NETGEAR, INC. 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 representNETGEAR, 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 continued profitability and cash generation; expectations regarding the timing, distribution, sales momentum and market acceptance of recent and anticipated new product introductions that position the Company for growth and market share gain; and expectations regarding NETGEAR's paid subscriber base growth, registered users and registered app users. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including the following: uncertainty surrounding the duration and impact of the global COVID-19 pandemic; uncertainty surrounding inventory and supply chain management; inflation; geopolitical instability; changes in government and tax policies and regulations; future demand for the Company's products may be lower than anticipated; consumers may choose not to adopt the Company's new product offerings or adopt competing products; product performance may be adversely affected by real world operating conditions; the Company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the Company's products or utilize competing products; the Company may be unable to grow its number of registered users and/or registered app users; the Company may be unable to grow its paid subscriber base; the Company may be unable to collect receivables as they become due; the Company may fail to manage costs, including the cost of material and component and freight, and cost of developing new products and manufacturing and distribution of its existing offerings; changes in the level of NETGEAR's cash resources and the Company's planned usage of such resources, including potential repurchases of the Company's common stock; changes in the Company's stock price and developments in the business that could increase the Company's cash needs; fluctuations in foreign exchange rates; and the actions and financial health of the Company's customers. 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. Factors that might cause such a discrepancy include, but are not limited to, those discussed in "Part II-Item 1A-Risk Factors" and "Liquidity and Capital Resources" below. 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 toNETGEAR, Inc. and its subsidiaries.
Business and Executive Overview
We are a global company that turns ideas into innovative, high-performance, and
premium networking products that connect people, power businesses and service
providers. Our products are designed to simplify and improve people's lives. Our
strategy focuses on being the leader of the premium WiFi consumer market, and to
serve the market with high-performance, secure, and dependable products and
services. We believe our targeted customers value speed, connectivity, and the
security of their network. Our strategy is to create and grow the higher price
points of the consumer networking market, where we believe competition is less
intense and consumers are less price sensitive, offering the possibility to
upsell our subscription services and higher margin products. 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 advanced connected solutions ranging from easy-to-use premium
WiFi solutions, performance gaming routers that enhance console and online-game
play, security and support services to protect and enhance home networks, to
switching and wireless solutions to augment business networks and audio and
video over Ethernet for Pro AV applications. We keep people
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connected through product and service offerings, including ultra-premium Orbi
Mesh WiFi systems, high-performance Nighthawk routers, high-speed cable modems,
5G mobile wireless products, cloud-based subscription services for network
management and security, smart networking products and Video over Ethernet for
Pro AV applications. Our products and services are built on a variety of
technologies such as wireless (WiFi and 4G/5G mobile), Ethernet and powerline,
with a focus on reliability and ease-of-use. Additionally, we continually invest
in research and development to create new technologies and services and to
capitalize on technological inflection points and trends, such as WiFi 7, audio
and video over Ethernet, non-fungible token ("NFT") artwork, and future
technologies. Our product line consists of devices that create and extend wired
and wireless networks, devices that attach to the network, such as smart digital
canvasses as well as services that complement and enhance our product line
offerings. These products are available in multiple configurations to address
the changing needs of our customers in each geographic region.
We operate and report in two segments: Connected Home, and Small and Medium
Business ("SMB"). We believe that this structure reflects our current
operational and financial management, and that it provides the best structure
for us to focus on growth opportunities while maintaining financial discipline.
The leadership team of each segment is focused on serving customer needs through
product and service development efforts, both from a product marketing and
engineering standpoint. The Connected Home segment focuses on consumers and
provides high-performance, dependable and easy-to-use premium WiFi internet
networking solutions such as WiFi 6 and WiFi 6E Tri-band and Quad-band mesh
systems, routers, 4G/5G mobile products, smart devices such as Meural digital
canvasses, and subscription services that provide consumers a range of
value-added services focused on performance, security, privacy and premium
support. The SMB segment focuses on small and medium sized businesses and
provides solutions for business networking, wireless local area network
("LAN"), audio and video over Ethernet for Pro AV applications, security and
remote management providing enterprise-class functionality at an affordable
price. We conduct business across three geographic regions: Americas ; Europe ,
Middle East , and Africa ("EMEA"); and Asia Pacific ("APAC").
