NETGEAR, INC. 10-Q

Item 1. Financial Statements NETGEAR, INC. UNAUDITED CONDENSED CONS OLIDATED BALANCE SHEETS (In thousands) October 1, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 131,459 $ 146,500 Short-term investments 96,586 80,925 Accounts receivable, net of allowance for doubtful accounts of $ 396 and $ 397 as of October 1, 2023 and December 31, 2022, respectively 200,900 277,485 Inventories 280,918 299,614 Prepaid expenses and other current assets 30,713 29,767 Total current assets 740,576 834,291 Property and equipment, net 8,274 9,225 Operating lease right-of-use assets 39,773 40,868 Intangibles, net — 1,329 Goodwill 36,279 36,279 Other non-current assets 17,563 97,793 Total assets $ 842,465 $ 1,019,785 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 47,133 $ 85,550 Accrued employee compensation 19,179 24,132 Other accrued liabilities 167,713 213,476 Deferred revenue 25,090 21,128 Income taxes payable 767 1,685 Total current liabilities 259,882 345,971 Non-current income taxes payable 12,760 14,972 Non-current operating lease liabilities 32,330 34,085 Other non-current liabilities 4,706 3,902 Total liabilities 309,678 398,930 Commitments and contingencies (Note 8) Stockholders’ equity: Common stock 30 29 Additional paid-in capital 963,350 946,123 Accumulated other comprehensive income (loss) 9 ( 535 ) Accumulated deficit ( 430,602 ) ( 324,762 ) Total stockholders’ equity 532,787 620,855 Total liabilities and stockholders’ equity $ 842,465 $ 1,019,785 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents NETGEAR, INC. UNAUDITED CONDENSED CONSOLIDA TED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Net revenue $ 197,845 $ 249,587 $ 552,166 $ 683,369 Cost of revenue 128,911 181,058 368,550 494,516 Gross profit 68,934 68,529 183,616 188,853 Operating expenses: Research and development 20,738 22,167 63,703 68,193 Sales and marketing 30,865 34,203 97,226 104,335 General and administrative 16,364 13,949 49,136 41,698 Goodwill impairment — — — 44,442 Intangibles impairment 1,071 — 1,071 — Other operating expenses, net 544 361 2,881 931 Total operating expenses 69,582 70,680 214,017 259,599 Loss from operations ( 648 ) ( 2,151 ) ( 30,401 ) ( 70,746 ) Other income (expenses), net 2,280 638 11,685 ( 1,164 ) Income (loss) before income taxes 1,632 ( 1,513 ) ( 18,716 ) ( 71,910 ) Provision for (benefit from) income taxes 86,431 ( 4,314 ) 84,382 ( 8,967 ) Net income (loss) $ ( 84,799 ) $ 2,801 $ ( 103,098 ) $ ( 62,943 ) Net income (loss) per share Basic $ ( 2.87 ) $ 0.10 $ ( 3.52 ) $ ( 2.17 ) Diluted $ ( 2.87 ) $ 0.10 $ ( 3.52 ) $ ( 2.17 ) Weighted average shares used to compute net income (loss) per share: Basic 29,524 28,891 29,266 29,023 Diluted 29,524 29,029 29,266 29,023 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 INCOME (LOSS) (In thousands) Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Net income (loss) $ ( 84,799 ) $ 2,801 $ ( 103,098 ) $ ( 62,943 ) Other comprehensive income (loss), before tax: Change in unrealized gains and losses on derivatives ( 168 ) 192 406 86 Change in unrealized gains and losses on available-for-sale investments 58 ( 471 ) 249 ( 459 ) Other comprehensive income (loss), before tax ( 110 ) ( 279 ) 655 ( 373 ) Tax benefit (provision) related to derivatives 21 ( 23 ) ( 50 ) ( 6 ) Tax benefit (provision) related to available-for-sale investments ( 14 ) 118 ( 61 ) 115 Other comprehensive income (loss), net of tax ( 103 ) ( 184 ) 544 ( 264 ) Comprehensive income (loss) $ ( 84,902 ) $ 2,617 $ ( 102,554 ) $ ( 63,207 ) 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 Change in unrealized gains and losses on available-for-sale investments, net of tax — — — ( 38 ) — ( 38 ) Change in unrealized gains and losses on derivatives, net of tax — — — 97 — 97 Net loss — — — — ( 8,587 ) ( 8,587 ) Stock-based compensation — — 4,687 — — 4,687 Restricted stock unit withholdings ( 141 ) — — — ( 1,985 ) ( 1,985 ) Issuance of common stock under stock-based compensation plans 485 — — — — — Balance as of July 2, 2023 29,400 29 957,761 112 ( 345,166 ) 612,736 Change in unrealized gains and losses on available-for-sale investments, net of tax — — — 44 — 44 Change in unrealized gains and losses on derivatives, net of tax — — — ( 147 ) — ( 147 ) Net loss — — — — ( 84,799 ) ( 84,799 ) Stock-based compensation — — 4,285 — — 4,285 Restricted stock unit withholdings ( 48 ) — — — ( 637 ) ( 637 ) Issuance of common stock under stock-based compensation plans 256 1 1,304 — — 1,305 Balance as of October 1, 2023 29,608 $ 30 $ 963,350 $ 9 $ ( 430,602 ) $ 532,787 6 Table of Contents 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 Change in unrealized gains and losses on available-for-sale investments, net of tax — — — 46 — 46 Change in unrealized gains and losses on derivatives, net of tax — — — ( 133 ) — ( 133 ) Net loss — — — — ( 8,534 ) ( 8,534 ) Stock-based compensation — — 5,129 — — 5,129 Repurchase of common stock ( 678 ) — — — ( 15,000 ) ( 15,000 ) Restricted stock unit withholdings ( 107 ) — — — ( 2,319 ) ( 2,319 ) Issuance of common stock under stock-based compensation plans 356 — 19 — — 19 Balance as of July 3, 2022 28,732 29 936,424 69 ( 320,293 ) 616,229 Change in unrealized gains and losses on available-for-sale investments, net of tax — — — ( 353 ) — ( 353 ) Change in unrealized gains and losses on derivatives, net of tax — — — 169 — 169 Net income — — — — 2,801 2,801 Stock-based compensation — — 3,440 — — 3,440 Restricted stock unit withholdings ( 45 ) — — — ( 1,150 ) ( 1,150 ) Issuance of common stock under stock-based compensation plans 212 — 1,791 — — 1,791 Balance as of October 2, 2022 28,899 $ 29 $ 941,655 $ ( 115 ) $ ( 318,642 ) $ 622,927 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents NETGEAR, INC. UNAUDITED CONDENSED CONSOLIDA TED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended October 1, 2023 October 2, 2022 Cash flows from operating activities: Net loss $ ( 103,098 ) $ ( 62,943 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 5,491 7,845 Stock-based compensation 13,637 13,266 (Gain) Loss on investments, net ( 2,301 ) 342 Goodwill impairment — 44,442 Intangibles impairment 1,071 — Deferred income taxes 82,205 ( 13,895 ) Provision for excess and obsolete inventory 2,705 3,005 Changes in assets and liabilities: Accounts receivable, net 76,585 1,250 Inventories 15,990 14,572 Prepaid expenses and other assets ( 3,020 ) ( 2,858 ) Accounts payable ( 38,443 ) 13,432 Accrued employee compensation ( 4,952 ) ( 4,329 ) Other accrued liabilities ( 46,929 ) ( 23,504 ) Deferred revenue 4,771 3,268 Income taxes payable ( 3,130 ) ( 2,692 ) Net cash provided by (used in) operating activities 582 ( 8,799 ) Cash flows from investing activities: Purchases of short-term investments ( 97,291 ) ( 143,933 ) Proceeds from maturities of short-term investments 85,006 50,418 Purchases of property and equipment ( 3,601 ) ( 4,133 ) Purchases of long-term investments ( 585 ) ( 450 ) Net cash used in investing activities ( 16,471 ) ( 98,098 ) Cash flows from financing activities: Repurchases of common stock — ( 24,377 ) Restricted stock unit withholdings ( 2,742 ) ( 4,731 ) Proceeds from exercise of stock options — 743 Proceeds from issuance of common stock under employee stock purchase plan 3,590 4,418 Net cash provided by (used in) financing activities 848 ( 23,947 ) Net decrease in cash and cash equivalents ( 15,041 ) ( 130,844 ) Cash and cash equivalents, at beginning of period 146,500 263,772 Cash and cash equivalents, at end of period $ 131,459 $ 132,928 Supplemental Cash Flow Information: Unpaid property and equipment $ 1,055 $ 735 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 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 and nine months ended October 1, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or any future period. 