588 STraTeGIc MaNaGeMeNT caSeS

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588 STraTeGIc MaNaGeMeNT caSeS
Netgear, Inc., 2013
www.netgear.com, ntgr
Headquartered in San Jose, California, Netgear develops and markets Ethernet switches,
wireless controllers, storage devices, routers, media services, and other products associated
with connecting users with the Internet. All Netgear products are produced through third-party
manufacturers and marketed through thousands of retailers worldwide. Netgear prides itself on
developing and marketing high performance devices that are dependable and easy to operate
in homes. But this “desired competitive advantage” is difficult to maintain because consumers
widely believe such products are a commodity (like gasoline). For businesses, Netgear provides
networking, storage, and security devices that are cheaper and easier to use than comparable
products offered by rival firms. Netgear products are sold in more than 28,000 retail locations
around the world and through about 42,000 resellers. Netgear has operations in 25 nations and
has 850 employees, of which 352 are in sales, marketing and technical support, 251 in research
and development (R&D), 128 in finance, and 119 in operations.
Netgear’s revenues for 2012 were $1.27 billion, up 7.6 percent from 2011. The company
reported revenue for Q2 of 2013 of $357.7 million, up from $320.7 million the prior year
when the company’s new acquisition, AirCard, was not in the numbers. Q2 2013 net income
was $14.0 million, down from $21.5 million the prior year. During Q2, Netgear grew its Retail
Business Unit (RBU), led by its 802.11ac upgrade cycle, as well as the rollout of the Smart
Home for developed markets. The integration of the AirCard business into the company’s
Service Provider Business Unit (SPBU) went well. On a year-over-year basis, Netgear’s RBU
revenue was up 3 percent. The company’s strong Q2 2013 year-on-year growth for RBU in
North America and Asia was offset by weakness in the European region. The company’s SPBU
revenue was up 58 percent sequentially, and up 20 percent over the prior year quarter. The
company’s Commercial Business Unit (CBU) revenue was up 25 percent sequentially, and up
10 percent over the prior year quarter.
Copyright by Fred David Books LLC. (Written by Forest R. David)
history
Netgear was incorporated in 1996 as a subsidiary of Bay Networks and was purchased by Nortel
in 1998. The company became fully independent from Nortel in 2002 and remains independent
today. Back in 1996, the Internet was in its infancy, especially high speed and wireless devices.
As an industry pioneer, Netgear has kept tight inventory controls and used off-the-shelf hardware and software products from existing companies. Founder, chairman, and CEO Patrick Lo
was quoted in 2004 as saying: “We do the system integration and let the contracted firms do the
grunt work of designing circuit boards.” Netgear went public in 2003. Since then, the company
has grown into a $1.2 billion in sales firm. In 2011, Netgear combined its North, Central, and
South U.S. salesforces to form a new Americas territory as a means to increase operational
efficiencies. Today, the company operates in three distinct geographic territories: (1) Americas,
(2) Europe, and (3) Middle East and Asia Pacific.
To get a flavor of what Netgear develops and markets, in late 2012, the company introduced
its CG4500TM Voice/Data Gateway that received the CableLabs® DOCSIS® 3.0 certification.
This unit has the capability for 24 × 4-channel bonding and is the firm’s most advanced DOCSIS
3.0 Voice/Data Gateway integrating in one device. The new product allows concurrent 802.11n
dual-band wireless networking that provides up to 900 Mbps (450 + 450 Mbps) aggregate speed
and with simultaneous dual-band technology helps mitigate interference ensuring sustained
throughput and reliable connections. With integrated MoCA, the CG4500TM Gateway enables
seamless data and video distribution over the in-home coax network.
case22 • Netgear,INc.,2013 589
Internal Issues
Vision and Mission
Netgear’s mission statement is: “To be the innovative leader in connecting the world to the
Internet,” recently changed from, “To be the preferred customer-driven provider of innovative
networking solutions for small businesses and homes.” There is a statement on the company’s
website that may be their vision: “Our goal is to be the leading provider of innovative networking
products to the consumer, business, and service provider markets.”
Location
Netgear’s primary administrative, sales, marketing, and R&D facilities consist of 142,700 square
feet in an office complex in San Jose, California, under a lease that expires in 2018. Netgear’s
international headquarters comprise 10,000 square feet of office space in Cork, Ireland, under a
lease that expires in 2026. Netgear’s international salespersons are based out of local sales offices or home offices in Austria, Australia, Brazil, Canada, China, Czech Republic, Denmark,
France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, New Zealand, Poland, Russia,
Singapore, Spain, Sweden, Switzerland, the Netherlands, the United Arab Emirates, and the
United Kingdom. Netgear has operations personnel in Hong Kong, and R&D facilities in Atlanta,
Chicago, Beijing, Guangzhou, Nanjing, and Shanghai, China, and in Taipei, Taiwan.
