each segment is focused on product and service development efforts, both from a product marketing and engineering standpoint, to service the unique needs of their customers. The results of the reportable segments are derived directly from the Company's management reporting system. The results are based on the Company's method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including contribution income (loss). Segment contribution income (loss) includes all product line segment revenues less the related cost of sales, research and development and sales and marketing costs. Contribution income (loss) is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated indirect costs include corporate costs, such as corporate research and development, corporate marketing expense and general and administrative costs, amortization of intangibles, stock-based compensation expense, goodwill impairment, restructuring and other charges, litigation reserves, net, and other income (expenses), net. 19 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Financial information for each reportable segment and a reconciliation of segment contribution income (loss) to loss before income taxes is as follows: Three Months Ended (In thousands) April 2, 2023 April 3, 2022 Net Revenue: Connected Home $ 102,746 $ 130,342 SMB 78,162 80,216 Total net revenue $ 180,908 $ 210,558 Contribution Income (loss): Connected Home $ 668 $ ( 1,975 ) Contribution margin 0.7 % ( 1.5 )% SMB $ 14,442 $ 13,496 Contribution margin 18.5 % 16.8 % Total segment contribution income $ 15,110 $ 11,521 Corporate and unallocated costs ( 22,183 ) ( 20,801 ) Amortization of intangibles (1) ( 129 ) ( 129 ) Stock-based compensation expense ( 4,665 ) ( 4,697 ) Goodwill impairment — ( 44,442 ) Restructuring and other charges ( 108 ) 23 Litigation reserves, net — ( 20 ) Other income (expenses), net (2) 1,406 ( 982 ) Loss before income taxes $ ( 10,569 ) $ ( 59,527 ) (1) Amounts exclude amortization expense related to patents within purchased intangibles in cost of revenue. (2) Amounts included gain/(loss), net from derivatives not designated as hedging instruments of $( 0.2 ) million and $ 1.2 million, for the three months ended April 2, 2023 and April 3, 2022 , respectively. The CODM does not evaluate operating segments using discrete asset information. Operations by Geographic Region For reporting purposes, revenue is generally attributed to each geographic region based on the location of the customer. The following table shows net revenue by geography: Three Months Ended (In thousands) April 2, 2023 April 3, 2022 United States (U.S.) $ 117,798 $ 141,005 Americas (excluding U.S.) 4,124 3,644 EMEA (1) 39,178 36,865 APAC (1) 19,808 29,044 Total net revenue $ 180,908 $ 210,558 (1) No individual foreign country represented more than 10 % of the Company's total net revenue in the periods presented. 20 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Long-lived assets by Geographic Region The following table presents the Company's long-lived assets located in geographic areas, which consist of property and equipment, net, and operating lease right-of-use assets: (In thousands) April 2, 2023 December 31, 2022 United States (U.S.) $ 30,201 $ 32,142 Americas (excluding U.S.) 2,062 2,367 EMEA 4,222 3,564 APAC (1) 11,689 12,020 Total $ 48,174 $ 50,093 (1) No individual foreign countries represented more than 10 % of the Company's total long-lived assets in the periods presented. Note 12. Fair V alue Measurements The following tables summarize assets and liabilities measured at fair value on a recurring basis: April 2, 2023 (In thousands) Total Quoted market prices in active markets (Level 1) Significant other observable inputs (Level 2) Assets: Cash equivalents: money-market funds $ 12,151 $ 12,151 $ — Available-for-sale investments: U.S. treasury securities (1) 88,457 — 88,457 Trading securities: mutual funds (1) 7,389 7,389 — Available-for-sale investments: convertible debt securities (2) 346 — 346 Foreign currency forward contracts (3) 851 — 851 Total assets measured at fair value $ 109,194 $ 19,540 $ 89,654 Liabilities: Foreign currency forward contracts (4) $ 243 $ — $ 243 Total liabilities measured at fair value $ 243 $ — $ 243 21 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2022 (In thousands) Total Quoted market prices in active markets (Level 1) Significant other observable inputs (Level 2) Assets: Cash equivalents: money-market funds $ 25,744 $ 25,744 $ — Available-for-sale investments: U.S. treasury securities (1) 73,800 — 73,800 Trading securities: mutual funds (1) 6,946 6,946 — Available-for-sale investments: certificates of deposit (1) 6 — 6 Available-for-sale investments: convertible debt securities (2) 346 — 346 Foreign currency forward contracts (3) 652 — 652 Total assets measured at fair value $ 107,494 $ 32,690 $ 74,804 Liabilities: Foreign currency forward contracts (4) $ 4,083 $ — $ 4,083 Total liabilities measured at fair value $ 4,083 $ — $ 4,083 (1) Included in Short-term investments on the Company's unaudited condensed consolidated balance sheets. (2) On the Company’s unaudited condensed consolidated balance sheets, $ 173,000 included in Short-term investments and the remaining included in Other non-current assets as of April 2, 2023 and December 31, 2022, respectively. (3) Included in Prepaid expenses and other current assets on the Company's unaudited condensed consolidated balance sheets. (4) Included in Other accrued liabilities on the Company's unaudited condensed consolidated balance sheets. The Company’s investments in money-market funds, corporate equity securities and mutual funds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company’s investments in U.S. treasury securities are classified within Level 2 of the fair value hierarchy because they are valued based on readily available pricing sources for comparable or identical instruments in less active markets. The Company’s investments in convertible debt securities issued by a publicly held company and certificates of deposits are classified within Level 2 of the fair value hierarchy as the fair value for the instrument approximates its cost based on the contractual terms of the arrangement. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that consider the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The carrying value of non-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities. 22 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements represent NETGEAR, Inc.’s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding: NETGEAR’s future operating performance and financial condition, including expectations regarding growth, revenue, expenses, continued profitability and cash generation; expectations regarding product mix and market demand for NETGEAR's products, including SMB and premium Connected Home products and NETGEAR's ability to respond to this demand; expectations regarding the timing, distribution, sales momentum and market acceptance of recent and anticipated new product introductions that position NETGEAR for growth and market share gain; expectations regarding inventory levels, sales and inventory management; expectations regarding transportation costs; and expectations regarding NETGEAR’s paid subscriber base growth, revenue, registered users and registered app users. These statements are based on management’s current expectations and are subject to a number of risks and uncertainties, including but not limited to those described in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below and in our other SEC filings, including our Annual Report. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements except as required by law. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “NETGEAR” refer to NETGEAR, Inc. and its subsidiaries. Business and Executive Overview We are a global company that turns ideas into innovative, high-performance, and premium networking products. Our products connect people, homes, and power businesses and service providers. Our products are designed to simplify and improve people’s lives. Our core long-term strategy is to create and grow the premium higher-margin segments of the consumer networking market, where we believe competition is less intense and consumers are less price sensitive and offers greater potential to sell our subscription services. A key element of our premium strategy is the curated online experience we deliver to guide our customers through the shopping experience. This approach has helped grow NETGEAR.com as a channel and, with expansion to more countries, we have a great opportunity to accelerate traction in the premium segment of the market. Our goal is to enable people to collaborate and connect to a world of information and entertainment in or outside of the home. We are dedicated to delivering innovative and differentiated high performance connected solutions ranging from easy-to-use premium WiFi solutions, 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. 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 7, audio and video over Ethernet, non-fungible token (“NFT”) artwork, and future technologies. 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 premium WiFi internet networking solutions such as WiFi 6/6E Tri-band and Quad-band mesh systems, routers, 4G/5G mobile 23 Table of Contents products, smart devices such as Meural digital canvasses, and subscription services that provide consumers a range of value-added services focused on security, performance, 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 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 Best Buy, Wal-Mart, Costco, Staples, Office Depot, Target, Electra (Sweden), Fnac Darty (Europe), JB HiFi (Australia), Elkjop (Norway), and Boulanger (France). Online retailers include Amazon.com (worldwide). 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, 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 as a percentage of overall revenue for the foreseeable future. Financial Overview During the three months ended April 2, 2023, our net revenue decreased by $29.7 million compared to the prior year period, mainly driven by a decrease of $27.6 million in our Connected Home segment, primarily due to elevated demand with higher inventory carrying levels at our channel partners in the prior year. Our SMB net revenue decreased by $2.1 million, primarily due to a reduction in inventory carrying level at our largest e-commerce channel partner. Our gross margin increased for the three months ended April 2, 2023, compared to the prior year period, in part due to an improved mix of our premium Connected Home products, as well as a higher mix of SMB net revenue, both of which carry higher gross margins. Additionally, we incurred lower sea freight costs when the inventory was purchased in the second half of 2022, and less reliance on higher cost air freight due to an improved supply picture. Loss from operations decreased by $46.5 million for the three months ended April 2, 2023, compared to the prior year period, primarily