9 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. This disclosure includes estimates of variable consideration. 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 October 1, 2023: (In thousands) Less than 1 year 1 to 2 years Beyond 2 years Total Performance obligations $ 86,773 $ 2,431 $ 2,368 $ 91,572 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 October 1, 2023 December 31, 2022 Accounts receivable, net Accounts receivable, net $ 200,900 $ 277,485 Contract liabilities - current Deferred revenue $ 25,090 $ 21,128 Contract liabilities - non-current Other non-current liabilities $ 4,706 $ 3,897 The difference in the balances of the Company's contract assets and liabilities as of October 1, 2023 and December 31, 2022, primarily results from the timing difference between the Company's performance and the customer’s payment. During the nine months ended October 1, 2023 , $ 34.9 million of revenue was deferred primarily due to unsatisfied performance obligations for service contracts, $ 30.1 million of revenue was recognized for the satisfaction of performance 10 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) obligations and $ 19.1 million of this recognized revenue was included in the contract liability balance at the beginning of the period. 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 October 1, 2023 October 2, 2022 (In thousands) Connected Home SMB Total Connected Home SMB Total Geographic regions (1) : Americas $ 104,695 $ 36,323 $ 141,018 $ 120,168 $ 49,192 $ 169,360 EMEA 10,898 24,786 35,684 12,545 32,282 44,827 APAC 11,742 9,401 21,143 17,868 17,532 35,400 Total $ 127,335 $ 70,510 $ 197,845 $ 150,581 $ 99,006 $ 249,587 Sales channels: Service provider $ 32,403 $ 219 $ 32,622 $ 40,448 $ 1,171 $ 41,619 Non-service provider 94,932 70,291 165,223 110,133 97,835 207,968 Total $ 127,335 $ 70,510 $ 197,845 $ 150,581 $ 99,006 $ 249,587 Nine Months Ended October 1, 2023 October 2, 2022 (In thousands) Connected Home SMB Total Connected Home SMB Total Geographic regions (1) : Americas $ 266,379 $ 113,172 $ 379,551 $ 327,372 $ 130,664 $ 458,036 EMEA 34,279 76,744 111,023 34,230 92,413 126,643 APAC 27,829 33,763 61,592 48,185 50,505 98,690 Total $ 328,487 $ 223,679 $ 552,166 $ 409,787 $ 273,582 $ 683,369 Sales channels: Service provider $ 71,346 $ 427 $ 71,773 $ 92,544 $ 3,515 $ 96,059 Non-service provider 257,141 223,252 480,393 317,243 270,067 587,310 Total $ 328,487 $ 223,679 $ 552,166 $ 409,787 $ 273,582 $ 683,369 (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 October 1, 2023, and December 31, 2022, were as follows: October 1, 2023 (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value U.S. treasury securities $ 88,764 $ — $ ( 71 ) $ 88,693 Convertible debt (1) 173 — — 173 Total $ 88,937 $ — $ ( 71 ) $ 88,866 11 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 October 1, 2023 , and December 31, 2022, respectively, and $ 173,000 included in Other non-current assets as of December 31, 2022. The contractual maturities on the U.S. treasury securities as of October 1, 2023, are all due within one year. Accrued interest receivable as of October 1, 2023 , was $ 0.3 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 October 1, 2023, and December 31, 2022: October 1, 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 $ 88,693 $ ( 71 ) $ — $ — $ 88,693 $ ( 71 ) Total $ 88,693 $ ( 71 ) $ — $ — $ 88,693 $ ( 71 ) 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 and nine months ended October 1, 2023, and October 2, 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 12 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) three and nine months ended October 1, 2023, and October 2, 2022. Refer to Note 12, Fair Value Measurements, for detailed disclosures regarding fair value measurements. Inventories (In thousands) October 1, 2023 December 31, 2022 Raw materials $ 10,466 $ 4,549 Finished goods 270,452 295,065 Total $ 280,918 $ 299,614 The Company records provisions for excess and obsolete inventory based on assumptions about future demand and market conditions and the amounts incurred were $ 1.2 million and $ 2.7 million for the three and nine months ended October 1, 2023 , respectively, and $ 0.4 million and $ 3.0 million for the three and nine months ended October 2, 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) October 1, 2023 December 31, 2022 Computer equipment $ 8,001 $ 9,648 Furniture, fixtures, and leasehold improvements 18,041 18,642 Software 28,377 30,610 Machinery and equipment 65,665 76,806 Total property and equipment, gross 120,084 135,706 Accumulated depreciation ( 111,810 ) ( 126,481 ) Total $ 8,274 $ 9,225 Intangibles, net October 1, 2023 December 31, 2022 (In thousands) Gross Accumulated Amortization Impairment Net Gross Accumulated Amortization Net Technology $ 59,799 $ ( 58,906 ) $ ( 893 ) $ — $ 59,799 $ ( 58,692 ) $ 1,107 Other 10,345 ( 10,167 ) ( 178 ) — 10,345 ( 10,123 ) 222 Total $ 70,144 $ ( 69,073 ) $ ( 1,071 ) $ — $ 70,144 $ ( 68,815 ) $ 1,329 Amortization of purchased intangibles was $ 0.3 million for the nine months ended October 1, 2023 , and $ 0.1 million and $ 0.4 million for the three and nine months ended October 2, 2022, respectively. During the three months ended October 1, 2023, the Company identified a triggering event indicating that the carrying amount of the intangibles may be impaired (Refer to below “Goodwill” for details of the triggering event). The Company performed a recoverability test of its intangible assets based on estimated future net undiscounted cash flows expected to be generated from the use of the long-lived asset group and determined that the carrying amount of such asset group was not recoverable. Therefore, in the third fiscal quarter of 2023, the Company recognized an intangible asset impairment charge of $ 1.1 million for its Connected Home reporting unit. Goodwill Each year on the first day of the fourth fiscal quarter, the Company assesses its goodwill for potential impairment. This impairment testing is applied more frequently than once a year if the Company is aware of changed conditions or circumstances since the last impairment testing that might call into question whether the current balances are fairly recorded. During the three months ended October 1, 2023, the Company reassessed the valuation allowance for the deferred tax assets and determined to establish a full valuation allowance on its U.S. deferred