Segment Information

9 Months Ended

Oct. 01, 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 current segments which are organized by product groups. Beginning fiscal 2017, the Company operates and reports in three segments: Arlo, Connected Home, and Small and Medium Business ("SMB"):

•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 to small and medium-sized businesses at an affordable price.

The Company believes that this 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						Nine Months Ended
	October 1, 2017			October 2, 2016*			October 1, 2017			October 2, 2016*
	(In thousands, except percentage data)
Net revenue:
Arlo	$	110,460		$	48,642		$	249,904		$	111,492
Connected Home	183,099			215,116			563,365			629,880
SMB	61,924			74,700			196,594			218,997
Total net revenue	$	355,483		$	338,458		$	1,009,863		$	960,369
Contribution income (loss):
Arlo	$	15,230		$	(771	)	$	18,723		$	(4,212	)
Arlo contribution margin	13.8		%	(1.6		)%	7.5		%	(3.8		)%
Connected Home	$	24,546		$	36,330		$	81,382		$	111,587
Connected Home contribution margin	13.4		%	16.9		%	14.4		%	17.7		%
SMB	$	12,583		$	20,747		$	47,839		$	54,988
SMB contribution margin	20.3		%	27.8		%	24.3		%	25.1		%
Total segment contribution income	$	52,359		$	56,306		$	147,944		$	162,363
Corporate and unallocated costs	(18,740		)	(17,532		)	(53,974		)	(50,666		)
Amortization of intangibles (1)	(2,608		)	(4,165		)	(10,136		)	(12,496		)
Stock-based compensation expense	(5,583		)	(4,870		)	(16,412		)	(14,300		)
Restructuring and other charges	(19		)	130			(78		)	(3,859		)
Litigation reserves, net	(15		)	(13		)	(68		)	(58		)
Interest income	501			291			1,388			804
Other income (expense), net	666			116			1,384			(582		)
Income before income taxes	$	26,561		$	30,263		$	70,048		$	81,206

_________________________

⁽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				Nine Months Ended
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016
	(In thousands)
Arlo	$	5,794	$	3,513	$	15,743	$	14,730
Connected Home	44,631		66,042		146,309		204,250
SMB	1,114		1,295		2,492		3,489
Total service provider net revenue	$	51,539	$	70,850	$	164,544	$	222,469

The Company conducts business across three geographic regions: Americas, Europe, Middle-East and Africa (“EMEA”) and Asia Pacific ("APAC"). Net revenue consists of gross product shipments, less allowances for estimated sales returns for stock rotation and warranty, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of net revenue per the authoritative guidance for revenue recognition, and net changes in deferred revenue. 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				Nine Months Ended
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016
	(In thousands)
United States (U.S.)	$	235,584	$	217,631	$	663,096	$	610,505
Americas (excluding U.S.)	8,804		7,604		19,870		19,488
EMEA	62,161		60,034		175,810		176,192
APAC	48,934		53,189		151,087		154,184
Total net revenue	$	355,483	$	338,458	$	1,009,863	$	960,369

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
	October 1, 2017		December 31, 2016
	(In thousands)
United States	$	9,278	$	9,542
Canada	1,832		2,745
EMEA	172		210
China	6,390		5,219
APAC (excluding China)	2,556		1,757
Total property and equipment, net	$	20,228	$	19,473