due to a non-recurring goodwill impairment of $44.4 million recognized in the prior year with respect to our Connected Home segment and to a lesser extent, the improved gross margin. Geographically, net revenue from Connected Home decreased in Americas and APAC, partially offset by an increase in EMEA during the three months ended April 2, 2023, compared to the prior year period, whereas net revenue from SMB segment decreased in EMEA and APAC, partially offset by an increase in Americas. Global Events Affecting our Business and Operations The COVID-19 pandemic has impacted businesses since the onset over three years ago. We experienced longer lead times for some of our key components, impacting our ability to accurately forecast and fully capitalize on end-market demand. Transportation disruptions had brought about a meaningful increase in the cost of sea freight, and we had increased our reliance on airfreight to secure supply to offset lengthening sea transit times. In 2022, we saw a positive downward trend on the cost per container to move goods via sea, with rates returning to near pre-pandemic levels by the end of 2022. In the 24 Table of Contents first fiscal quarter of 2023, we began to realize the gross margin benefits from those lower sea freight rates as we worked through the inventory obtained when freight costs were elevated. Additionally, we also decreased our use of higher cost air freight in 2023 due to an improved supply picture. Recent macroeconomic trends have led to uncertainty in the global economic environment. These include conditions such as the potential for a recession, high inflation, rising interest rates, and the related negative impact on the global economy, foreign exchange rate fluctuations, particularly changes of the U.S. dollar, as well as the continued conflict between Russia and Ukraine. The extent of impacts from the COVID-19 pandemic and/or macroeconomic trends on our ongoing operational and financial performance, including our ability to execute our business strategies in the expected time frame, will depend on future developments. The duration of the pandemic and the broader implications of the macro-economic recovery and any related disruptions to channel partners are uncertain and unpredictable. Refer to Item 1A, Risk Factors of Part II of this Quarterly Report on Form 10-Q for various risks and uncertainties associated with the macroeconomic trends and uncertainty. Looking forward, in spite of the on-going broad-based inflationary pressures and the uncertain macroeconomic environment, we expect to continue to experience strong underlying demand in our SMB segment driven by Pro AV products, and the premium portion of our Connected Home product portfolio powered by our super-premium mesh systems and 5G mobile hotspots. We expect our channel partners to continue to reduce their inventory levels, which will reduce sales into these channels. We aim to execute on our strategy of capitalizing on the technological inflection points of WiFi 6E, WiFi 6, 5G, audio and video over Ethernet and the recent release of WiFi 7, to develop and expand the premium WiFi market through new product introductions and to develop and roll out service offerings that build recurring service revenue streams. Critical Accounting Estimates In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income, and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base these estimates on historical and anticipated results, trends and various other assumptions that we believe are reasonable under the circumstances. As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ materially from those estimates under different assumptions and conditions. For a complete description of what we believe to be the critical accounting estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report. Results of Operations The following table sets forth the unaudited condensed consolidated statements of operations for the periods presented. Three Months Ended (In thousands, except percentage data) April 2, 2023 April 3, 2022 Net revenue $ 180,908 100.0 % $ 210,558 100.0 % Cost of revenue 120,526 66.6 % 151,655 72.0 % Gross profit 60,382 33.4 % 58,903 28.0 % Operating expenses: Research and development 22,134 12.2 % 23,821 11.3 % Sales and marketing 33,879 18.7 % 35,586 16.9 % General and administrative 16,236 9.0 % 13,602 6.5 % Goodwill impairment charge — — % 44,442 21.1 % Other operating expenses (income), net 108 0.1 % (3 ) — % Total operating expenses 72,357 40.0 % 117,448 55.8 % Loss from operations (11,975 ) (6.6 )% (58,545 ) (27.8 )% Other income (expenses), net 1,406 0.8 % (982 ) (0.5 )% Loss before income taxes (10,569 ) (5.8 )% (59,527 ) (28.3 )% Benefit from income taxes (857 ) (0.4 )% (2,317 ) (1.1 )% 25 Table of Contents Net loss $ (9,712 ) (5.4 )% $ (57,210 ) (27.2 )% Net Revenue by Geographic Region 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. Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Americas $ 121,922 (15.7 )% $ 144,649 Percentage of net revenue 67.4 % 68.7 % EMEA $ 39,178 6.3 % $ 36,865 Percentage of net revenue 21.7 % 17.5 % APAC $ 19,808 (31.8 )% $ 29,044 Percentage of net revenue 10.9 % 13.8 % Total net revenue $ 180,908 (14.1 )% $ 210,558 Americas Net revenue in Americas decreased in the three months ended April 2, 2023, primarily due to a net revenue decline of 21.7% from our Connected Home segment, compared to the prior year period. Our Connected Home segment experienced a year-over-year decline across both the retail and service provider channels, primarily due to elevated demand with higher inventory carrying levels at our channel partners in the prior year. SMB net revenue in the three months ended April 2, 2023 increased by 1.7% compared to the prior year period. EMEA Net revenue in EMEA increased in the three months ended April 2, 2023, compared to the prior year period, primarily driven by increased net revenue of 33.8% in our Connected Home segment. This increase was mainly attributable to growth of our super-premium WiFi 6 mesh systems and 5G mobile hotspots, partially offset by a decline of home wireless products. SMB net revenue in the three months ended April 2, 2023 decreased by 2.6% compared to the prior year period. APAC Net revenue in APAC decreased in the three months ended April 2, 2023, compared to the prior year period, driven by a decline of 52.2% in our Connected Home segment and a decline of 12.9% in our SMB segment. Our APAC revenue declined due to the sudden COVID-19 pandemic surge in China at the end of 2022 and into the first quarter of 2023, which caused a significant market slowdown in certain countries within the APAC region. For further discussions specific to our Connected Home and SMB business, refer to the " Segment Information " section below. 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. 26 Table of Contents 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: Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Cost of revenue $ 120,526 (20.5 )% $ 151,655 Gross margin percentage 33.4 % 28.0 % Our overall gross margin increased for the three months ended April 2, 2023, compared to the prior year period, as we experienced an improved mix of our premium Connected Home products, as well as a higher mix of SMB net revenue, both of which carry higher gross margins. Additionally, we incurred lower sea freight costs when the inventory was purchased in the second half of 2022, and less reliance on higher cost air freight due to an improved supply picture. We believe that a combination of improved product mix with increased sales of premium and super-premium Connected Home products and SMB products, higher subscription services and reduced transportation costs, including less reliance on higher-cost air freight, will help to deliver improvement to margin performance from fiscal 2022 levels as 2023 progresses. Over the past two years, we experienced meaningful and continuously elevated cost of materials and components for our products. After more than a year of increasing market rates for sea freight transportation, we saw a positive downward shift starting in the second quarter of 2022 with rates stabilizing near pre-pandemic levels in the first quarter of 2023. In the first quarter of 2023, we began to realize the gross margin benefits from the improved sea freight rates having worked through inventory obtained when freight costs were elevated. We have experienced disruptions caused by the pandemic. If the disruptions become more widespread, they could significantly hamper our ability to fulfill the demand for our 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 broad-based inflationary pressures and the uncertain macroeconomic environment, future pricing and/or potential discounts as a result of the economy or in response to the strengthening of the U.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 due to 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: Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Research and development $ 22,134 (7.1 )% $ 23,821 Research and development expenses decreased for the three months ended April 2, 2023, compared to the prior year period primarily driven by a decrease in personnel-related expenditures of $1.6 million mainly due to lower headcount. 27 Table of Contents 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 create and expand our hardware product offerings focused on premium WiFi 7, and WiFi 6/6E, Advanced 4G/5G mobile and 5G coverage solutions, audio and video over Ethernet, web-managed, 10Gig and PoE switch and SMB wireless products. While we expect research and development expenses for the remainder of fiscal 2023 to be lower in absolute dollars than fiscal 2022 levels, we expect it to be higher as a percentage of net revenue due to lower anticipated net revenues as we work with our channel partners to optimize their inventory carrying 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 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: Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Sales and marketing $ 33,879 (4.8 )% $ 35,586 The decline in sales and marketing expenses for the three months ended April 2, 2023, compared to the prior year period, was primarily attributable to a decrease of $1.8 million in outbound freight costs for product deliveries to our customers and $0.4 million in personnel-related expenditures. These declines were partially offset by a $0.9 million increase in marketing-related expenditures for brand recognition. While we expect sales and marketing expenses for the remainder of fiscal 2023 to be lower in absolute dollars than fiscal 2022 levels, we expect it to be higher as a percentage of net revenue due to lower anticipated net revenue as mentioned above. 