tax assets (refer to Note 7, Income Taxes for detailed disclosures regarding the valuation allowance on deferred tax assets). Additionally, the Company experienced a reduction in its market capitalization. Due to these factors, the Company determined that a triggering event had occurred, and an interim goodwill impairment assessment was performed. Prior to performing a goodwill impairment test, the Company assessed its long-lived assets and concluded the carrying amount of the intangible assets for its Connected Home reporting unit was not recoverable 13 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) as noted above. No other impairments of long-lived assets were identified. The Company elected to bypass the qualitative goodwill impairment assessment and proceeded directly to the quantitative test, measured as of October 1, 2023. The fair values of the reporting units, namely Connected Home and SMB, were determined using an income and market approach. Under the income approach, the Company calculated the fair values of its reporting units based on the present value of estimated future cash flows. Cash flow projections were based on management's estimates of revenue growth rates and net operating income margins, taking into consideration market and industry conditions. The discount rate used was based on the weighted-average cost of capital adjusted for the risk, size premium, and business-specific characteristics related to the business's ability to execute on the projected cash flows. Under the market approach, the Company evaluated the fair value based on forward-looking earnings multiples derived from comparable publicly traded companies with similar market position and size as the reporting unit. The underlying unobservable inputs used to measure the fair value included projected revenue growth rates, the weighted average cost of capital, the normalized working capital level, capital expenditures assumptions, profitability projections, control premium, the determination of appropriate market comparison companies and terminal growth rates. The two approaches generated similar results and indicated that the fair value of the SMB reporting unit substantially exceeded its carrying amount, including goodwill, thus no goodwill impairment was recognized. Other non-current assets (In thousands) October 1, 2023 December 31, 2022 Non-current deferred income taxes $ 3,450 $ 85,704 Long-term investments 8,240 7,879 Other 5,873 4,210 Total $ 17,563 $ 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: Nine months ended (In thousands) October 1, 2023 October 2, 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 funds of $ 2.2 million as of October 1, 2023 , $ 1.5 million as of October 2, 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 October 2, 2022 , and December 31, 2022, respectively, and $ 0.3 million as of December 31, 2021. For such equity investments without readily determinable fair values still held at October 1, 2023 , there were no cumulative downward adjustments for price changes and impairment and the cumulative upward adjustments for price changes was $ 0.3 million. 14 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other accrued liabilities (In thousands) October 1, 2023 December 31, 2022 Current operating lease liabilities $ 11,379 $ 11,012 Sales and marketing 74,813 98,690 Warranty obligations 7,038 6,320 Sales returns (1) 36,751 44,944 Freight and duty 2,478 7,243 Other 35,254 45,267 Total $ 167,713 $ 213,476 (1) Inventory expected to be received from future sales returns amounted to $ 17.6 million and $ 21.8 million as of October 1, 2023 , and December 31, 2022, respectively. Provisions to write down expected returned inventory to net realizable value amounted to $ 10.7 million and $ 11.8 million as of October 1, 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 $ 5.5 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 eight non-designated forwards per quarter with maturities less than three months and an average USD notional amount of approximately $ 2.5 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 October 1, 2023 December 31, 2022 Location October 1, 2023 December 31, 2022 Derivatives not designated as hedging instruments Prepaid expenses and other current assets $ 1,802 $ 636 Other accrued liabilities $ 527 $ 3,871 Derivatives designated as hedging instruments Prepaid expenses and other current assets 71 16 Other accrued liabilities 27 212 Total $ 1,873 $ 652 $ 554 $ 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. 15 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 6. Net I ncome (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 income (loss) per share consisted of the following: Three Months Ended Nine Months Ended (In thousands, except per share data) October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Numerator: Net income (loss) $ ( 84,799 ) $ 2,801 $ ( 103,098 ) $ ( 62,943 ) Denominator: Weighted average common shares - basic 29,524 28,891 29,266 29,023 Potentially dilutive common share equivalent — 138 — — Weighted average common shares - dilutive 29,524 29,029 29,266 29,023 Basic net income (loss) per share $ ( 2.87 ) $ 0.10 $ ( 3.52 ) $ ( 2.17 ) Diluted net income (loss) per share $ ( 2.87 ) $ 0.10 $ ( 3.52 ) $ ( 2.17 ) Anti-dilutive employee stock-based awards, excluded 2,563 1,539 2,358 1,582 Note 7. In come Taxes The income tax provision for the three and nine months ended October 1, 2023 was $ 86.4 million and $ 84.4 million, respectively. The income tax benefit for the three and nine months ended October 2, 2022 was $ 4.3 million and $ 9.0 million, respectively. The changes in taxes for the three and nine months ended October 1, 2023, compared to the prior year periods, were primarily due to the recognition of a valuation allowance of $ 81.5 million on deferred tax assets for U.S. federal and state purposes during the three month period. In evaluating the current results, coupled with expectation for the remainder of the year, the Company reassessed its position and determined that it was not more likely than not that the deferred tax assets would be realized, and accordingly recorded a full valuation allowance on the net deferred tax assets in the U.S. In the three and nine months ended October 2, 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 in the first fiscal quarter of 2022. The tax benefits on the three and nine months ended October 2, 2022 were partially offset by the tax impact of non-tax-deductible goodwill impairment which substantially reduced the effective tax rate for that period. Tax benefits on current year losses for the three and nine months ended October 1, 2023 were offset by the valuation allowance. 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. 16 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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. During the three months ended October 1, 2023, the Company determined that recovery of its U.S. federal and state deferred tax assets was no longer more likely than not and established a full valuation allowance on those net assets, based on evaluation of all available evidence, including actual and anticipated business results. Accordingly, the balance sheet net deferred tax assets from the U.S. federal and state jurisdictions reported in “Other Non-current Assets” were reduced after the effect of establishing the valuation allowance. 