Business Overview
The markets in which our segments operate are intensely competitive and subject
to rapid technological evolution. We believe that the principal competitive
factors in the consumer and small and medium-sized business markets for
networking products include product breadth, price points, size and scope of the
sales channel, brand recognition, timeliness of new product introductions,
product availability, performance, features, functionality, reliability,
ease-of-installation, maintenance and use, security, as well as customer service
and support. To remain competitive, we believe we must continue to aggressively
invest resources to develop new products and subscription services, enhance our
current products, and expand our channels and direct-to-consumer capabilities,
while increasing engagement and maintaining satisfaction with our customers. Our
investments reflect our steadfast focus on 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, Fnac Darty (Europe ),
MediaMarkt (Europe ), JB HiFi (Australia ), Elkjop (Norway ) and Sunning and Guomei
(China) . Online retailers include Amazon.com (worldwide), Newegg.com (U.S. ),
JD.com, Alibaba (China) and Coolblue.com (Netherlands ). Our DMRs include CDW
Corporation, Insight Corporation , and PC Connection in domestic markets. Our
main wholesale distributors include Ingram Micro , TD Synnex, and D&H
Distribution Company . In addition, we also sell our products through broadband
service providers, such as multiple system operators, 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 2, 2022 , our net revenue decreased by
$40.6 million compared to the prior year period. The decrease was driven by the
retail portion of our Connected Home segment, which saw net revenue decline by
$56.7 million , mainly due to a contraction of the U.S. consumer WiFi market in
the current year and elevated pandemic-induced demand in the prior year. The
decline was partially offset by higher revenue of $17.4 million in our SMB
segment
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mainly attributable to the growth in our Pro AV product line of managed switches. Loss from operations was$2.2 million during the three months endedOctober 2, 2022 , as compared to income from operations of$12.9 million in the prior year period. The decline in net revenue and, to a lesser extent, the lower gross margin, primarily due to increased product acquisition and transportation costs, resulted in a$18.3 million reduction in gross profit in the three months endedOctober 2, 2022 , as compared to the prior year period. In addition, the strengthening of the US dollar over the past year had a meaningful negative impact on our international revenue and our profitability.
Geographically, net revenue from Connected Home decreased across all three
regions during the three months ended
COVID-19 Pandemic Update The COVID-19 pandemic has widespread, rapidly evolving, and unpredictable impacts on global economies, inflation, and supply chains, and has created significant volatility and disruption in financial markets. Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. Since the onset of the pandemic, we have taken actions by directing most of our worldwide workforce to work from home, allowing only critical business travel, and replacing in-person events with digital events. As COVID-19 restrictions have eased, some of our offices, including our San Jose headquarters, have transitioned to hybrid work. We continue to actively monitor the situation and will continue to adapt our business operations as necessary. Over the last two and half years, the COVID-19 pandemic has brought about a considerable shift in our business while increasing uncertainty. As a result, our supply chain partners have experienced disruptions in production, materials and components, factory uptime, and transportation. The pandemic resulted in longer lead times for some of our key components, impacting our ability to accurately forecast and capitalize fully on end-market demand. We experienced certain improvements in supply chain constraints in the third fiscal quarter of 2022, but we expect supply chain constraints to continue to persist into the first half of 2023. This may impact our ability to fulfill SMB product demand and limit the availability of certain Connected Home products. Transportation disruptions have brought about a meaningful increase in the cost of sea freight, and we have increased our reliance on