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 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: Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 General and administrative $ 16,236 19.4 % $ 13,602 The increase in general and administrative expenses for the three months ended April 2, 2023, compared to the prior year period, was primarily driven by an increase in legal and professional services fees of $1.9 million mainly associated with litigation matters and a $0.5 million increase in personnel-related expenditures. While we expect general and administration expenses for the remainder of fiscal 2023 to be lower in absolute dollars than fiscal 2022 levels, we expect it to be higher as a percentage of net revenue due to lower anticipated net revenue as mentioned above. 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 Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. Future general and administrative expense increases or decreases in absolute dollars 28 Table of Contents 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. Goodwill impairment charge The following table presents goodwill impairment charge for the periods indicated: Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Goodwill impairment charge $ — (100.0 )% $ 44,442 There was no goodwill impairment charge for the three months ended April 2, 2023, as compared to the prior year period charge of $44.4 million for the Connected Home segment resulting from an interim goodwill impairment assessment performed in the first fiscal quarter of 2022. For a detailed discussion of goodwill impairment charge, refer to Note 4 , Balance Sheet Components, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. Other operating expenses (income), net Other operating expenses (income), net consists of restructuring and other charges, litigation reserves, net, and change in fair value of contingent consideration. The following table presents Other operating expenses (income), net for the periods indicated: Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Other operating expenses (income), net $ 108 ** $ (3 ) ** Percentage change not meaningful. The net change in other operating expenses (income), net for the three months ended April 2, 2023, compared to the prior year period, was not significant. 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: Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Other income (expenses), net $ 1,406 ** $ (982 ) ** Percentage change not meaningful. The change in other income (expenses), net for the three months ended April 2023, compared to the prior year period was primarily due to higher interest earned on our short-term investment pertaining to U.S. treasuries and lower net loss on our long-term investments. Benefit from Income Taxes Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Benefit from income taxes $ (857 ) (63.0 )% $ (2,317 ) Effective tax rate 8.1 % 3.9 % 29 Table of Contents The change in taxes for the three months ended April 2, 2023, compared to the prior year period, was primarily due to a higher forecasted effective tax rate in the quarter ended April 2, 2023 compared to the previous year, resulting primarily from relatively lower forecasted earnings for 2023. In the period ended April 3, 2022, the forecasted annual loss was significantly higher (in relative terms) as compared to the forecasted earnings for 2023 due to the impairment of goodwill. The tax benefit on the period ended April 3 2022 was partially offset by the tax impact of non-tax-deductible goodwill impairment which substantially reduced the effective tax rate for that period. We are subject to income taxes in the U.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 the U.S. federal rate. We are under examination in various U.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 (loss) to income (loss) before income taxes can be found in Note 11. Segment Information , and information on net revenue by sales channels can be found in Disaggregation of Revenue in Note 3. Revenue , in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. Connected Home Segment Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Net revenue $ 102,746 (21.2 )% $ 130,342 Percentage of net revenue 56.8 % 61.9 % Contribution income (loss) $ 668 ** $ (1,975 ) Contribution margin 0.7 % (1.5 %) ** Percentage change not meaningful. Connected Home net revenue decreased in both the retail and service provider channels in the three months ended April 2, 2023, compared to the prior year period, primarily due to elevated demand with higher inventory carrying levels at our channel partners in the prior year period. Despite a decline in the overall consumer networking market in the first fiscal quarter of 2023, our super-premium WiFi 6 mesh systems and 5G mobile hotspots both outperformed the broader market and we saw growth in our services revenue as compared to the prior year period. Geographically, we experienced decreases in Americas and APAC, partially offset by an increase in EMEA in the three months ended April 2, 2023, compared to the prior year period. Connected Home experienced a contribution income increase in the three months ended April 2, 2023, compared to the prior year period, mainly attributable to higher gross margin achievement through strong demand for higher-margin premium products and decreased transportation costs. SMB Segment Three Months Ended (In thousands, except percentage data) April 2, 2023 % Change April 3, 2022 Net revenue $ 78,162 (2.6 )% $ 80,216 Percentage of net revenue 43.2 % 38.1 % Contribution income $ 14,442 7.0 % $ 13,496 Contribution margin 18.5 % 16.8 % SMB net revenue decreased for the three months ended April 2, 2023, compared to the prior year period, primarily due to a reduction in inventory carrying levels at our largest e-commerce