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 October 1, 2023, the Company had approximately $ 68.5 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 saw 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 October 1, 2023 , $ 367.1 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 have 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, amounted to $ 0.6 million and $ 2.0 million for the three and nine months ended October 1, 2023 , respectively, and $ 1.6 million and $ 4.6 million for the three and nine months ended October 2, 2022, respectively. Non-Trade Commitments As of October 1, 2023 , the Company had non-cancellable purchase commitments of $ 13.1 million pertaining to non-trade activities. 17 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 Nine Months Ended (In thousands) October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Balance as of beginning of the period $ 6,217 $ 6,523 $ 6,320 $ 6,861 Provision for warranty liability made 2,185 1,052 4,862 3,706 Settlements made ( 1,364 ) ( 1,431 ) ( 4,144 ) ( 4,423 ) Balance as of the end of the period $ 7,038 $ 6,144 $ 7,038 $ 6,144 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 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 was 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. The invalidity proceedings are ongoing. The Company attended an oral hearing for both infringement cases on March 21, 2023 before the Dusseldorf District Court and the Court rendered its decisions on May 11, 2023. The Court dismissed case no. 09/22 for the ‘741 Patent and stayed case no. 8/22 for the ‘077 Patent. Huawei has filed a notice of appeal for the dismissal of case no. 09/22. The parties are preparing their appellate briefs. In the Chinese cases, the parties attended an evidentiary hearing for cases on July 3, 2023. Licensing and technical hearings followed on July 24, 2023 and July 25, 2023. After the July 25th hearing, the Court indicated it will confer internally and advise the parties of further action. 18 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Huawei v. NETGEAR Inc., NETGEAR Deutschland GmbH, and NETGEAR International Limited On or around July 3, 2023, the Company learned that Huawei filed a new infringement suit, asserting patent EP 3 611 989 (the ’989 Patent), against NETGEAR Inc., NETGEAR Deutschland GmbH, and NETGEAR International Limited at the recently established Unified Patent Court (UPC) in Munich, Germany. The Company’s statement of defense is due November 7, 2023. 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 nine months ended October 1, 2023. During the nine months ended October 2, 2022 , the Company repurchased, reported based on trade date, approximately 1.0 million shares of common stock at a cost of approximately $ 24.4 million under the repurchase authorizations. As of October 1, 2023 , 2.5 million shares remained authorized for repurchase under the repurchase program. The Company repurchased, reported based on trade date, approximately 194,000 and 198,000 shares of common stock, at a cost of approximately $ 2.7 million and $ 4.7 million, during the nine months ended October 1, 2023, and October 2, 2022, respectively, to administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving RSUs. 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. 19 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accumulated Other Comprehensive Income (Loss) The following tables set forth the changes in accumulated other comprehensive income (loss) ("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 249 2,584 ( 568 ) 2,265 Less: Amount reclassified from accumulated other comprehensive income (loss) — 2,178 ( 457 ) 1,721 Net current period other comprehensive income (loss) 249 406 ( 111 ) 544 Balance as of October 1, 2023 $ ( 73 ) $ 68 $ 14 $ 9 (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 ( 459 ) 1,340 ( 154 ) 727 Less: Amount reclassified from accumulated other comprehensive income (loss) — 1,254 ( 263 ) 991 Net current period other comprehensive income (loss) ( 459 ) 86 109 ( 264 ) Balance as of October 2, 2022 $ ( 461 ) $ 259 $ 87 $ ( 115 ) The following table provides details about significant amounts reclassified out of each component of AOCI: Three Months Ended Nine Months Ended (In thousands) October 1, 2023 October 2, 2022 October 1, 2023 October 2, 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 $ 1,059 $ 683 $ 2,510 $ 1,395 Cost of revenue ( 2 ) — ( 4 ) — Research and development — ( 3 ) ( 26 ) ( 18 ) Sales and marketing ( 100 ) ( 64 ) ( 242 ) ( 97 ) General and administrative ( 41 ) ( 22 ) ( 60 ) ( 26 ) Total before tax 916 594 2,178 1,254 Tax impact ( 192 ) ( 124 ) ( 457 ) ( 263 ) Total, net of tax $ 724 $ 470 $ 1,721 $ 991 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. In June 2023, the stockholders of the Company approved an amendment to the 2016 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2016 plan by an additional 2.0 million shares. As of October 1, 2023 , approximately 2.4 million shares were reserved for future grants under the 2016 Plan. 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 20 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 October 1, 2023 , approximately 0.8 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 Outstanding as of December 31, 2022 872 $ 30.64 Expired ( 6 ) $ 21.86 Outstanding as of October 1, 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 752 $ 17.49 Vested ( 638 ) $ 27.32 Cancelled ( 84 ) $ 25.52 Outstanding as of October 1, 2023 1,576 $ 23.01 Performance Shares Activity In July 2020, July 2021, April 2022 and July 2023, 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 service 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 145 $ 14.44 Vested — — Cancelled ( 158 ) $ 27.85 Outstanding as of October 1, 2023 417 $ 24.76 21 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 Nine Months Ended (In thousands) October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Cost of revenue $ 354 $ 283 $ 1,047 $ 1,027 Research and development 841 968 3,050 3,150 Sales and marketing 1,271 1,249 4,099 4,275 General and administrative 1,819 940 5,441 4,814 Total $ 4,285 $ 3,440 $ 13,637 $ 13,266 As of October 1, 2023 , $ 32.0 million of unrecognized compensation cost related to unvested RSUs and performance shares was expected to be recognized over a weighted-average period of 2.4 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 recently released WiFi 7, WiFi 6 and WiFi 6E Tri-band and Quad-band mesh systems, and 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, intangibles impairment, restructuring and other charges, litigation reserves, net, and other income (expenses), net. 22 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 Nine Months Ended (In thousands) October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Net