Organizational Structure
Netgear is managed in three specific business units: (1) retail, (2) commercial, and (3) service
provider. The retail business unit consists of home networking, storage, and digital media products to connect users with the Internet and their content and devices. The commercial business
unit consists of relatively low-cost business networking, storage, and security solutions. The service provider business unit consists of made-to-order and retail proven, whole-home networking
solutions sold to service providers for sale to their customers.
Netgear recently combined their North American, Central American, and South American
sales forces to form the Americas territory. Thus, the firm is today organized into the following
three geographic territories: (1) Americas, (2) Europe, Middle-East, and Africa (EMEA) and
(3) Asia, Pacific (APAC).
Exhibit 1 provides a diagram of Netgear’s existing organizational structure. Note there is no
Chief Operations Officer. Some analysts contend that the company is too dependent on Lo, with
no other person being groomed as an eventual successor.
Patrick Lo,
Chairman, CEO, and
Acting General
Manager of Commercial
Business Unit
Christine
Gorjanc,
Chief
Financial
Officer
Mark
Merrill,
Chief
Technology
Officer
David Soares,
General
Manager and
Senior
Vice-president,
Retail
Business Unit
Michael
Falcon, Senior
Vice-president
of Operations
and Support
Charles Olson,
Senior
Vice-president
of Engineering
Michael Clegg,
General
Manager and
Senior
Vice-president,
Service
Provider
Business Unit
Andrew Kim,
Vice-president
of Legal and
Corporate
Development
and Company
Secretary
Michael
Werdann,
Vice-president
of Worldwide
Sales, Retail
Business Unit
Exhibit 1 Organizational Chart
Source: Based on company documents.
590 Strategic ManageMent caSeS
Products
Netgear products that target businesses are designed with metal cases and are capable of
faster speeds, up to 10 gigabits per second, and higher port counts to allow more users.
Products targeting homes are designed with more pleasing aesthetics and are often offered
at much lower prices than the more robust higher security business models. Netgear plans
to develop a home network that will enable all devices to be connected to the Internet at all
times.
Netgear’s products can be grouped into three categories: (1) commercial business networking, (2) broadband access, and (3) network connectivity. Commercial business networking
products include (a) Ethernet switches and wireless controllers such as routers used in WiFi
applications, (b) Internet security appliances that enable Internet access with capabilities such
as anti-virus and firewalls, and (c) network-attached storage, which provides file sharing with
multiple PCs over a businesses own local area network.
Netgear’s broadband access enables customers to move digital content over high-speed
networks rather than traditional low-speed telephone lines. Products in this segment include:
(a) routers, which allow the home or office networks to connect wireless to the Internet via
a broadband modem, (b) gateways, which are routers integrated into a modem, (c) Internet
Protocol (IP) telephony products, which enable voice communications over a network, and
(d) media servers, which store multimedia content for use on PCs laptops, smartphones, and
other devices.
Netgear’s connectivity products enable resource sharing and include wireless access points,
wireless network interface cards, Ethernet network interface cards, media adapters, and power
line adapters.
R&D
High technology firms spend anywhere from 5 to 15 percent of revenue on R&D. In 2012,
Netgear spent $61 million, up 25.5 percent, on R&D to develop new and improved products
and respond to changing technology in a timely manner. The $61 million was 4.8 percent of
Netgear’s revenues, up from 4.1 percent the prior year. Netgear works closely with their technology suppliers to develop products using a methodology such as Original Design Manufacturer
(ODM) or In-House Development. Under ODM, Netgear defines the product and specifications
and coordinates with suppliers who develop the product. On development of a prototype, debugging and testing begins, and the product is ultimately released for production after passing final
measures. The In-House Development model is similar to ODM, except entire development is
coordinated by Netgear engineers.
Manufacturing
Like Apple, Inc., Netgear outsources all of their manufacturing to third parties, such as
Cameo Communications, Delta Networks, Hon Hai Precision (more commonly known as
Foxconn Corporation), and several others. Almost all Netgear products are manufactured
on mainland China or in Vietnam. Products are sometimes tested in a pilot basis in Taiwan.
Netgear component parts such as connector jacks, plastic casings, and physical layer transceivers are all purchased from a few sources, making reliance on a few suppliers a threat. If
any third-party manufacturers experience any delay, disruption, or quality control problems
in their operations, Netgear could lose market share and the Netgear brand could suffer.
