Revenue Recognition

Adoption of ASC 606

On January 1, 2018, the Company adopted ASC 606 and applied this guidance to those contracts which were not completed at the date of adoption using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods (ASC 605). The adoption did not have a significant impact to the nature and timing of the Company's revenues, results of operations, cash flows and statement of financial position.

The majority of sales revenue continues to be recognized when control of the product transfers to a customer upon shipment or delivery. The primary impact of adopting ASC 606 relates to the establishment of liability estimates for channel rebates and discounts upon revenue recognition on the basis of customary business practice. Under ASC 606, the Company is required to estimate for rebates and discounts ahead of commitment date if customary business practice creates an implied expectation that such activities will occur in the future. The Company utilizes channel rebates and discounts to stimulate end user demand. Consequently, this change in guidance results in an adjustment to the statement of financial position to accelerate the recording of a liability for yet to be committed channel marketing rebates and discounts upon adoption. Further, under ASC 606, deferred revenue balances are to be booked at an amount that reflects only the amounts expected to be received for future obligations. As such, an adjustment was made to allocate variable consideration to deferred revenue. Additionally, the balance sheet presentation of certain reserve balances previously shown net within accounts receivable are now presented as refund liabilities within current liabilities. Deferrals for undelivered shipments with destination shipping terms are now removed from receivables and deferred revenue.

The following table summarizes the impacts of adopting ASC 606 on the Company’s consolidated balance sheets for the fiscal year beginning January 1, 2018 as an adjustment to the opening balances:



	As of		Adjustments			As of
	December 31, 2017		Adjustments			January 1, 2018
	(In thousands)
Assets:
Accounts receivable, net	$	255,118	$	5,286		$	260,404
Inventories	$	162,942	$	(1,991	)	$	160,951
Current assets of discontinued operations	$	243,125	$	450		$	243,575
Total current assets	$	1,015,664	$	3,745		$	1,019,409
Other non-current assets	$	49,471	$	2,904		$	52,375
Non-current assets of discontinued operations	$	41,126	$	1,440		$	42,566
Total assets	$	1,208,564	$	8,089		$	1,216,653
Liabilities:
Accounts payable	$	91,205	$	(108	)	$	91,097
Other accrued liabilities	$	149,821	$	32,110		$	181,931
Deferred revenue	$	21,212	$	(15,855	)	$	5,357
Income taxes payable	$	7,015	$	55		$	7,070
Current liabilities of discontinued operations	$	130,663	$	4,666		$	135,329
Total current liabilities	$	424,436	$	20,868		$	445,304
Other non-current liabilities	$	8,766	$	(35	)	$	8,731
Non-current liabilities of discontinued operations	$	13,333	$	(241	)	$	13,092
Total liabilities	$	478,079	$	20,592		$	498,671
Stockholders’ equity:
Retained earnings	$	128,168	$	(12,503	)	$	115,665

The following table summarizes the impacts of adopting ASC 606 on the Company’s consolidated balance sheets as of December 31, 2018:



	As of December 31, 2018
	As reported			Adjustments			Balance without adoption of ASC 606
	(In thousands)
Assets
Accounts receivable, net	$	303,667		$	(5,776	)	$	297,891
Inventories	$	243,871		$	2,419		$	246,290
Other non-current assets	$	67,433		$	(2,811	)	$	64,622
Liabilities:
Accounts payable	$	139,748		$	67		$	139,815
Other accrued liabilities	$	199,472		$	(32,803	)	$	166,669
Deferred revenue	$	11,086		$	13,795		$	24,881
Income taxes payable	$	2,020		$	4		$	2,024
Other non-current liabilities	$	12,232		$	36		$	12,268
Stockholders’ equity:
Retained losses	$	(166,050	)	$	12,733		$	(153,317	)

The following tables summarize the impacts of adopting ASC 606 on the Company’s consolidated statement of operations for the fiscal year ended December 31, 2018:



