Segment Information

3 Months Ended

Apr. 02, 2017

Segment Reporting [Abstract]

Segment Information

Segment Information

Operating segments are components of an enterprise about which separate financial information is available and is regularly evaluated by management, namely the Chief Operating Decision Maker (“CODM”) of an organization, in order to determine operating and resource allocation decisions. By this definition, the Company has identified its CEO as the CODM.

In the first quarter of fiscal 2017, the Company's CODM requested changes to the information that he regularly reviews for purposes of allocating resources and assessing performance. The Company reorganized its operating segment structure, resulting in a change to its reportable segments. The former Service Provider segment was integrated into the new segments, with the new segments organized by product groups. Beginning fiscal 2017, the Company operates and reports in three new segments: Arlo, Connected Home, and Small and Medium Business ("SMB") segments:

•Arlo: Focused on intelligent internet-connected products for consumers and business that provide security and safety;

• Connected Home: Focused on consumers and consists of high-performance, dependable and easy-to-use LTE and WiFi internet networking solutions; and

• SMB: Focused on small and medium-sized businesses and consists of business networking, storage and security solutions that bring enterprise-class functionality down to small and medium-sized businesses at an affordable price.

The Company believes that this new structure reflects its current operational and financial management, and provides the best structure for the Company to focus on growth opportunities while maintaining financial discipline. Each segment contains leadership focused on the product development efforts, both from a product marketing and engineering standpoint, to service the unique needs of their customers.

The results of the reportable segments are derived directly from the Company’s management reporting system. The results are based on the Company’s method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including contribution income. Segment contribution income includes all product line segment revenues less the related cost of revenue, research and development and sales and marketing expenses. Contribution income is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. The CODM does not evaluate operating segments using discrete asset information. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated indirect costs include corporate expenses, such as corporate research and development, corporate marketing expense and general and administrative expense, amortization of intangibles, stock-based compensation expense, restructuring and other charges, litigation reserves, net, interest income and other income (expense), net.

Financial information for each reportable segment and a reconciliation of segment contribution income to income before income taxes is as follows:

	Three Months Ended
	April 2, 2017			April 3, 2016*
	(In thousands, except percentage data)
Net revenue:
Arlo	$	60,712		$	24,265
Connected Home	194,361			216,110
SMB	68,584			69,881
Total net revenue	$	323,657		$	310,256
Contribution income:
Arlo	$	321		$	(3,830	)
Arlo contribution margin	0.5		%	(15.8		)%
Connected Home	$	31,712		$	42,029
Connected Home contribution margin	16.3		%	19.4		%
SMB	$	18,504		$	15,395
SMB contribution margin	27.0		%	22.0		%
Total segment contribution income	$	50,537		$	53,594
Corporate and unallocated costs	(18,201		)	(16,716		)
Amortization of intangibles (1)	(4,382		)	(4,165		)
Stock-based compensation expense	(5,128		)	(4,411		)
Restructuring and other charges	(37		)	(2,678		)
Litigation reserves, net	—			(10		)
Interest income	405			234
Other income (expense), net	335			(366		)
Income before income taxes	$	23,529		$	25,482

_________________________

⁽¹⁾  Amount excludes amortization expense related to patents within purchased intangibles in cost of revenue.

* Prior year financial information for each reportable segment has been recast to conform to the current reportable segment structure effective on January 1, 2017.

The following table shows net revenue from service provider customers within each of the reportable segments for the periods indicated:

	Three Months Ended
	April 2, 2017		April 3, 2016
	(In thousands)
Arlo	$	1,977	$	5,981
Connected Home	53,193		76,852
SMB	790		1,448
Total service provider net revenue	$	55,960	$	84,281

The Company conducts business across three geographic regions: Americas, Europe, Middle-East and Africa (“EMEA”) and Asia Pacific ("APAC"). Net revenue by geography comprises gross revenue less such items as end-user customer rebates and other sales incentives deemed to be a reduction of net revenue per the authoritative guidance for revenue recognition, sales returns and price protection. For reporting purposes revenue is attributed to each geographic region based on the location of the customer. The following table shows net revenue by geography for the periods indicated:

	Three Months Ended
	April 2, 2017		April 3, 2016
	(In thousands)
United States (U.S.)	$	206,125	$	189,366
Americas (excluding U.S.)	5,504		4,484
EMEA	58,445		64,505
Australia	33,481		31,134
APAC (excluding Australia)	20,102		20,767
Total net revenue	$	323,657	$	310,256

Long-lived assets include purchased intangibles, goodwill and property and equipment. The Company's property and equipment are located in the following geographic locations:

	As of
	April 2, 2017		December 31, 2016
	(In thousands)
United States	$	8,950	$	9,542
Canada	2,440		2,745
EMEA	192		210
China	6,199		5,219
APAC (excluding China)	1,567		1,757
Total property and equipment, net	$	19,348	$	19,473