Netgear (NTGR), which offers networking and internet connected products for consumers, businesses, and service providers, inserted new language in its latest annual report that may portend future trouble. In determining how much and when to recognize contract revenue, Netgear must develop an estimate of the stand-alone selling price (SSP) for each distinct performance obligation.

In its 2019 10-K, Netgear details the factors included in its SSP estimate:

“Judgment is required to determine the SSP for each distinct performance obligation. We consider multiple factors, including, but not limited to, historical discounting trends for products and services, pricing practices in different geographies and through different sales channels, gross margin objectives, internal costs, competitor pricing strategies, and industry technology lifecycles.”

In it’s 2020 10-K, Netgear includes the above excerpt and adds language that suggests its process may soon change and impact revenue recognition:

“As our business offerings evolve over time, we may be required to modify our estimated standalone selling prices, and as a result the pattern and timing of our revenue could be affected.”

The footnotes provide a subtle but telling clue.

Revenue from Netgear’s subscription services— cyber security, parental controls, remote network management, advanced technical support and extended warranties— is recognized ratably when performance obligations are met. In last year’s annual report, Netgear provided the following detail:

“The subscription contracts are generally for 30 days or 12 months in length, billed in advance.”

But in this year’s annual report, Netgear includes two new details revealing wider ranging contract terms:

“Service contracts are generally for 30 days or 12 months in length, billed either monthly or annually and generally in advance.”

The changes may be foreshadowing lumpier revenue recognition. If the new language reflects actual changes in Netgear’s billing terms or timing, Netgear would likely have to estimate different SSPs based on whether it’s selling a service monthly, annually, or another contract term in between. The timing and pattern of revenue recognition may also vary from the past if, as the new language implies, not all contracts are billed in advance.