Revenue: Connected Home $ 127,335 $ 150,581 $ 328,487 $ 409,787 SMB 70,510 99,006 223,679 273,582 Total net revenue $ 197,845 $ 249,587 $ 552,166 $ 683,369 Contribution Income (loss): Connected Home $ 11,885 $ ( 512 ) $ 9,558 $ ( 3,033 ) Contribution margin 9.3 % ( 0.3 )% 2.9 % ( 0.7 )% SMB $ 14,913 $ 23,683 $ 43,382 $ 53,844 Contribution margin 21.2 % 23.9 % 19.4 % 19.7 % Total segment contribution income $ 26,798 $ 23,171 $ 52,940 $ 50,811 Corporate and unallocated costs ( 21,546 ) ( 21,392 ) ( 65,495 ) ( 62,532 ) Amortization of intangibles (1) — ( 129 ) ( 257 ) ( 386 ) Stock-based compensation expense ( 4,285 ) ( 3,440 ) ( 13,637 ) ( 13,266 ) Goodwill impairment — — — ( 44,442 ) Intangibles impairment ( 1,071 ) — ( 1,071 ) — Restructuring and other charges ( 366 ) ( 361 ) ( 2,703 ) ( 911 ) Litigation reserves, net ( 178 ) — ( 178 ) ( 20 ) Other income (expenses), net (2) 2,280 638 11,685 ( 1,164 ) Income (loss) before income taxes $ 1,632 $ ( 1,513 ) $ ( 18,716 ) $ ( 71,910 ) (1) Amounts exclude amortization expense related to patents within purchased intangibles in cost of revenue. (2) Amounts included gain/(loss), net from litigation settlements of $ 6.0 million for the nine months ended October 1, 2023, and gain/(loss), net from derivatives not designated as hedging instruments of $ 1.3 million and $ 2.2 million, for the three and nine months ended October 1, 2023 , respectively, and $ 3.4 million and $ 6.9 million for the three and nine months ended October 2, 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 Nine Months Ended (In thousands) October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 United States (U.S.) $ 138,013 $ 164,890 $ 368,772 $ 445,170 Americas (excluding U.S.) 3,005 4,470 10,779 12,866 EMEA (1) 35,684 44,827 111,023 126,643 APAC (1) 21,143 35,400 61,592 98,690 Total net revenue $ 197,845 $ 249,587 $ 552,166 $ 683,369 (1) No individual foreign country represented more than 10 % of the Company's total net revenue in the periods presented. 23 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) October 1, 2023 December 31, 2022 United States (U.S.) $ 26,640 $ 32,142 Americas (excluding U.S.) 4,805 2,367 EMEA 3,897 3,564 Singapore 6,364 4,032 APAC (excluding Singapore) (1) 6,341 7,988 Total $ 48,047 $ 50,093 (1) No individual country 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: October 1, 2023 (In thousands) Total Quoted market prices in active markets (Level 1) Significant other observable inputs (Level 2) Assets: Cash equivalents: money-market funds $ 24,110 $ 24,110 $ — Available-for-sale investments: U.S. treasury securities (1) 88,693 — 88,693 Trading securities: mutual funds (1) 7,720 7,720 — Available-for-sale investments: convertible debt securities (2) 173 — 173 Foreign currency forward contracts (3) 1,873 — 1,873 Total assets measured at fair value $ 122,569 $ 31,830 $ 90,739 Liabilities: Foreign currency forward contracts (4) $ 554 $ — $ 554 Total liabilities measured at fair value $ 554 $ — $ 554 24 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 as of October 1, 2023, and $ 173,000 included in Short-term investments and the remaining included in Other non-current assets as of December 31, 2022. (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 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. Note 13. Restructuring and Other Charges The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The Company includes expenses related to restructuring and other charges in Other operating expenses (income), net in the condensed consolidated statements of operations. Accrued restructuring and other charges are classified within Accrued employee compensation and Other accrued liabilities on the condensed consolidated balance sheets. Restructuring and other charges recognized in the nine months ended October 1, 2023 and October 2, 2022, respectively, were primarily for severance, and other costs in relation to the reorganization of our business to better align the cost structure of the business with projected revenue levels. The liabilities as of October 1, 2023 are expected to be settled in 2023. 25 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table provides a summary of the activity related to accrued restructuring and other charges: (In thousands) Accrued Restructuring and Other Charges at December 31, 2022 Additions Cash Payments Adjustments Accrued Restructuring and Other Charges at October 1, 2023 Restructuring Employee termination charges $ 1,912 $ 2,650 $ ( 4,138 ) $ ( 80 ) $ 344 Lease contract termination and other charges — 395 ( 367 ) — 28 Total Restructuring and other charges $ 1,912 $ 3,045 $ ( 4,505 ) $ ( 80 ) $ 372 (In thousands) Accrued Restructuring and Other Charges at December 31, 2021 Additions Cash Payments Adjustments Accrued Restructuring and Other Charges at October 2, 2022 Restructuring Employee termination charges $ — $ 950 $ ( 851 ) $ ( 18 ) $ 81 Lease contract termination and other charges 23 1 ( 1 ) ( 23 ) — Total Restructuring and other charges $ 23 $ 951 $ ( 852 ) $ ( 41 ) $ 81 26 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, operating margin, gross margin, continued profitability and cash generation; NETGEAR’s strategic shift to focusing on the premium, higher-margin segments of the market and growing service revenue; NETGEAR’s investments in developing new products and subscription services, enhancing current products and expanding channels and direct-to-consumer capabilities; NETGEAR's outsourcing strategy and its impact to products cost and gross margin; expectations regarding product mix and market demand for NETGEAR's products and services, including SMB and premium Connected Home products and subscription services 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 and services introductions that position NETGEAR for growth and market share gain; expectations regarding competition, competitive factors, consumer price sensitivity and demand for NETGEAR's products and services; expectations regarding sales channels, direct online store and in-app offerings; expectations regarding macroeconomic conditions and impacts to NETGEAR's operational and financial performance and business strategies; expectations regarding the consumer retail networking market; expectations regarding existing cash, cash equivalents and short-term investments and anticipated cash requirements; expectations regarding inventory management and inventory costs; expectations regarding transportation costs; expectations regarding research and development expenses, sales and marketing expenses and general and administration expenses; expectations regarding expected tax rates or tax expenses; and expectations regarding NETGEAR’s subscription services, paid subscriber base growth, service revenue and gross margin. 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 27 Table of Contents 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 and recently released WiFi 7 Tri-band and Quad-band mesh systems, and 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. 