NETGEAR, INC. (NTGR) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations together with the audited consolidated financial statements and notes to the financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Risk Factors” in Part I, Item 1A above.

This section generally discusses the results of our operations for the year ended December 31, 2022 (“fiscal 2022”) compared to the year ended December 31, 2021 (“fiscal 2021”). For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Business and Executive Overview

We are a global company that turns ideas into innovative, high-performance, and premium networking products. Our products connect people, 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. 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 highly differentiated, connected solutions ranging from easy-to-use premium WiFi solutions, security and support services to protect and enhance home networks, to switching and wireless solutions to augment business networks and audio and video over Ethernet for Pro AV applications. Our products and services are built on a variety of technologies such as wireless (WiFi and 4G/5G mobile), Ethernet and powerline, with a focus on reliability and ease-of-use. Additionally, we continually invest in research and development to create new technologies and services and to capitalize on technological inflection points and trends, such as WiFi 7, audio and video over Ethernet, non-fungible token (“NFT”) artwork, and future technologies. Our product line consists of devices that create and extend wired and wireless networks, devices that attach to the network, such as smart digital canvasses as well as services that complement and enhance our product line offerings. These products are available in multiple configurations to address the changing needs of our customers in each geographic region.

We operate and report in two segments: Connected Home, and Small and Medium Business (“SMB”). We believe that this structure reflects our current operational and financial management, and that it provides the best structure for us to focus on growth opportunities while maintaining financial discipline. The leadership team of each segment is focused on serving customer needs through product and service development efforts, both from a product marketing and engineering standpoint. The Connected Home segment focuses on consumers and provides high-performance, dependable and easy-to-use premium WiFi internet networking solutions such as WiFi 6 and WiFi 6E Tri-band and Quad-band mesh systems, routers, 4G/5G mobile products, smart devices such as Meural digital canvasses, and subscription services that provide consumers a range of value-added services focused on security, performance, privacy, and premium support. The SMB segment focuses on small and medium sized businesses and provides solutions for business networking, wireless local area network (“LAN”), audio and video over Ethernet for Pro AV applications, security and remote management providing enterprise-class functionality at an affordable price. We conduct business across three geographic regions: Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific (“APAC”).

Business Overview

The markets in which our segments operate are intensely competitive and subject to rapid technological evolution. We believe that the principal competitive factors in the consumer and small and medium-sized business markets for networking products include product breadth, price points, size and scope of the sales channel, brand recognition, timeliness of new product introductions, product availability, performance, features, functionality, reliability, ease-of-installation, maintenance and use, security, as well as customer service and support. To remain competitive, we believe we must continue to aggressively invest resources to develop new products and subscription services, enhance our current products, and expand our channels and direct-to-consumer capabilities, while increasing engagement and maintaining satisfaction with our customers. Our investments reflect our steadfast focus on

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cybersecurity of our products and systems, as the rising threat of cyber-attacks and exploitation of security vulnerabilities in our industry is a significant consumer concern.

We sell our products through multiple sales channels worldwide, including traditional and online retailers, wholesale distributors, direct market resellers (“DMRs”), value-added resellers (“VARs”), broadband service providers, and through our direct online store at www.netgear.com. Our retail channel includes traditional retail locations domestically and internationally, such as 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), and Digitec Galaxus AG (Switzerland). 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 year ended December 31, 2022, our net revenue decreased by $235.6 million compared to the prior year. The decrease was driven by our Connected Home segment, which saw net revenue from retail channels decline by $313.9 million, partially offset by net revenue from service provider channels growing by $19.3 million. The decline in net revenue from retail channels was mainly due to a contraction of the U.S. consumer WiFi market in the current year, coming off elevated pandemic-induced demand in the prior year, as well as the impact of retailers reducing their inventory levels. The decline was partially offset by a $59.0 million increase in net revenue from our SMB segment, mainly attributable to the growth in our Pro AV product line of managed switches. The decline in net revenue, the lower gross margin, mainly stemming from increased product acquisition and transportation costs, and a goodwill impairment with respect to our Connected Home segment, resulted in loss from operations of $82.9 million during the year ended December 31, 2022, as compared to income from operations of $66.6 million in the prior year. In addition, the strengthening of the US dollar over the prior 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 year ended December 31, 2022, while net revenue from SMB increased across all three regions, as compared to the prior year.

