8x8 1999 Annual Report Download - page 33

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of product revenues for the ViaTV and Video Monitoring products is substantially greater as a percentage of related revenues as compared to
the Company's multimedia semiconductor products. The cost of product revenues in fiscal year 1998 included costs associated with increasing
shipments of its ViaTV videophone products. In fiscal 1997, cost of product revenues included a $4.0 million charge associated with the write-
off of inventories related to the Company's discontinuation of the MPEG product line in September 1996. As a result of this write-off, costs for
the period increased and were equal to 79% of product revenue.
Cost of license, and other revenues was $100,000 and $1.1 million for the fiscal years ended March 31, 1999 and 1998, respectively. In fiscal
1998 cost of license and other revenues consisted of personnel and other costs incurred to perform certain development work under terms of a
nonrecurring engineering contract between the Company and one of its customers. There were no costs associated with license and other
revenues in the fiscal year ended March 31, 1997.
Gross Profit
Total gross profit was $7.4 million, $30.9 million and $7.1 million in fiscal 1999, 1998 and 1997, respectively. Gross profit from product
from license and other revenues, all of which were nonrecurring was $5.4 million, $13.4 million and $3.9 million in fiscal 1999, 1998 and
1997, respectively.
The decrease in gross profit and margin from product revenues in fiscal 1999 compared to fiscal 1998 was due to the decrease in multimedia
communication semiconductor revenues and to the $5.7 million write off of inventories due to the Company's decision to cease production and
distribution of its ViaTV videophone product line. The increase in gross profit and margin from product revenues in fiscal 1998 compared to
fiscal 1997 was due to the increase in multimedia communication semiconductor revenues in fiscal 1998 and to lower revenues and charges
associated with the write-off of inventories related to the Company's exit from the MPEG semiconductor market in fiscal 1997.
The Company's gross margin is affected by a number of factors including, product mix, the recognition of license and other revenues for which
there may be no or little corresponding cost of revenues, product pricing, the allocation between international and domestic sales, the
percentage of direct sales and sales to resellers, and manufacturing and component costs. The markets for the Company's products are
characterized by falling average selling prices. The Company expects that, as a result of competitive pressures and other factors, gross profit as
a percentage of revenue for the Company's multimedia communication semiconductor products will likely decrease for the foreseeable future.*
Because the market is emerging, the average selling price for broadband telephony semiconductors is uncertain. The Company may not be able
to attain ASPs similar to those of its historical videoconferencing semiconductors. If ASPs are lower, gross margins will be lower than the
Company's historical gross margins, unless costs for Broadband Telephony semiconductors are also proportionately lower. In addition, the
gross margins for the Company's Video Monitoring products are, and will continue to be, substantially lower than the gross margins for its
semiconductors. In the likely event that the Company encounters significant price competition in the markets for its products, the Company
could be at a significant disadvantage compared to its competitors, many of which have substantially greater resources, and therefore may be
better able to withstand an extended period of downward pricing pressure.
* 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 15, "Competition" commencing on
page 13 and "Factors That May Affect Future Results" commencing on page 17 for a discussion of certain factors that could affect future
performance.
29
YEAR ENDED MARCH 31,
---------------------------
1999 1998 1997
----- ----- -----
(IN MILLIONS)
Gross profit............................................. $ 7.4 $30.9 $ 7.1
As a percentage of total revenues........................ 23% 62% 37%