Netgear outsources warehousing and distribution logistics to five third-party providers,
located in California, Hong Kong, Netherlands, and Australia. Netgear does not have longterm contracts with any of their third-party manufacturers, some of whom produce products
for competitors.
Marketing
Netgear’s global sales channel includes thousands of value added resellers (VARs), direct
market resellers (DMRs), such as CDW, and 37,000 traditional retailers worldwide, such
as Best Buy, Walmart, Fry’s Electronics, and Staples in North America; PC World in the
United Kingdom; and MediaMarket in Germany, as well as online retailers such as Amazon.
case22 • Netgear,INc.,2013 591
com, Dell.com, and NewEgg.com. Netgear also sells its products through broadband service
providers such as BSkyB, Virgin Media UK, YouSee Denmark, Telecom Denmark, TimeWarner Cable, Comcast, TV Cabo Portugal, Telkom South Africa, J:Com of Japan, and
Comhem of Sweden.
Best Buy and Ingram Micro each account for 10 percent or greater of Netgear revenues.
Netgear works closely with customers on market development activities, such as co-advertising,
in-store promotions and demonstrations, instant rebate programs, event sponsorship, and sales
associate training. It also participates in major industry trade shows and marketing events.
Netgear marketing managers work closely with the company’s sales and R&D people to align
product development roadmaps to meet customer technology demands.
Finance
Netgear’s net income declined in 2012 to $86.5 million from the year before value of $91.4 million.
Income Statements
Netgear’s recent income statements are provided in Exhibit 2. Note the steady increases in revenues but recent drop in net income.
Netgear,INc.
StateMentS OF OPeratiOnS
(In thousands, except per share data)
YearendedDecember31,
2012 2011 2010
Net revenue $1,271,921 $1,181,018 $902,052
Cost of revenue 888,368 811,572 602,805
Gross profit 383,553 369,446 299,247
Operating expenses:
Research and development 61,066 48,699 39,972
Sales and marketing 149,766 154,562 131,570
General and administrative 45,027 39,423 36,220
Restructuring and other charges 1,190 2,094 (88)
Litigation reserves, net 390 (201) 211
Total operating expenses 257,439 244,577 207,885
Income from operations 126,114 124,869 91,362
Interest income 498 477 426
Other income (expense), net 2,670 (1,136) (564)
Income before income taxes 129,282 124,210 91,224
Provision for income taxes 42,743 32,842 40,315
Net income $86,539 $91,368 $50,909
Net income per share:
Basic $2.27 $2.46 $1.44
Diluted $2.23 $2.41 $1.41
Weighted average shares outstanding used to
compute net income per share:
Basic 38,057 37,121 35,385
Diluted 38,747 37,932 36,124
Exhibit 2
Source: 2012 Form 10K, p. 54.
592 Strategic ManageMent caSeS
Exhibit 3 Netgear’s Balance Sheet
Netgear,INc.
BaLance SHeetS
(In thousands, except per share data)
December31,
2012
December31,
2011
ASSETS
Current assets:
Cash and cash equivalents $149,032 $208,898
Short-term investments 227,845 144,797
Accounts receivable, net 256,014 261,307
Inventories 174,903 163,724
Deferred income taxes 22,691 23,088
Prepaid expenses and other current assets 33,724 32,415
Total current assets 864,209 834,229
Property and equipment, net 19,025 15,884
Intangibles, net 27,621 20,956
Goodwill 100,880 85,944
Other non-current assets 22,834 14,357
Total assets $1,034,569 $971,370
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $87,310 $117,285
Accrued employee compensation 18,338 26,896
Other accrued liabilities 126,255 120,480
Deferred revenue 27,645 40,093
Income taxes payable 1,382 4,207
Total current liabilities 260,930 308,961
Non-current income taxes payable 13,735 18,657
Other non-current liabilities 5,293 4,995
Total liabilities 279,958 332,613
Commitments and contingencies
Stockholders’ equity:
Preferred stock: $0.001 par value; 5,000,000 shares
authorized; none issued or outstanding
— —
Common stock: $0.001 par value; 200,000,000
shares authorized; shared issued and outstanding:
38,341,644 and 37,646,872 at December 31, 2012 and
2011, respectively
38 38
Additional paid-in capital 394,427 364,243
Cumulative other comprehensive income 4 23
Retained earnings 360,142 274,453
Total stockholders’ equity 754,611 638,757
Total liabilities and stockholders’ equity $1,034,569 $971,370
Source: 2012 Form 10K, p. 53.