airfreight to secure supply to offset lengthening sea transit times. However, starting in the second quarter of 2022, we began to see a positive downward trend on the cost per container to move goods via sea. Moreover, we have seen favorable downward movement in the cost of airfreight as we move into the second half of 2022. Additionally, shortages for materials and components have resulted in increased acquisition costs for our products. We expect material acquisition costs to remain high in the fourth quarter of 2022. Looking forward to the fourth quarter of 2022, we anticipate the net revenue from the service provider channel to increase to approximately$50 million and the overall net revenue to approximate our third fiscal quarter of 2022 levels, powered by our super-premium mesh systems and 5G mobile hotspots in the Connected Home segment, Pro AV products in the SMB segment, and our suite of subscription services in both Connected Home and SMB segments, all of which are the key to delivering revenue growth and expanding profitability in both short-term and long-term. Due to broad-based inflationary pressures and the uncertain macroeconomic environment, we expect our retail partners to continue to reduce their inventory levels in the fourth quarter of 2022, which will impact our sales into these channels. We aim to execute on our strategy of capitalizing on the technological inflection points of WiFi 6E, WiFi 6, 5G and audio and video over Ethernet, to develop and expand the premium WiFi market through new product introductions and to develop and roll out service offerings that build recurring service revenue streams. While we have been able to manage through most of the COVID-19 related supply chain challenges to date, any further disruption brought about by the COVID-19 pandemic to supply chain partners, production schedules, material availability or freight carriers or any increases to costs associated with supply chain operations could have a significant negative impact on our net revenue, gross and operating margin performance. The extent of the impact of the COVID-19 pandemic on our ongoing operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments. The duration of the pandemic and the broader implications of the macro-economic recovery, any related disruptions to channel partners and restrictions on travel and transport are uncertain and unpredictable. Refer to Item 1A, Risk Factors of Part II of this Quarterly Report on Form 10-Q for various risks and uncertainties associated with the COVID-19 pandemic.
Critical Accounting Estimates
In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that
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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. Refer to Note 1. The Company and Basis of Presentation, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for the risks and uncertainties related to the COVID-19 pandemic.
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 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021
Net revenue $ 249,587 100.0 % $ 290,150 100.0 % $ 683,369 100.0 % $ 916,886 100.0 %
Cost of revenue 181,058 72.5 % 203,309 70.1 % 494,516 72.4 % 625,748 68.2 %
Gross profit 68,529 27.5 % 86,841 29.9 % 188,853 27.6 % 291,138 31.8 %
Operating expenses:
Research and
development 22,167 8.9 % 23,472 8.1 % 68,193 10.0 % 69,887 7.6 % Sales and marketing 34,203 13.8 % 36,176 12.4 %
104,335 15.3 % 109,731 12.0 % General and administrative
13,949 5.6 % 14,056 4.8 % 41,698 6.1 % 45,084 4.9 %
Goodwill impairment
charge - - % - - % 44,442 6.5 % - - %
Other operating
expenses (income),
net 361 0.1 % 222 0.1 % 931 0.1 % 690 0.1 %
Total operating
expenses 70,680 28.4 % 73,926 25.4 % 259,599 38.0 % 225,392 24.6 %
Income (loss) from
operations (2,151 ) (0.9 )% 12,915 4.5 % (70,746 ) (10.4 )% 65,746 7.2 %
Other income
(expenses), net 638 0.3 % (132 ) (0.1 )%(1,164 ) (0.1 )% 15 0.0 % Income (loss) before income taxes (1,513 ) (0.6 )% 12,783 4.4 %
(71,910 ) (10.5 )% 65,761 7.2 %
Provision for
(benefit from)
income taxes (4,314 ) (1.7 )% 3,199 1.1 % (8,967 ) (1.3 )% 15,383 1.7 %
Net income (loss) $ 2,801 1.1 % $ 9,584 3.3 % $ (62,943 ) (9.2 )% $ 50,378 5.5 %
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Net Revenue by
Our net revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, and net changes in deferred revenue.
For reporting purposes, revenue is generally attributed to each geographic region based upon the location of the customer.