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 October 1, 2023, our net revenue decreased by $51.7 million, compared to the prior year period, mainly driven by decreases of $28.5 million in our SMB segment, and $23.2 million in our Connected Home segment. The year-over-year decrease in SMB net revenue was primarily due to a reduction in inventory carrying levels across our channel partners driven by the continued pressure of the uncertain macroeconomic environment. The year-over-year decrease in Connected Home net revenue was primarily due to a contraction of the U.S. retail market and higher inventory carrying levels at our channel partners in the prior year period. Despite the year-over-year decline in net revenue during the three months ended October 1, 2023, demand for our premium WiFi mesh systems and 5G mobile hotspots, continued to grow, bolstered by the addition of our recently released WiFi 7 mesh systems and routers. We also experienced continued strong demand for the Pro AV product line of managed switches, and growth in our services revenue. Our gross margin percentage increased 730 basis points for the three months ended October 1, 2023, compared to the prior year period, in part due to a more favorable mix of our premium Connected Home products, combined with continued growth of our services business. 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 $1.5 million for the three months ended October 1, 2023, compared to the prior year period, primarily driven by reduced operating expenses and higher gross profit in spite of lower net revenue in the current period. 28 Table of Contents Geographically, net revenue from Connected Home and SMB decreased across all three regions during the three months ended October 1, 2023, compared to the prior year period. Global Events Affecting our Business and Operations 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 2023, we began to realize the gross margin benefits from the inventory we obtained with lower sea freight rates. 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, and ongoing worldwide tensions, including the Russia-Ukraine and Israel-Hamas conflicts. The extent of impacts from these macroeconomic and geopolitical 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 broader implications of the macroeconomic uncertainty and any related disruptions to channel partners are 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 the premium portion of our Connected Home product portfolio powered by our premium WiFi mesh systems and 5G mobile hotspots. We are starting to see indicators that the broader consumer retail networking market is stabilizing and our retail channel partners are now maintaining rather than depleting their inventories. However, we will continue to work with our SMB channel partners to optimize their inventory carrying levels. Accordingly, for the fourth quarter of 2023, we expect the Connected Home net revenue to be relatively flat sequentially, in line with market seasonality, and SMB to be down sequentially. We aim to execute on our strategy of capitalizing on the technological inflection points of the recent release of WiFi 7, WiFi 6E, WiFi 6, 5G, audio and video over Ethernet, to develop and expand the premium WiFi market through new product introductions and to develop and roll out service offerings 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. 29 Table of Contents Results of Operations The following table sets forth the unaudited condensed consolidated statements of operations for the periods presented. Three Months Ended Nine Months Ended (In thousands, except percentage data) October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Net revenue $197,845 100.0 % $249,587 100.0 % $552,166 100.0% $683,369 100.0% Cost of revenue 128,911 65.2 % 181,058 72.5 % 368,550 66.7% 494,516 72.4% Gross profit 68,934 34.8 % 68,529 27.5 % 183,616 33.3% 188,853 27.6% Operating expenses: Research and development 20,738 10.5 % 22,167 8.9 % 63,703 11.5% 68,193 10.0% Sales and marketing 30,865 15.4 % 34,203 13.8 % 97,226 17.7% 104,335 15.3% General and administrative 16,364 8.3 % 13,949 5.6 % 49,136 8.9% 41,698 6.1% Goodwill impairment — —% — —% — —% 44,442 6.5 % Intangibles impairment 1,071 0.5 % — —% 1,071 0.2% — —% Other operating expenses, net 544 0.3 % 361 0.1 % 2,881 0.5 % 931 0.1% Total operating expenses 69,582 35.1 % 70,680 28.4 % 214,017 38.8% 259,599 38.0% Loss from operations (648) (0.3)% (2,151) (0.9)% (30,401) (5.5)% (70,746) (10.4)% Other income (expenses), net 2,280 1.1 % 638 0.3 % 11,685 2.1 % (1,164) (0.1)% Income (loss) before income taxes 1,632 0.8 % (1,513) (0.6)% (18,716) (3.4)% (71,910) (10.5%) Provision for (benefit from) income taxes 86,431 43.7 % (4,314) (1.7)% 84,382 15.3 % (8,967) (1.3%) Net income (loss) $(84,799) (42.9)% $2,801 1.1 % $(103,098) (18.7)% $(62,943) (9.2%) 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 Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Americas $ 141,018 (16.7 )% $ 169,360 $ 379,551 (17.1 )% $ 458,036 Percentage of net revenue 71.3 % 67.8 % 68.7 % 67.1 % EMEA $ 35,684 (20.4 )% $ 44,827 $ 111,023 (12.3 )% $ 126,643 Percentage of net revenue 18.0 % 18.0 % 20.1 % 18.5 % APAC $ 21,143 (40.3 )% $ 35,400 $ 61,592 (37.6 )% $ 98,690 Percentage of net revenue 10.7 % 14.2 % 11.2 % 14.4 % Total net revenue $ 197,845 (20.7 )% $ 249,587 $ 552,166 (19.2 )% $ 683,369 Americas Net revenue in Americas decreased in the three and nine months ended October 1, 2023, driven by declines in Connected Home net revenue of 12.9% and 18.6%, respectively, and declines in SMB net revenue of 26.2% and 13.4%, respectively, compared to the prior year periods. The declines in Connected Home net revenue were primarily due to a contraction of the U.S. retail market, along with higher inventory carrying levels at our channel partners in the prior year periods. The declines in SMB net revenue were primarily due to higher inventory carrying levels at our channel partners in the prior year periods. 30 Table of Contents EMEA Net revenue in EMEA decreased in the three and nine months ended October 1, 2023, primarily due to the performance of our SMB segment, which experienced declines in net revenue of 23.2% and 17.0%, respectively, compared to the prior year periods, mainly driven by meaningful reductions in our channel partner inventory carrying levels, stemming from the continued pressure of the uncertain macro environment. Net revenue for our Connected Home segment in the nine months ended October 1, 2023 remained relatively flat, while the three months ended October 1, 2023 experienced a decline in net revenue of 13.1%, driven by macroeconomic environment headwinds weighing on the market, compared to the prior year periods. APAC Net revenue in APAC decreased in the three and nine months ended October 1, 2023, compared to the prior year periods, driven by declines of 34.3% and 42.2%, respectively, in our Connected Home segment and declines of 46.4% and 33.1%, respectively, in our SMB segment. The declines in SMB net revenue were mainly due to meaningful reductions in our channel partner inventory carrying levels, driven by the uncertain macro environment. The declines in Connected Home net revenue were primarily driven by the macroeconomic environment headwinds. 