Balance Sheets
Netgear’s recent balance sheets are provided in Exhibit 3. Note the zero long-term debt.
Segments
Netgear reports operating income by geographic region. Before 2011, the company’s operations
in Central and South America were categorized under the APAC segment. Note in Exhibit 4 that
Netgear’s APAC segment was the largest gainer in 2012 versus the prior year, whereas EMEA
reported a decline in revenues.
case22 • Netgear,INc.,2013 593
Competition
Netgear operates in an extremely competitive industry, with many products being viewed by consumers as commodities, proper position on store floors being critically important, and competitive pricing being essential. Many Netgear products, such as media adapters, Ethernet, and routers, are also made by rivals Cisco Systems, Roku, Western Digital, and Apple in the USA, and
by many foreign competitors such as AVM in Europe, Corega in Japan, and TP-Link in China.
Netgear also develops and markets networking and streaming products, competing against rivals
LG, Microsoft, Samsung, and Sony. Also competing against Netgear are many cable companies
that now provide modems, and those companies may soon provide their own routers as part of
their service offerings. If Netgear cannot form contracts with various cable providers, then those
firms may also become competitors.
Netgear’s principal competitors in the commercial business market include Allied
Telesys, Barracuda, Buffalo, Data Robotics, Dell, D-Link, Fortinet, Hewlett-Packard, Huawei,
Cisco Systems, the Linksys division of Cisco Systems, QNAP Systems, Seagate Technology,
SonicWALL, Synology, WatchGuard, and Western Digital. Netgear’s principal competitors in
the home market for networking devices and television connectivity products include Apple,
Belkin, D-Link, the Linksys division of Cisco Systems, Roku, and Western Digital. Netgear’s
principal competitors in the broadband service provider market include Actiontec, ARRIS,
Comtrend, D-Link, Hitron, Huawei, Motorola, Pace, Sagem, Scientific Atlanta (a Cisco company), SMC Networks, TechniColor, Ubee, Compal Broadband, ZTE, and ZyXEL. Other current
and potential competitors that Netgear considers include numerous local vendors such as Devolo,
LEA, and AVM in Europe; Corega and Melco in Japan; and TP-Link in China. Even consumer
electronics vendors are rivals, including LG Electronics, Microsoft, Panasonic, Samsung, Sony,
Toshiba, and Vizio, who could integrate networking and streaming capabilities into their line of
products, such as televisions, set top boxes, and gaming consoles.
Exhibit 5 provides a comparative summary of Netgear versus four leading competitors. Note
that Netgear is a bit larger than D-Link, but much smaller than most rival firms.
Exhibit 4 Revenues by Geographic Segment
Year end December (in thousands)
2012 2011 2010 Percent change
$ % $ % $ % 2012 2011

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APAC 15.9 22.0
Total $1,271,921 100% $1,181,018 100% $902,052 100%
APAC, Asia Pacific; EMEA, Europe, Middle East, Africa.
Source: 2012 Form 10K, page 41.
Exhibit 5 Comparative Data for Netgear versus Rival Firms
netgear cisco Systems D-Link alcatel Lucent Western Digital
Number of Employees 791 71.8K 500 76K 103K
Net Income ($) 95.3M 7.36B 41.5M 1.4B 1.9B
Revenue ($) 1.23B 45.6B 1.15B 19.8B 13.8B
Revenue ($)/Employee 1,554K 635K 2,300K 260.5K 134K
EPS Ratio ($) 2.49 1.36 0.06 0.54 7.61
Market Capitalization 1.26B 87.64B — — 10.1B
Headquarters California California Taiwan France California
EPS, earnings per share.
Source: Based on company information.
594 Strategic ManageMent caSeS
Cisco Systems, Inc.
Nearly 40 times the size of Netgear, Cisco is headquartered in the same city as Netgear, San
Jose, California. Like Netgear, Cisco structures its operations in the same three geographic segments, with its European and Middle East headquarters in the Netherlands and the Asia Pacific
headquarters in Singapore. Also like Netgear, Cisco produces Internet protocol networking and
other related devices to support communications and information technology. Cisco’s sales by
geographic region reported in its fiscal year end June 2012 were 65, 21, and 14 percent respectively for Americas, EMEA, and APAC. Also like Netgear, Cisco produces cable modems, video
software, encoders, decoders, and many more products. Cisco’s Linksys wireless routers compete directly with Netgear routers. As of year-end 2012, Cisco had 66,000 employees, annual
revenues of $46 billion, and net income of $8 billion. Also like Netgear, Cisco relies exclusively
on contract manufacturers for all their manufacturing needs.