Three Months Ended Nine Months Ended
(In thousands,
except percentage October 2, October 3, October 2, October 3,
data) 2022 % Change 2021 2022 % Change 2021
Americas $ 169,360 (13.2 )% $ 195,123 $ 458,036 (26.9 )% $ 626,907
Percentage of net
revenue 67.8 % 67.3 % 67.1 % 68.4 %
EMEA $ 44,827 (21.3 )% $ 56,940 $ 126,643 (29.6 )% $ 179,802
Percentage of net
revenue 18.0 % 19.6 % 18.5 % 19.6 %
APAC $ 35,400 (7.1 )% $ 38,087 $ 98,690 (10.4 )% $ 110,177
Percentage of net
revenue 14.2 % 13.1 % 14.4 % 12.0 %
Total net revenue
Americas Net revenue inAmericas decreased in the three and nine months endedOctober 2, 2022 , primarily due to the performance of our Connected Home segment, which experienced declines in net revenue of 24.4% and 37.4%, respectively, compared to the prior year periods. While the pandemic-induced demand resulting from work and schooling from home mandates remained elevated in 2021, in 2022 the market demand subsided, receding to below pre-pandemic levels of 2019. The decline in Connected Home performance was partially offset by strong demand for our SMB products. Despite certain supply chain challenges, SMB net revenue in the three and nine months endedOctober 2, 2022 , increased 35.8% and 25.8%, respectively, compared to the prior year periods.
EMEA
Net revenue in EMEA decreased in the three and nine months ended
APAC
Net revenue in APAC decreased in the three and nine months ended
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-
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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 3, 2021 October 2, 2022 % Change October 3, 2021
Cost of revenue $ 181,058 (10.9 )% $ 203,309 $ 494,516 (21.0 )% $ 625,748
Gross margin percentage 27.5 % 29.9 % 27.6 % 31.8 %
Our overall gross margin decreased for the three and nine months ended October
2, 2022 , compared to the prior year periods, primarily due to increased product
acquisition and transportation costs, higher provision for sales returns and the
strengthened U.S. dollar, partially offset by improved product mix, with SMB net
revenue representing a higher proportion of net revenue as compared to the prior
year periods.
We expect gross margin percentage for the fourth quarter of 2022 to decline
slightly from the third quarter of 2022 levels as a result of further
strengthening of the U.S. dollars. Over the past year and a half, we experienced
meaningful increases in the cost of materials and components for our products.
After twelve months of continuous increase in the market rates of sea freight
transportation, in the second quarter of 2022, we began to see a positive
downward trend which continued in the third quarter of 2022. However, we will
not realize the gross margin benefits from the downward trend in sea freight
rates until early 2023 as we carried approximately five months of inventory as
of October 2, 2022 , for which most was obtained when freight costs were
elevated. In the first quarter of 2022, we selectively increased the price on
certain products, and then again in the second quarter for certain SMB products,
to offset increased costs. For the remainder of the year, we expect that our
reliance on air transportation for SMB products will continue. We believe that a
combination of improved product mix with increased sales of premium and
super-premium Connected Home products and SMB products, higher subscription
services and selective price increases will help to deliver improvement to
margin performance as the year progresses.
We continue to experience disruptions caused by the pandemic, with partners
affected by factory uptime, scarcity of materials and components and
transportation disruptions. In 2022, pandemic-induced lockdowns in China
disrupted supply of components to our manufacturers, limiting our ability to
capitalize further on strong demand for our SMB products. If such disruptions
become more widespread, they could significantly hamper our ability to fulfill
the demand for our products. Forecasting gross margin percentages is difficult,
and there are a number of risks related to our ability to maintain or improve
our current gross margin levels. Our cost of revenue as a percentage of net
revenue can vary significantly based upon factors such as: uncertainties
surrounding revenue levels, including future pricing and/or potential discounts
as a result of the economy or in response to the strengthening of the U.S.
dollar in our international markets, competition, the timing of sales, and
related production level variances; import customs duties and imposed tariffs;
changes in technology; changes in product mix; expenses associated with writing
off excessive or obsolete inventory; variability of stock-based compensation
costs; royalties to third parties; fluctuations in freight costs; manufacturing
and purchase price variances; changes in prices on commodity components; and
warranty costs. We expect that revenue derived from paid subscription service
plans will continue to increase in the future, which may have a positive impact
on our gross margin. However, we may experience fluctuations in our gross margin
due to the factors discussed above.
