Adobe 1998 Annual Report Download - page 17

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Application products revenue increased $125.8 million, or 21%, in fiscal 1997 compared to fiscal 1996,
due to major product releases and upgrades, which included Adobe PageMaker, Adobe Illustrator, and
Adobe FrameMaker. In addition, increased demand for Adobe Photoshop, the Adobe Acrobat family of
products, and Adobe PhotoDeluxe contributed to the increase.
Overall, revenue from the Company’s application products on the Windows platform increased by
21% in fiscal 1998 over fiscal 1997, while application products revenue from the Macintosh platform
decreased 10% during the same period. In fiscal 1998, the Windows and Macintosh platforms accounted
for 58% and 42%, respectively, of application products revenue, excluding platform-independent and
UNIX products, compared to 51% and 49%, respectively, in fiscal 1997. The Company expects this trend
toward the Windows platform to continue for the foreseeable future.
The Company remains cautious about the economic conditions in Japan as well as the fluctuating
economic conditions in other Asian and Latin American countries.
Direct costs:
1998 Change 1997 Change 1996
Direct costs ................................... $111.4 (12)% $126.3 (11)% $141.1
Percentage of total revenue ....................... 12.4% 13.8% 17.9%
Direct costs include product packaging, third party royalties, amortization of localization costs and
acquired technologies, and reserves for excess and obsolete inventory.
Gross margin (expressed as a percentage of revenue), in general, is affected by the mix of licensing
revenue versus application products revenue, as well as the product mix within application products.
Direct costs decreased $14.9 million, or 12%, in fiscal 1998 compared to fiscal 1997, due to lower
packaging costs and the Company’s full transition from distribution of its products on disk to CD-ROM
media. Direct costs also decreased in fiscal 1998 and fiscal 1997 compared to fiscal 1996 as certain acquired
technologies became fully amortized in fiscal 1997 and the Company incurred lower product localization
costs.
The Company anticipates that direct costs will increase in fiscal 1999 due to increased costs necessary
to support higher anticipated application products revenue. However, on a percentage of revenue basis,
direct costs are expected to be the same or slightly lower than fiscal 1998.
Operating expenses:
1998 Change 1997 Change 1996
Research and development ........................ $207.3 21% $170.9 10% $155.4
Percentage of total revenue ....................... 23.2% 18.7% 19.8%
Research and development expenses consist principally of salaries and benefits for software develop-
ers, contracted development efforts, related facilities costs, and expenses associated with computer
equipment used in software development.
Research and development expenses increased in absolute dollars over the past three years due to the
expansion of the Company’s engineering staff and related costs required to support its continued emphasis
on developing new products and enhancing existing products. The increase also reflects the Company’s
increased investments in new technologies, new product development, and the infrastructure to support
such activities. The increase in research and development expenses in fiscal 1998 was partially offset by
certain cost reduction initiatives related to the restructuring program that was implemented during the
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