channel partner, partially offset by the continued strong 30 Table of Contents demand for the Pro AV product line of managed switches. Geographically, SMB net revenue decreased in EMEA and APAC, partially offset by an increase in Americas in the three months ended April 2, 2023, compared to the prior year period. SMB contribution income increased in the three months ended April 2, 2023, compared to the prior year period, primarily attributable to higher gross margin achievement, in part due to decreased transportation costs. Liquidity and Capital Resources Our principal sources of liquidity are cash, cash equivalents, short-term investments and cash generated from operations. As of April 2, 2023, we had cash, cash equivalents and short-term investment of $239.2 million, an increase of $11.8 million from December 31, 2022. As of April 2, 2023, approximately 37% of our cash and cash equivalents and short-term investments were outside of the U.S., which 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 the U.S., we will be required to pay income taxes in certain U.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 the U.S. Cash Flows The following table presents our cash flows for the periods presented. Three Months Ended (In thousands) April 2, 2023 April 3, 2022 Cash provided by operating activities $ 9,122 $ 1,294 Cash used in investing activities (14,597 ) (50,952 ) Cash provided by (used in) financing activities 2,166 (7,288 ) Net cash decrease $ (3,309 ) $ (56,946 ) Operating activities Net cash provided by operating activities increased by $7.8 million for the three months ended April 2, 2023, compared to the prior year period, primarily due to lower net loss and favorable working capital movements. Our accounts payable (excluding payables related to property and equipment) decreased from $85.3 million as of December 31, 2022, to $79.4 million as of April 2, 2023, primarily due to timing of inventory receipts and supplier payments. Accounts receivable decreased from $277.5 million as of December 31, 2022 to $192.5 million as of April 2, 2023. Inventory increased from $299.6 million as of December 31, 2022, to $337.2 million as of April 2, 2023, mainly due to an unexpected and unprecedented level of inventory reduction by our channel partners. Investing activities Net cash used in investing activities increased by $36.4 million in the three months ended April 2, 2023, compared to the prior year period, mainly driven by lower net purchases of short-term investments. Financing activities Net cash provided by financing activities was $2.2 million in the three months ended April 2, 2023, compared to net cash used of $7.3 million in the prior year period, primarily due to lower purchases of our common stock and lower tax withholdings pertaining to restricted stock unit releases. 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 in the short-term and long-term. 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 31 Table of Contents 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. We did not repurchase any shares of common stock during the three months ended April 2, 2023. During the three months ended April 3, 2022, we repurchased and retired, reported based on trade date, approximately 0.4 million shares of common stock at a cost of approximately $9.4 million under the repurchase authorizations. As of April 2, 2023, approximately 2.5 million shares remained authorized for repurchase under the repurchase program. We also repurchased and retired, reported based on trade date, approximately 6,000 and 46,000 shares of common stock, respectively, at a cost of approximately $0.1 million and $1.3 million during the three months ended April 2, 2023, and April 3, 2022, respectively, to 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 Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. We remain confident in our ability to generate meaningful levels of cash, and plan to continue to opportunistically repurchase shares in future periods. Contractual and Other Obligations Except as follows, there were no material changes outside of the ordinary course of business in our contractual obligations as of April 2, 2023, from those as of December 31, 2022, disclosed in Part II, Item 7, of our Annual Report. As of April 2, 2023, we had $88.4 million of purchase obligations which represented non-cancellable inventory-related purchase agreements with suppliers, down from $105.1 million as of December 31, 2022, as we align our procurement with anticipated demand for our products. During the height of COVID-19 pandemic, we experienced an elongation of the time from order placement to production. In response, we issued purchase orders to supply chain partners beyond contractual termination periods. As of April 2, 2023, $466.9 million of purchase orders beyond contractual termination periods remained outstanding. These purchase 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. For a detailed discussion, refer to Note 8, Commitments and Contingencies , in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. Recent Accounting Pronouncements Information with respect to this item many be found in Note 2. Summary of Significant Accounting Policies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Report on Form 10-Q, which are hereby incorporated by reference. Item 3. Quantitative and Qualitative Disclosures About Market Risk During the three months ended April 2, 2023, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report. 32 Table of Contents