During the first fiscal quarter ended April 3, 2022, the market price of our common stock and our market capitalization declined significantly. In addition, with a decline in the size of the U.S. WiFi market, sales of our Connected Home products in the first fiscal quarter of 2022 were significantly lower than anticipated. Due to these factors, we determined that a triggering event had occurred. In the first fiscal quarter of 2022, before an interim goodwill impairment test, we assessed our long-lived assets and concluded that they were not impaired. The interim goodwill impairment test performed resulted in an impairment charge of $44.4 million in respect to our Connected Home reporting unit. Refer to Note 3, Balance Sheet Components, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for details.

Global Events Affecting our Business and Operations

COVID-19 pandemic continued to impact businesses since the onset almost three years ago. Our supply chain partners have experienced disruptions in production, materials and components, factory uptime, and transportation. We experienced longer lead times for some of our key components, impacting our ability to accurately forecast and fully capitalize on end-market demand. We have experienced certain improvements in supply chain constraints beginning in the third fiscal quarter of 2022, but we expect supply chain constraints to persist at least into the first half of 2023, primarily on certain SMB products. This may impact our ability to fulfill SMB product demand. 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. 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. However, we will not realize the gross margin benefits from the downward trend in sea freight rates until early 2023 as we continue to

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work through inventory obtained when freight costs were elevated. Starting in the second half of 2022, we also began to see a favorable downward movement in the cost of airfreight, and expect to decrease our reliance on using this mode of transportation in 2023. Shortages for materials and components continue to result in elevated material acquisition costs for our products, which we expect to remain elevated in at least the first half of 2023.

Looking forward to 2023, we expect to continue to experience strong underlying demand in our SMB segment driven by Pro AV products, and the premium portion of our Connected Home product portfolio powered by our super-premium mesh systems and 5G mobile hotspots. 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 first half of 2023, which will reduce sales into these channels. We aim to execute on our strategy of capitalizing on the technological inflection points of WiFi 6E, WiFi 6, 5G, audio and video over Ethernet and the anticipated release of WiFi 7, to develop and expand the premium WiFi market through new product introductions and to develop and roll out service offerings that build recurring service revenue streams. 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.

Recent macroeconomic trends have led to uncertainty in the global economic environment. These include conditions such as the potential for a recession, foreign exchange rate fluctuations, particularly the strengthening of the U.S. dollar, high inflation and the related negative impact on the global economy, as well as the continued conflict between Russia and Ukraine. The extent of impacts from the COVID-19 pandemic and/or macroeconomic trends on our ongoing operational and financial performance, including our ability to execute our business strategies in the expected time frame, will depend on future developments. The duration of the pandemic and the broader implications of the macro-economic recovery and any related disruptions to channel partners are uncertain and unpredictable. Refer to Item 1A, Risk Factors, of Part I of this Annual Report on Form 10-K for various risks and uncertainties associated with the COVID-19 pandemic.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The preparation of these financial statements requires management to make assumptions, judgments and estimates that can have a significant impact on the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. Actual results could differ significantly from these estimates. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. Note 1, The Company and Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the consolidated financial statements.

We have listed below our critical accounting estimates that we believe to have the greatest potential impact on our consolidated financial statements. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. We do not expect the estimates and assumptions are likely to change materially.

Revenue Recognition

We enter into contracts with customers to sell products and services, and while some sales agreements contain standard terms and conditions, there are agreements that contain non-standard terms and conditions and include promises to transfer multiple goods or services. As a result, significant interpretation and judgment is sometimes required to determine the appropriate accounting for these transactions including: (1) whether performance obligations are considered distinct and required to be accounted for separately or combined, including allocation of transaction price; (2) combining contracts that may impact the allocation of the transaction price between product and services; and (3) estimating and accounting for variable consideration, including rights of return, sales incentives, and price protection as a reduction of the transaction price.

