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 fiscal quarter of 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 with fiscal year 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 businesses 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 sales, research and development and sales and marketing costs. Contribution income is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated indirect costs include corporate costs, such as corporate research and development, corporate marketing expense and general and administrative costs, amortization of intangibles, stock-based compensation expense, restructuring and other charges, losses on inventory commitments due to restructuring, litigation reserves, net, interest income and other income (expense), net. The CODM does not evaluate operating segments using discrete asset information.

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



	Year Ended December 31,
	2017			2016 *			2015 *
	(In thousands, except percentage data)
Net revenue:
Arlo	$	378,413		$	188,469		$	91,636
Connected Home	762,069			844,818			937,215
SMB	266,438			295,011			271,844
Total net revenue	$	1,406,920		$	1,328,298		$	1,300,695
Contribution income (loss):
Arlo	$	29,591		$	(5,218	)	$	(126	)
Arlo contribution margin	7.8		%	(2.8		)%	(0.1		)%
Connected Home	101,993			152,560			121,745
Connected Home contribution margin	13.4		%	18.1		%	13.0		%
SMB	65,392			75,461			56,156
SMB contribution margin	24.5		%	25.6		%	20.7		%
Total segment contribution income	196,976			222,803			177,775
Corporate and unallocated costs	(75,382		)	(69,140		)	(54,501		)
Amortization of intangibles ⁽¹⁾	(12,597		)	(16,733		)	(16,969		)
Stock-based compensation expense	(22,147		)	(18,949		)	(16,825		)
Restructuring and other charges	(97		)	(3,881		)	(6,398		)
Losses on inventory commitments due to restructuring	—			—			(407		)
Litigation reserves, net	(176		)	(73		)	2,682
Interest income	2,113			1,163			295
Other income (expense), net	2,024			(121		)	(88		)
Income before income taxes	$	90,714		$	115,069		$	85,564

_________________________


⁽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:



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
Arlo	$	20,795	$	19,758	$	18,585
Connected Home	190,186		249,980		395,900
SMB	3,268		4,175		6,997
Total service provider net revenue	$	214,249	$	273,913	$	421,482

Operations by Geographic Area

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 and service revenue, 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 years ended December 31, 2017, 2016 and 2015:



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
United States (U.S.)	$	927,952	$	855,796	$	779,361
Americas (excluding U.S.)	30,112		27,852		18,385
EMEA	253,885		245,405		321,714
APAC	194,971		199,245		181,235
Total net revenue	$	1,406,920	$	1,328,298	$	1,300,695

Long-lived assets by Geographic Area

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
	December 31, 2017		December 31, 2016		December 31, 2015
	(In thousands)
United States	$	9,216	$	9,542	$	9,832
Canada	1,807		2,745		3,586
EMEA	141		210		468
China	6,803		5,219		6,562
APAC (excluding China)	2,693		1,757		1,936
Total property and equipment, net	$	20,660	$	19,473	$	22,384

Significant Customers

Two customers, primarily within the Arlo and Connected Home segments, accounted for 19% and 14% of net revenue in the year ended December 31, 2017, respectively. Two customers, primarily within the Arlo and Connected Home segments, accounted for 17% and 12% of net revenue in the year ended December 31, 2016, respectively. One customer, primarily within the Arlo and Connected Home segments, accounted for 15% of net revenue in the year ended December 31, 2015.