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 and operates and reports in three segments: Arlo, Connected Home, and SMB. The Arlo segment is a majority-owned, publicly traded subsidiary, Arlo Technologies, Inc. upon the completion of its IPO on August 7, 2018:


•	Arlo: Focused on combining an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle;


•	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. The leadership team of each segment is 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, separation expense, restructuring and other charges, 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:



	Three Months Ended						Nine Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
	(In thousands, except percentage data)
Net revenue:
Arlo	$	131,174		$	110,460		$	332,197		$	249,904
Connected Home	194,684			183,099			563,628			563,365
SMB	74,728			61,924			216,554			196,594
Total net revenue	$	400,586		$	355,483		$	1,112,379		$	1,009,863
Contribution income:
Arlo	$	8,495		$	15,230		$	12,813		$	18,723
Arlo contribution margin	6.5		%	13.8		%	3.9		%	7.5		%
Connected Home	$	31,283		$	24,546		$	87,143		$	81,382
Connected Home contribution margin	16.1		%	13.4		%	15.5		%	14.4		%
SMB	$	21,200		$	12,583		$	58,130		$	47,839
SMB contribution margin	28.4		%	20.3		%	26.8		%	24.3		%
Total segment contribution income	$	60,978		$	52,359		$	158,086		$	147,944
Corporate and unallocated costs	(32,454		)	(18,740		)	(82,003		)	(53,974		)
Amortization of intangibles ⁽¹⁾	(2,304		)	(2,608		)	(7,111		)	(10,136		)
Stock-based compensation expense	(9,554		)	(5,583		)	(26,674		)	(16,412		)
Separation expense	(7,054		)	—			(25,822		)	—
Restructuring and other charges	(1		)	(19		)	(1,368		)	(78		)
Litigation reserves, net	—			(15		)	(5		)	(68		)
Interest income	1,490			501			3,310			1,388
Other income (expense), net	829			666			638			1,384
Income before income taxes	$	11,930		$	26,561		$	19,051		$	70,048

_________________________


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

Operations by Geographic Region

The Company conducts business across three geographic regions: Americas, EMEA, and APAC. 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 net 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 on the location of the customer.

The following table shows net revenue by geography for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017
	(In thousands)
United States (U.S.)	$	280,639	$	235,584	$	762,619	$	663,096
Americas (excluding U.S.)	8,145		8,804		19,611		19,870
EMEA	64,917		62,161		200,227		175,810
APAC	46,885		48,934		129,922		151,087
Total net revenue	$	400,586	$	355,483	$	1,112,379	$	1,009,863

Long-lived assets by Geographic Region

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
	September 30, 2018		December 31, 2017
	(In thousands)
United States ("U.S.")	$	41,799	$	9,216
Americas (excluding U.S.)	4,189		1,807
EMEA	386		141
China	7,021		6,803
APAC (excluding China)	3,252		2,693
Total property and equipment, net	$	56,647	$	20,660