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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 3, 2021 October 2, 2022 % Change October 3, 2021
Research and development $ 22,167 (5.6 )% $ 23,472 $ 68,193 (2.4 )% $ 69,887
Research and development expenses decreased for the three and nine months ended
October 2, 2022 , compared to the prior year periods. Decreases in
personnel-related expenditures of $1.5 million and $3.8 million , respectively,
were partially offset by increased costs for engineering projects and outside
professional services of $0.3 million and $2.0 million in support of our product
development efforts. The declines in the personnel-related expenditures were
mainly due to lower stock-based compensation and lower headcount for the three
and nine months ended October 2, 2022 . The personnel-related expenditures for
the nine months ended October 2, 2022 were also reduced by lower
performance-based compensation expenses.
We believe that innovation and technological leadership is critical to our
future success, and we are committed to continuing a significant level of
research and development to develop new technologies, products and services. We
continue to invest in research and development to grow our cloud platform
capabilities, our services and mobile applications and to create and expand our
hardware product offerings focused on WiFi 7, premium WiFi 6E, WiFi 6, Advanced
4G/5G mobile and 5G coverage solutions, audio and video over Ethernet,
web-managed, 10Gig and PoE switch and SMB wireless products. We expect research
and development expenses as a percentage of net revenue in the fourth quarter of
2022 to be in line with or slightly higher than the third quarter of 2022
levels. Research and development expenses may fluctuate depending on the timing
and number of development activities and could vary significantly as a
percentage of net revenue, depending on actual revenues achieved in any given
quarter.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising, trade shows,
corporate communications and other marketing expenses, product marketing
expenses, outbound freight costs, amortization of certain intangibles, personnel
expenses for sales and marketing staff, technical support expenses, and IT and
facility allocations. The following table presents sales and marketing expenses,
for the periods indicated:
Three Months Ended Nine Months Ended
(In thousands, except percentage data)
October 3, 2021 October 2, 2022 % Change October 3, 2021
Sales and marketing $ 34,203 (5.5 )% $ 36,176 $ 104,335 (4.9 )% $ 109,731
The decline in sales and marketing expenses for the three months ended October
2, 2022 , compared to the prior year period, was primarily attributable to a
decrease of $1.3 million in personnel-related expenditures, mainly due to lower
stock-based compensation and lower headcount. The decline in sales and marketing
expenses for the nine months ended October 2, 2022 , compared to the prior year
period, was mainly attributable to decreases in personnel-related expenditures
of $4.1 million , outside service expenditures of $2.0 million , and amortization
of intangibles of $1.3 million , partially offset by increased marketing expenses
of $1.1 million . The decline in personnel related expenses for the nine months
ended October 2, 2022 was mainly due to lower performance-based compensation
expense and lower stock based compensation.
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We expect our sales and marketing expenses as a percentage of net revenue in the fourth quarter of 2022 to decline from the third quarter of 2022 levels. Expenses may fluctuate depending on revenue levels achieved as certain expenses, such as commissions, are determined based upon the revenues achieved. Forecasting sales and marketing expenses is highly dependent on expected revenue levels and could vary significantly depending on actual revenue achieved in any given quarter. Marketing expenses may also fluctuate depending upon the timing, extent and nature of marketing programs. Marketing expenditure committed with a customer is generally recorded as a reduction of 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 3, 2021 October 2, 2022 % Change October 3, 2021
General and administrative $ 13,949 (0.8 )% $ 14,056 $ 41,698 (7.5 )% $ 45,084
The decreases in general and administrative expenses for the three and nine
months ended October 2, 2022 , compared to the prior year periods, were primarily
driven by lower personnel-related expenditure of $1.0 million and $5.8 million ,
respectively, partially offset by increases in legal and professional services
fees of $0.9 million and $2.2 million , respectively, mainly associated with
patent litigation claims. The declines in the personnel-related expenditures
were mainly due to lower stock-based compensation for the three and nine months
ended October 2, 2022 , and lower performance-based compensation expenses for the
nine months ended October 2, 2022 .