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Our standard obligation to our direct customers generally provides for a full refund if such product is not merchantable or is found to be damaged or defective. In determining estimates for future returns, we estimate variable consideration at the expected value based on management’s analysis of historical data, channel inventory levels, current economic trends and changes in customer demand. Sales incentives and price protection are determined based on a combination of the actual amounts committed and through estimating future expenditure based upon historical customary business practice. We continue to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur.

Provisions for Excess and Obsolete Inventory

On a quarterly basis we assess the value of our inventory and write down its value for estimated excess and obsolete inventory based upon assumptions about the future demand by reviewing inventory quantities on hand and on order under non-cancelable purchase commitments in comparison to our estimated forecast of product demand to determine what inventory, if any, is not saleable at or above cost. Our analysis is based on the demand forecast which takes into account market conditions, product development plans, product life expectancy and other factors. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. As demonstrated during prior years, demand for our products can fluctuate significantly. If actual demand is lower than our forecasted demand and we fail to reduce our manufacturing accordingly, we could be required to write down the value of additional inventory, which would have a negative effect on our gross profit.

Goodwill

Goodwill is not amortized, but instead tested for impairment on an annual basis, or more frequently if certain events or indicators of potential impairment exists, and goodwill is written down when it is determined to be impaired. During the first fiscal quarter ended April 3, 2022, the market price of our common stock and our market capitalization declined significantly. In addition, with a decline in the size of the U.S. WiFi market, sales of our Connected Home products in the first fiscal quarter of 2022 were significantly lower than anticipated. Due to these factors, we determined that a triggering event had occurred, indicating a potential impairment of goodwill and/or long-lived assets. Prior to performing a goodwill impairment test, we assessed our long-lived assets and concluded that they were not impaired. We identified the reporting units for the purpose of goodwill impairment testing as Connected Home and SMB. The interim goodwill impairment test performed resulted in an impairment charge of $44.4 million in respect to our Connected Home reporting unit, which reduced the goodwill of this reporting unit to zero. Further, we completed our annual impairment test of goodwill as of the first day of the fourth fiscal quarter of 2022, or October 3, 2022. We identified the reporting units for the purpose of goodwill impairment testing still as Connected Home and SMB and performed a qualitative test on the SMB reporting unit. Based upon the results of the qualitative testing, we believed that it was more-likely-than-not that the fair value of the SMB reporting unit was greater than its carrying value and therefore performing the next step of impairment test for this reporting unit was unnecessary. No goodwill impairment was recognized for our SMB reporting unit in the year ended December 31, 2022. No goodwill impairment was recognized for our Connected Home and SMB reporting units in the year ended December 31, 2021 or 2020.

For our SMB reporting unit, we do not believe it is likely that there will be a material change in the estimates or assumptions we use to test for impairment losses on goodwill. However, if the actual results are not consistent with our estimates or assumptions, we may be exposed to a future impairment charge that could be material.

Income Taxes

We account for income taxes under an asset and liability approach. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences resulting from different treatments for tax versus accounting of certain items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. Our assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing our future taxable income on a jurisdictional basis, we consider the effect of its transfer pricing policies on that income. We have recorded a valuation allowance against certain federal and state deferred tax assets since the recovery of the

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assets is uncertain. We believe that all of our other deferred tax assets are recoverable; however, if there were a change in our ability to recover our deferred tax assets, we would be required to take a charge in the period in which we determined that recovery was not more likely than not.

Uncertain tax provisions are recognized under guidance that provides that a company should use a more-likely-than-not recognition threshold based on the technical merits of the income tax position taken. Income tax positions that meet the more-likely-than-not recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. We include interest expense and penalties related to uncertain tax positions as additional tax expense.

The Company made an accounting policy election related to accounting for the tax effects of Global Intangible Low-Taxed Income (“GILTI”) that was implemented as part of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), enacted on December 22, 2017. With regard to GILTI, the Company accounts for the tax effects as a period cost, if and when incurred.