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. 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 Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Cost of revenue $128,911 (28.8)% $181,058 $368,550 (25.5)% $494,516 Gross margin percentage 34.8% 27.5% 33.3% 27.6% Our gross margin percentages increased for the three and nine months ended October 1, 2023, compared to the prior year periods, primarily due to a more favorable mix of premium Connected Home products 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 Connected Home products, higher subscription services and stabilized transportation costs, including less reliance on higher-cost air freight, will help to deliver improvement to margin performance from fiscal 2022 levels in the remainder of 2023. Over the past couple of years, we incurred meaningful and continuously elevated cost of materials and components for our products, as well as freight transportation costs. Starting in the second quarter of 2022, we saw a positive downward trend for sea freight transportation costs. In the first half of 2023, sea freight rates stabilized slightly above pre-pandemic levels at which time we began to realize the gross margin benefits from the lower sea freight rates. 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, 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. 31 Table of Contents 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 will continue to 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 Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Research and development $ 20,738 (6.4 )% $ 22,167 $ 63,703 (6.6 )% $ 68,193 Research and development expenses decreased for the three and nine months ended October 1, 2023, primarily driven by a decrease in personnel-related expenditures of $1.3 million and $4.1 million, respectively, compared to the prior year periods, mainly due to decreased headcount. 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 expect research and development expenses for the fourth fiscal quarter of 2023 to be in line or slightly lower in absolute dollars than in the first three quarters of 2023. 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, AV over IP managed switches and SMB wireless products. 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 Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Sales and marketing $ 30,865 (9.8 )% $ 34,203 $ 97,226 (6.8 )% $ 104,335 The declines in sales and marketing expenses for the three and nine months ended October 1, 2023, compared to the prior year periods, were primarily attributable to decreases in outbound freight costs for product deliveries to our customers of $1.7 million and $5.2 million, respectively, personnel-related expenditures of $0.9 million and $2.1 million, respectively, mainly due to lower performance-based compensation expenses and decreased headcount, and lower outside service expenditures of $1.0 million and $2.0 million, respectively, mainly attributable to lower call center support costs. The declines were partially offset by increases in brand-marketing related expenditures for the nine months ended October 1, 2023 of $2.5 million, compared to the prior year period. We expect sales and marketing expenses for the fourth fiscal quarter of 2023 to be lower in absolute dollars than in the first three quarters of 2023. 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 32 Table of Contents 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 Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 General and administrative $ 16,364 17.3 % $ 13,949 $ 49,136 17.8 % $ 41,698 The increases in general and administrative expenses for the three and nine months ended October 1, 2023, were primarily driven by increases in legal and professional services fees of $1.6 million and $5.1 million, respectively, mainly associated with litigation matters, which included fees incurred while reaching the favorable litigation settlement mentioned below in "Other income (expenses), net", as well as increases in personnel-related expenditures of $0.6 million and $1.5 million, respectively, compared to the prior year periods. We expect general and administration expenses for the fourth fiscal quarter of 2023 to be in line in absolute dollars with the first three quarters of 2023. 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 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 and Intangibles Impairment The following table presents goodwill impairment charge for the periods indicated: Three Months Ended Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Goodwill impairment charge $ — ** $ — $ — ** $ 44,442 Intangibles impairment charge $ 1,071 ** $ — $ 1,071 ** $ — ** Percentage change not meaningful. There was no goodwill impairment for the three and nine months ended October 1, 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. In the third quarter of fiscal 2023, we recognized a $1.1 million intangibles impairment charge for the Connected Home segment resulting from an interim impairment assessment performed in the quarter. For a detailed discussion on the interim intangible impairment assessment, 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. 33 Table of Contents 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 Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Other operating expenses, net $ 544 50.7 % $ 361 $ 2,881 ** $ 931 ** Percentage change not meaningful. For the three and nine months ended October 1, 2023, we incurred restructuring and other charges of $0.4 million and $2.7 million, respectively, associated with our reorganization to better align the cost structure of the business with projected revenue levels. For a detailed discussion of restructuring and other charges, refer to Note 13, Restructuring and Other Charges, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. 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, including gain on litigation settlements. The following table presents other income (expenses), net for the periods indicated: Three Months Ended Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Other income (expenses), net $ 2,280 ** $ 638 $ 11,685 ** $ (1,164 ) ** Percentage change not meaningful. The changes in other income (expenses), net for the three and nine months ended October 1, 2023, compared to the prior year periods, were primarily due to higher interest earned on our short-term investment in U.S. treasuries. The increase in other income (expenses), net for the nine months ended October 1, 2023, was also attributable to $6.0 million cash received relating to a favorable litigation settlement during the second quarter of 2023. Provision for (Benefit from) Income Taxes Three Months Ended Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Provision for (benefit from) income taxes $86,431 ** $(4,314) $84,382 ** $(8,967) Effective tax rate ** ** ** 12.5% ** Percentage change not meaningful. The changes in taxes for the three and nine months