Cisco spends about 12 percent of net sales on R&D compared to only 4 percent for Netgear.
Cisco contains around $17 billion in goodwill on the balance sheet resulting in approximately
40 percent of total stockholders’ equity residing from intangible assets, which is not good, versus
Netgear’s 17 percent.
Western Digital Corporation
Headquartered in Irvine, California, Western Digital creates and markets storage devices, home
entertainment devices, and networking devices, similar to Netgear. Western Digital is known for
their 2.5- and 3.5-inch form factor hard drives under the Ultrastart, XE, WD, and SiliconDrive
brand names. Western Digital also produces a wide range of external hard drives in 500-gb sizes,
FireWire, and Ethernet connections.
Western Digital is structured based on the same geographic regions both Netgear and Cisco.
One notable exception, Western Digital, with $12.5 billion of revenue in fiscal 2012 that ended
June 2012, reported that about 58 percent of their revenues come from Asian markets with 23
and 19 percent coming from the Americas and EMEA, respectively, providing the company a
significantly more Asian presence than both Netgear and Cisco. The company currently spends
8 percent of revenues on R&D. The firm has $2 billion in goodwill and around 37 percent of all
current assets are in inventory.
As of December 2012, Western Digital has a price-to-earnings (P/E) ratio of five, below the
S&P 500 P/E ratio of 17.7, and its stock price was up 22.9 percent year-to-date. Western Digital
has numerous strengths, such as robust revenue growth, reasonable debt levels, solid stock price
performance, impressive record of earnings per share growth, and compelling growth in net
income. Western Digital has no glaring weaknesses.
Western Digital recently acquired the hard disk drive operations of Hitachi, greatly increasing its capacity and sales volume. Like rival Seagate Technology, Western Digital has been targeting some acquisitions upstream to better control input costs. Seagate recently acquired the
hard disk operations of Samsung.
D-Link Corporation
Headquartered in Taipei, Taiwan, D-Link develops, produces, and markets networking, connectivity, and data communications hardware, offering hubs and switches, adapters, print servers,
routers, and transceivers. Other D-Link products include broadband modems, virtual private network/firewall devices, data-storage systems, videoconferencing equipment, Web cameras, and
business phones. D-Link sells to individuals and businesses, but the firm specializes in wi-fi
and Ethernet components for the small to medium-sized office market. D-Link sells its products
through distributors in more than 100 countries, but generates most of its sales in Asia.
The Future
In July 2012, Netgear acquired AVAAK, Inc., a privately-held company that develops wire-free
video networking products for a total purchase consideration of $24.0 million in cash. This
acquisition bolstered the company’s retail business unit product offerings and expanded their
presence in the smart home market. Some analysts however contend that the fate of Netgear’s
industry is inexorably tied to the PC and that PCs are in decline as users switch to tablets, which
case22 • Netgear,INc.,2013 595
will not need hard disk drives. But there are external storage needs for hard-disk drives that
seem to be growing and conventional storage is still cheaper than flash memory.
Every few months or so, Netgear introduces a new or improved product, including the
recently introduced Netgear ProSecure® UTM25S Unified Threat Management Firewall, which
provides two modular slots that fit optional interface cards, enabling IT administrators to custom
tailor the firewall to their specific connectivity requirements. In addition, like other members
of the ProSecure UTM family of security appliances, the UTM25S integrates with Netgear
ReadyNAS® network-attached storage systems, giving businesses almost unlimited activity log
and quarantine capacity for forensic, regulatory and legal requirements.
Netgear also recently introduced the CentriaTM, a powerful, all-in-one automatic backup/
media server and high-speed wi-fi router. Centria is a dual-band high-performance router with
the added convenience of automatic data backup for both PCs and Macs. The backup capability of the Centria router gives a consumer peace of mind knowing that data is always backed
up. If a PC or Mac goes down or is lost, a consumer can still access data from Centria using
another computer. Routers are excellent for data backup because they are always on and are the
central point of connection for all computers in the home. Centria can also be used as a storage
repository for photos, media, and documents that may take up too much space on your computer.
Centria uses an internal SATA drive or external USB drives to backup and store data.
There are companies such as Western Digital or Cisco that may be interested in acquiring
Netgear. Even D-Link desires a greater market share in the United States. And Netgear itself has
a history of making acquisitions. What would be some good acquisition targets for Netgear, to
help solidify its competitive position and gain economies of scale. To remain attractive in this
rapidly changing industry, Netgear needs a clear strategic plan going forward.