Recent Accounting Pronouncements

For a complete description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, refer to Note 1, The Company and Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

Results of Operations

The following table sets forth, for the periods presented, the consolidated statements of operations data, which is derived from the accompanying consolidated financial statements:

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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.

2022 vs 2021

Americas

Net revenue in Americas decreased in fiscal 2022, primarily due to the performance of our Connected Home segment, which experienced decline in net revenue of 32.0%, compared to the prior year. While the pandemic-induced demand resulting from work and schooling from home mandates remained elevated in 2021, in 2022 the market demand subsided, receding below the 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 fiscal 2022 increased by 29.2%, compared to the prior year period.

EMEA

Net revenue in EMEA decreased in fiscal 2022, compared to the prior year, mainly due to pandemic driven demand across the Connected Home segment receding by 55.7%, as well as headwinds from the strengthened U.S. dollar. The decrease in Connected Home net revenue was partially offset by a 10.4% increase in SMB net revenue.

APAC

Net revenue in APAC decreased in fiscal 2022, compared to the prior year, mainly due to pandemic driven demand across the Connected Home segment receding by 26.6%, as well as headwinds from the strengthened U.S. dollar. The decrease in Connected Home net revenue was partially offset by a 12.2% increase in SMB net revenue.

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.

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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:

2022 vs 2021

Gross margin decreased for fiscal 2022, compared to the prior year, primarily due to higher transportation costs and component 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.

We expect gross margin percentage for fiscal 2023 to improve from fiscal 2022 levels driven by a shift in product mix as higher-margin SMB products and premium portion of our Connected Home product portfolio are expected to represent a greater proportion of net revenue. Over nearly the past two years, we experienced meaningful and continuous 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. However, we don’t expect to begin realizing the gross margin benefits from the downward trend in sea freight rates until early 2023 as we work through inventory obtained when freight costs were elevated. We believe that a combination of improved product mix with increased sales of premium and super-premium Connected Home products and SMB products, higher subscription services and reduced transportation costs, including less reliance on higher-cost air freight, will help to deliver improvement to margin performance as 2023 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:

2022 vs 2021

The decline in research and development expenses in fiscal 2022, compared to the prior year, was mainly due to the decrease in personnel-related expenditures of $5.4 million, partially offset by increased costs for engineering projects and outside professional services of $1.2 million in support of our product development efforts. The decrease in the personnel-related expenditures was mainly due to lower performance-based compensation expense, lower stock-based compensation and lower 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 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 fiscal 2023 to be relatively similar to fiscal 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:

2022 vs 2021

The decline in sales and marketing expenses for fiscal 2022, compared to the prior year, was mainly attributable to decreases in personnel-related expenditures of $4.7 million, outside service expenditures of $2.0 million, and amortization of intangibles of $1.3 million, partially offset by increased marketing expenses of $1.5 million. The decline in personnel related expenses for fiscal 2022 was mainly due to lower stock based compensation, lower performance-based compensation expense and lower headcount.

We expect our sales and marketing expenses as a percentage of net revenue in fiscal 2023 to be relatively similar to fiscal 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.

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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:

2022 vs 2021

The decline in general and administrative expenses for fiscal 2022, compared to the prior year, was primarily driven by lower personnel-related expenditure of $6.6 million, partially offset by higher expenditure in legal and professional services fees of $2.9 million, mainly associated with patent litigation claims. The decrease in the personnel-related expenditures was mainly due to lower stock-based compensation and lower performance-based compensation expenses.

We expect our general and administrative expenses as a percentage of net revenue in fiscal 2023 to be relatively similar to fiscal 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 Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. Future general and administrative expense increases or decreases in 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 Impairment Charge

The following table presents goodwill impairment charge for the periods indicated:

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** Percentage change not meaningful.

The increase in goodwill impairment charge for fiscal 2022, compared to the prior year, 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 3, Balance Sheet Components, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

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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 the fair value of contingent consideration. The following table presents Other operating expenses (income), net for the periods indicated:

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** Percentage change not meaningful.