	Year Ended December 31, 2018
	As reported			Adjustments			Balance without adoption of ASC 606
	(In thousands)
Net revenue	$	1,058,816		$	2,247		$	1,061,063
Cost of revenue	$	717,118		$	(252	)	$	716,866
Gross profit	$	341,698		$	2,499		$	344,197
Provision for income taxes	$	25,878		$	(2,536	)	$	23,342
Net income from continuing operations	$	17,326		$	5,035		$	22,361
Net loss from discontinued operations, net of tax	$	(35,655	)	$	5,721		$	(29,934	)
Net loss	$	(18,329	)	$	10,756		$	(7,573	)
Net loss attributable to non-controlling interest in discontinued operations	(9,167		)	598			(8,569		)
Net income (loss) attributable to NETGEAR, Inc.	$	(9,162	)	$	10,158		$	996

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of December 31, 2018:



		1 year		2 years		Greater than 2 years		Total
	(In thousands)
Performance obligations		$	53,945	$	923	$	904	$	55,772

Contract Costs

Costs to fulfill a contract are capitalized when they relate directly to an existing contract or specific anticipated contract, generate or enhance resources that will be used to fulfill performance obligations and are recoverable. These costs include direct cost incurred at inception of a contract which enables the fulfillment of the performance obligation and totaled $7.4 million as of December 31, 2018. There was no impairment of capitalized contract costs in the fiscal year of 2018.

Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in Sales and marketing and General and administrative expenses. If the incremental direct costs of obtaining a contract, which consist of sales commissions, relate to a service recognized over a period longer than one year, costs are deferred and amortized in line with the related services over the period of benefit. Deferred commissions are classified as non-current based on the original amortization period of over one year. As of December 31, 2018 deferred commissions were not significant.

Contract Balances

The Company records accounts receivable when it has an unconditional right to consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Contract liabilities are mainly classified as Deferred revenue on the consolidated balance sheets.

Payment terms vary by customer. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer.

The following table reflects the changes in contract balances for the fiscal year ended December 31, 2018:



	Balance Sheet Location	December 31, 2018		January 1, 2018 ^(*)		$ change		% change
		(In thousands)
Accounts receivable, net	Accounts receivable, net	$	303,667	$	260,404	$	43,263	16.6	%
Contract liabilities - current	Deferred revenue	$	11,086	5,357		$	5,729	106.9	%
Contract liabilities - non-current	Other non-current liabilities	$	779	$	728	$	51	7.0	%

* Includes the adjustments made upon ASC 606 adoption using the modified retrospective method.

During the fiscal year ended December 31, 2018, contract liabilities increased primarily due to consideration being received in advance of performance.

During the fiscal year ended December 31, 2018, $14.8 million of revenue was deferred due to unsatisfied performance obligations. During the fiscal year 2018, $9.0 million of revenue was recognized for the satisfaction of performance obligations over time. $4.4 million of this recognized revenue was included in the contract liability balance at the beginning of the period.

There were no significant changes in estimates during the period that would affect the contract balances.

Disaggregation of Revenue

In the following tables, net revenue is disaggregated by geographic region and sales channel. The Company conducts business across three geographic regions: Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific ("APAC"). The tables also include reconciliations of the disaggregated revenue by reportable segment. Sales and usage-based taxes are excluded from net revenue.



	Year Ended December 31,
	2018						2017^(*)						2016^(*)
	Connected Home		SMB		Total		Connected Home		SMB		Total		Connected Home		SMB		Total

Geographic regions:
Americas	$	576,476	$	124,217	$	700,693	$	547,314	$	117,775	$	665,089	$	595,606	$	139,374	$	734,980
EMEA	97,979		109,620		207,599		93,438		103,636		197,074		110,941		106,613		217,554
APAC	96,605		53,919		150,524		127,509		49,497		177,006		140,382		50,529		190,911
Total net revenue	$	771,060	$	287,756	$	1,058,816	$	768,261	$	270,908	$	1,039,169	$	846,929	$	296,516	$	1,143,445
Sales channels:
Service provider	$	156,671	$	3,624	$	160,295	$	190,186	$	3,268	$	193,454	$	249,980	$	4,175	$	254,155
Non-service provider	614,389		284,132		898,521		578,075		267,640		845,715		596,949		292,341		889,290
Total net revenue	$	771,060	$	287,756	$	1,058,816	$	768,261	$	270,908	$	1,039,169	$	846,929	$	296,516	$	1,143,445

_________________________

* Prior period amounts have not been adjusted to conform with ASC 606 as the Company adopted ASC 606 under the modified retrospective method.