We expect our general and administrative expenses as a percentage of net revenue
in the fourth quarter of 2022 to be consistent with the third quarter of 2022
levels. General and administrative expenses could fluctuate depending on a
number of factors, including the level and timing of expenditures associated
with litigation defense costs in connection with the litigation matters
described in Note 8, Commitments and Contingencies, in Notes to 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.
The following table presents goodwill impairment charge for the periods indicated:
Three Months Ended Nine Months Ended
(In thousands, except percentage data)
October 3, 2021 October 2, 2022 % Change October 3, 2021 Goodwill impairment charge $ - ** $ - $ 44,442 ** $ -
**Percentage change not meaningful.
The increase in goodwill impairment charge for the nine months endedOctober 2, 2022 , compared to the prior year period, was due to an impairment charge recognized for the Connected Home segment resulting from an interim goodwill impairment assessment performed in the first fiscal quarter of 2022. For a detailed discussion of goodwill impairment charge, refer to Note 4, Balance Sheet Components, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. 33
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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)
361 62.6 % $ 222 $ 931 34.9 % $ 690
The net changes in other operating expenses (income), net for the three and nine
months ended October 2, 2022 , compared to the prior year periods, were not
significant. We incurred restructuring and other charges of $0.9
million associated with the reorganization of our Connected Home segment in the
nine months ended October 2, 2022 to better align the cost structure of the
business with projected revenue levels. In the nine months ended October 2,
2021 , we incurred $0.7 million of other operating expenses, comprising of $3.7
million for restructuring and other charges associated with the consolidation of
offices in the APAC region and the reorganization of our supply chain function,
partially offset by a $3.0 million release of contingent consideration
associated with a prior acquisition.
Other Income (Expenses), Net
Other income (expenses), net consists of interest income, which represents
amounts earned and incurred on our cash, cash equivalents and short-term
investments, and other income and expenses, which primarily represents gains and
losses on transactions denominated in foreign currencies, gains and losses on
investments, and other non-operating income and expenses. The following table
presents other income (expenses), net for the periods indicated:
Three Months Ended Nine Months Ended
(In thousands, except percentage data)
$ 638 ** $ (132 ) $ (1,164 ) ** $ 15
**Percentage change not meaningful.
The change in other income (expenses), net for the three months endedOctober 2, 2022 , compared to the prior year period was mainly attributable to higher interest earned on our short-term investments and lower net loss on our long-term investments. The change in other income (expenses), net for the nine months endedOctober 2, 2022 was primarily due to increased net losses on our short-term investments.
Provision for (Benefit from) Income Taxes
Three Months Ended Nine Months Ended
(In thousands, except percentage data)
$ 3,199 $ (8,967 ) ** $ 15,383 Effective tax rate 285.1 % 25.0 % 12.5 % 23.4 %
**Percentage change not meaningful.
The change in taxes for the three months endedOctober 2, 2022 , compared to the prior year period, was primarily due to the pre-tax loss of$1.5 million during the period coupled with the impact of changes in estimate for the effective tax rate resulting in a true-up in tax benefits recorded for the prior periods. Additionally, we recorded a tax benefit for favorable changes in estimates recorded during the quarter upon completion of the 2021 US federal tax return. For the nine months endedOctober 2, 2022 , the tax benefit for favorable changes in estimates recorded during the quarter upon completion of the 2021 US federal tax return was offset by the tax impact of a goodwill impairment that is not deductible for tax purposes. For the three and nine months endedOctober 3, 2021 , tax expenses were partially offset by tax benefits 34
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related to stock-based compensation and non-taxable income related to adjustments to acquisition-related contingent accruals. Additionally, we recorded a tax benefit for favorable changes in estimates recorded during the fiscal quarter upon completion of the 2020 US federal tax return.
We are subject to income taxes in theU.S. and numerous foreign jurisdictions. Our future foreign tax rate could be affected by changes in the composition in earnings in countries with tax rates differing from theU.S. federal rate. We are currently under examination by theU.S. Internal Revenue Service ("IRS") for our fiscal years endedDecember 31, 2018 andDecember 31, 2019 . We are also under examination in various other state, local and foreign jurisdictions.
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