2022 vs 2021

We incurred restructuring and other charges of $4.6 million associated with the reorganization of our Connected Home segment in fiscal 2022 to better align the cost structure of the business with projected revenue levels. In fiscal 2021, we incurred $0.7 million of other operating expenses, mainly comprising of $3.3 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. For a detailed discussion of restructuring and other charges, refer to Note 13. Restructuring and Other Charges, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

Other Income (Expenses), Net

Other income (expenses), net consists of interest income, which represents amounts earned and incurred on our cash, cash equivalents and short-term investments, and other income and expenses, which primarily represents gains and losses on transactions denominated in foreign currencies, gains and losses on investments, and other non-operating income and expenses. The following table presents other income (expenses), net for the periods indicated:

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** Percentage change not meaningful.

2022 vs 2021

The change in other income (expenses), net for fiscal 2022 was primarily due to higher interest earned on our short-term investment pertaining to U.S. treasuries. For details on the changes in Other income (expenses), net, refer to Note 6, Other Income (Expenses), Net, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

Provision for Income Taxes

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** Percentage change not meaningful.

2022 vs 2021

The benefit from income taxes in fiscal 2022 resulted primarily from the current year loss from operations as well as benefit from certain changes in estimate upon filing the 2021 U.S. federal tax return and the recognition of uncertain tax benefits related to the closing Internal Revenue Service (“IRS") tax audits for the 2018 and 2019 tax years. These benefits were partially offset by the impact of the write-off of non-deductible goodwill during the year. The tax expense in 2021 resulted primarily from U.S. Base Erosion and Anti-abuse Tax (BEAT) estimated for 2021, and the income from operations in 2021.

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During fiscal 2022, we evaluated the impact of the Global Intangible Low-Tax Income (“GILTI”), Foreign Derived Intangible Income (“FDII”) and BEAT provisions. These provisions resulted in a net reduction of tax of $0.6 million.

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. In December, 2022, the IRS concluded its examination of our 2018 and 2019 tax years with no change to our tax liability for those years. We are currently under examination in various other 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 to income before income taxes can be found in Note 11, Segment Information, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

Connected Home Segment

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** Percentage change not meaningful.

2022 vs 2021

Connected Home net revenue decreased in fiscal 2022, compared to the prior year, mainly due to a contraction of the U.S. consumer WiFi market, and to a lesser extent, the impact of retailers reducing their inventory levels. The size of the U.S. consumer WiFi market declined as compared to 2021 when consumers were continuing to purchase WiFi networking products at elevated levels as pandemic driven work and schooling from home mandates persisted. The decline in net revenue was experienced across all product categories. However, we continued to experience net revenue growth from our super-premium WiFi 6 mesh systems, and 5G mobile hotspots in both the retail and service provider channels, as well as revenue growth from our services. Geographically, we experienced decreases across all three regions in fiscal 2022, compared to the prior year.

Connected Home experienced contribution losses in fiscal 2022, mainly attributable to lower net revenue and gross margin achievement, contributing to a lack of operating expense leverage. The lower gross margin compared to the prior year, was primarily driven by increased component and transportation costs. In 2022, we took action to adjust the cost structure of the Connected Home business to align with projected revenue levels. We expect the Connected Home contribution margin to return to positive contribution income in 2023, as we build on strong underlying demand for the higher-margin premium products and begin to realize the impact of improved transportation costs.

SMB Segment

2022 vs 2021

SMB net revenue increased in fiscal 2022, compared to the prior year, primarily due to record demand for the Pro AV product line of managed switches, despite supply chain challenges throughout the year. Geographically,

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despite negative foreign exchange impact, SMB net revenue increased across all three regions in fiscal 2022, compared to the prior year.

SMB contribution income increased in fiscal 2022, compared to the prior year, primarily attributable to net revenue growth.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, short-term investments and cash generated from operations. As of December 31, 2022, we had cash, cash equivalents and short-term investment of $227.4 million, a decrease of $44.1 million from December 31, 2021.

