8x8 1998 Annual Report Download - page 27

The increase in gross profit and margin from product revenues in fiscal 1998 was due primarily to the increase in video communication
semiconductor revenues. In fiscal 1997, the significant decline in gross profit and margin relates primarily to charges associated with the write-
off of inventories related to the Company's exit from the MPEG market. In fiscal 1997, the Company sold its remaining MPEG inventory. The
gross profit from product revenues for fiscal 1996 was adversely impacted by negative margin from sales of MPEG products.
The markets for the Company's products are characterized by falling average selling prices, which could have a material adverse effect on the
Company's future business and operating results if the Company cannot achieve lower cost of sales.* The Company expects that, as a result of
competitive pressures and other factors, gross profit as a percentage of revenue for the Company's semiconductor products will likely decrease
for the foreseeable future.* Gross profit as a percent of revenue is substantially lower for the sales of ViaTV products than for sales of the
Company's semiconductors. If ViaTV product revenue continues to grow as a percentage of total product revenue, the Company expects that
gross profit as a percentage of total product revenue will decrease.* See "Factors That May Affect Future Results -- Fluctuations in Operating
Results."
Operating Expenses -- Research and Development
Research and development expenses consist primarily of personnel, system prototype design and fabrication, mask, prototype wafer and
equipment costs necessary for the Company to conduct its development efforts. Research and development costs, including software
development costs, are expensed as incurred. Research and development expenses were $12.3 million, $10.5 million and $7.7 million for fiscal
1998, 1997 and 1996, respectively. During fiscal 1998 and 1997, research and development expenses were concentrated on video
communication semiconductors and VideoCommunicators. Higher research and development expenses during fiscal 1998 were due to
increased headcount, increased engineering and prototype expenses associated with the Company's VideoCommunicator products, and mask
and prototype costs associated with the ongoing development of the Company's next generation video communication semiconductor product.
A significant portion of research and development expenses during fiscal 1996 was attributable to the development of products that were
subsequently discontinued, including an Intel compatible x86 microprocessor and graphics and MPEG semiconductors.
During fiscal 1998, the overall increase in research and development expenses was partially offset by the use of research and development
personnel to perform nonrecurring engineering services under a revenue generating contract. The costs associated with this contract are
included in the cost of license and other revenues. Although total research and development expenses increased from fiscal 1997 to fiscal 1998
as a result of the factors listed above, the non-
cash compensation expense recognized on certain stock option grants and charged to research and
development decreased to $416,000 in fiscal 1998 from $1.1 million in fiscal 1997.
The Company expects to continue to allocate substantial resources to research and development.* However, future research and development
costs may vary both in absolute dollars and as a percentage of total revenues.* See "Factors That May Affect Future Results -- Rapid
Technological Change; Dependence on New Product Introduction."
* This statement is a forward looking statement reflecting current expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing" commencing on page 10, "Competition" on page 13 and
"Factors That May Affect Future Results" commencing on page 14 for a discussion of certain factors that could affect future performance.
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YEAR ENDED MARCH 31,
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1998 1997 1996
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(IN MILLIONS)
Research and development............................. $12.3 $10.5 $7.7
As a percentage of total revenues.................... 25% 55% 27%