ended October 1, 2023, compared to the prior year periods, were primarily due to the recognition of a valuation allowance of $81.5 million on deferred tax assets for U.S. federal and state purposes during the current quarter. In evaluating the current results, coupled with expectation for the remainder of the year, we reassessed our position and determined that it was not more likely than not that the deferred tax assets would be realized, and accordingly recorded a full valuation allowance on the net deferred tax assets in the U.S. In the three and nine months ended October 2, 2022, the forecasted annual loss was significantly higher (in relative terms) as compared to the forecasted loss for 2023 due to the impairment of goodwill during the first fiscal quarter of 2022. The tax benefits on the three and nine months ended October 2, 2022 were partially offset by the tax impact of non-tax-deductible goodwill impairment which substantially reduced the effective tax rate for that period. Tax benefits on current year losses for the three and nine month period ended October 1, 2023 were offset by the valuation allowance. 34 Table of Contents 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 Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Net revenue $127,335 (15.4)% $150,581 $328,487 (19.8)% $409,787 Percentage of net revenue 64.4% 60.3% 59.5% 60.0% Contribution income (loss) $11,885 ** $(512) $9,558 ** $(3,033) Contribution margin 9.3% (0.3%) 2.9% (0.7%) ** Percentage change not meaningful. Connected Home net revenue decreased in both the retail and service provider channels in the three and nine months ended October 1, 2023, compared to the prior year periods, primarily due to a contraction of the U.S. retail market and higher inventory carrying levels at our channel partners in the prior year periods. Despite a decline in the overall consumer networking market during the three and nine months ended October 1, 2023, our premium WiFi 6 mesh systems and 5G mobile hotspots continued to grow, bolstered by the addition of our recently released WiFi 7 mesh systems and routers, and we saw growth in our services revenue as compared to the prior year periods. Geographically, during the three months ended October 1, 2023, net revenue in all regions decreased, and during the nine months ended October 1, 2023, net revenue in EMEA remained relatively flat and net revenue in Americas and APAC decreased, compared to the prior year periods. Connected Home contribution income increased in the three and nine months ended October 1, 2023, compared to the prior year periods, primarily due higher gross margin achievement through strong demand for higher-margin premium products, decreased operating expenses and freight transportation costs, partially offset by decreases in net revenue. SMB Segment Three Months Ended Nine Months Ended (In thousands, except percentage data) October 1, 2023 % Change October 2, 2022 October 1, 2023 % Change October 2, 2022 Net revenue $70,510 (28.8)% $99,006 $223,679 (18.2)% $273,582 Percentage of net revenue 35.6% 39.7% 40.5% 40.0% Contribution income $14,913 (37.0)% $23,683 $43,382 (19.4)% $53,844 Contribution margin 21.2% 23.9% 19.4% 19.7% SMB net revenue decreased for the three and nine months ended October 1, 2023, compared to the prior year periods, primarily due to a reduction in inventory carrying levels across our channel partners driven by the continued pressure of the uncertain macroeconomic environment, particularly in Asia and Europe. The decreases in products for the traditional SMB market were partially offset by the continued strong demand for the Pro AV product line of managed switches. Geographically, SMB net revenue decreased across all regions in the three and nine months ended October 1, 2023, compared to the prior year periods. SMB contribution income decreased in the three and nine months ended October 1, 2023, compared to the prior year periods, primarily due to lower net revenue, partially offset by decreased transportation costs. 35 Table of Contents Liquidity and Capital Resources Our principal sources of liquidity are cash, cash equivalents, short-term investments and cash generated from operations. As of October 1, 2023, we had cash, cash equivalents and short-term investment of $228.0 million, an increase of $0.6 million from December 31, 2022. As of October 1, 2023, approximately 25% 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. Nine Months Ended (In thousands) October 1, 2023 October 2, 2022 Cash provided by (used in) operating activities $ 582 $ (8,799 ) Cash used in investing activities (16,471 ) (98,098 ) Cash provided by (used in) financing activities 848 (23,947 ) Net cash decrease $ (15,041 ) $ (130,844 ) Operating activities Net cash provided by operating activities was $0.6 million, compared to net cash used of $8.8 million in the prior year period, primarily due to 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 $46.1 million as of October 1, 2023, primarily due to the reduction and timing of inventory receipts and supplier payments. Accounts receivable decreased from $277.5 million as of December 31, 2022, to $200.9 million as of October 1, 2023, primarily due to the timing of cash collections and lower revenue. Inventory decreased from $299.6 million as of December 31, 2022, to $280.9 million as of October 1, 2023, as we work to optimize our inventory carrying value. We expect to continue generating positive cash flows from operating activities in the remainder of fiscal 2023 as we make further progress in reducing our inventory. Investing activities Net cash used in investing activities decreased by $81.6 million in the nine months ended October 1, 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 $0.9 million in the nine months ended October 1, 2023, compared to net cash used of $23.9 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 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 36 Table of Contents 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 nine months ended October 1, 2023. During the nine months ended October 2, 2022, we repurchased and retired, reported based on trade date, approximately 1.0 million shares of common stock at a cost of approximately $24.4 million under the repurchase authorizations. As of October 1, 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 194,000 and 198,000 shares of common stock, respectively, at a cost of approximately $2.7 million and $4.7 million during the nine months ended October 1, 2023, and October 2, 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 October 1, 2023, from those as of December 31, 2022, disclosed in Part II, Item 7, of our Annual Report. As of October 1, 2023, we had $68.5 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 saw 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 October 1, 2023, $367.1 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 have 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 may 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 nine months ended October 1, 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.