As of December 31, 2022, approximately 40% of our cash and cash equivalents and short-term investments were outside of the U.S. The cash and cash equivalents and short-term investments balances outside of the U.S. are subject to fluctuation based on the settlement of intercompany balances. As we repatriate these funds in accordance with our designation of funds not permanently reinvested outside of 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:

2022 vs 2021

Operating activities

Net cash used in operating activities increased by $9.2 million for fiscal 2022, compared to the prior year, primarily due to lower net revenue.

Our accounts payable (excluding payables related to property and equipment) increased from $73.2 million as of December 31, 2021 to $85.3 million as of December 31, 2022 primarily due to timing of inventory receipts and supplier payments. Inventory decreased from $315.7 million as of December 31, 2021 to $299.6 million as of December 31, 2022 as we work to realign inventory carrying levels with projected demands.

Investing activities

Net cash used in investing activities increased by $69.5 million for fiscal 2022, compared to the prior year, mainly driven by net purchases of short-term investments, partially offset by lower payments for purchases of property and equipment.

Financing activities

Net cash used in financing activities decreased by $44.1 million in fiscal 2022 as compared to the prior year, primarily due to lower purchases of our common stock and lower payments relating to restricted stock unit tax withholdings, partially offset by lower proceeds from exercise of stock options.

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, including contractual and other obligations, capital expenditures, and commitments for business operations, for the next twelve months and the foreseeable future. However, we may require or desire additional funds

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to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology.

Stock Repurchase Program

From time to time, our Board of Directors has authorized programs under which we may repurchase shares of our common stock. Under the authorizations, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of our common stock. As of December 31, 2022, approximately 2.5 million shares remained authorized for repurchase under the repurchase program. During the years ended December 31, 2022 and 2021, we repurchased and retired, and reported based on trade date, approximately 1.0 million and 2.1 million shares of common stock at a cost of $24.4 million and $75.0 million, respectively, under the repurchase authorizations. We also repurchased and retired, reported based on trade date, approximately 202,000 and 204,000 shares of common stock at a cost of $4.8 million and $7.7 million, 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 Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. We remain confident in our ability to generate meaningful levels of cash, and plan to continue to opportunistically repurchase shares in the future. On August 16, 2022, the “Inflation Reduction Act” (“IRA”) was signed into law, which includes a 1% exercise tax on stock repurchases. We do not expect the 1% exercise tax on stock repurchases under IRA will have a material impact to our financial statements for the tax years after December 31, 2022.

Contractual and Other Obligations

The following table summarizes our non-cancelable short-term and long-term contractual and other obligations as of December 31, 2022:

(1) Represent non-cancellable inventory-related purchase agreements with suppliers. A further $580.7 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand expectations for the forthcoming 18 months. These purchases orders may be cancelled by either party, however we may incur expenses for materials and components, such as chipsets purchased by the supplier to fulfill the purchase order, in the event of cancellation. Expenses incurred in respect of cancelled purchase orders has historically not been significant relative to the original order value. Our commitments for property and equipment purchases as of December 31, 2022 was not material.

(2) Represent undiscounted non-cancellable remaining lease payments. For a detailed discussion on our operating leases, refer to Note 14, Leases, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. The amounts presented are consistent with contractual terms and are not expected to differ significantly, unless a substantial change in our headcount needs requires us to exit an office facility early or expand our occupied space.

(3) Represent non-cancellable purchase commitments pertaining to non-trade activities.

(4) Represent estimated liability related to a one-time transaction tax that resulted from the passage of the Tax Act.

(5) Included on our consolidated balance sheets.

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(6) For a detailed discussion, refer to Note 8, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

In addition, as of December 31, 2022, we had $8.2 million of total gross unrecognized tax benefits and related interest and penalties. The timing of any payments that could result from these unrecognized tax benefits will depend upon a number of factors. The unrecognized tax benefits have been excluded from the contractual obligations table because reasonable estimates cannot be made of whether, or when, any cash payments for such items might occur. The possible reduction in liabilities for uncertain tax positions in multiple jurisdictions that may impact the statements of operations in the next 12 months is approximately $0.4 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities.

Our contractual and other obligations are expected to be funded by our existing cash, cash equivalents and short-term investments, together with cash generated from operations.

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