Adobe 2001 Annual Report Download - page 26

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Direct Costs
2001 Change 2000 Change 1999
Direct costs ........................ $81.5 (7)% $87.3 (8)% $94.5
Percentage of total revenue ............ 6.6% 6.9% 9.3%
Direct costs include product packaging, third-party royalties, excess and obsolete inventory,
amortization related to localization costs and acquired technologies, hosted server costs, and the costs
associated with the manufacturing of our products.
Direct costs decreased in absolute dollars and as a percentage of revenue in fiscal 2001 compared to
fiscal 2000, primarily due to lower third-party royalties, mainly associated with our PostScript and Type
products revenue. In addition, direct costs also decreased in fiscal 2001 compared to fiscal 2000 due to
lower material costs. The decrease in direct costs in fiscal 2001 compared to fiscal 2000 was partially offset
by an increase in hosted server costs, due to the launch of Adobe Studio in the fourth quarter of fiscal
2001. Direct costs also decreased in absolute dollars and as a percentage of revenue in fiscal 2000
compared to fiscal 1999, primarily due to lower localization and royalty costs, as well as a reduction in
material costs as a result of our ongoing cost improvement program.
For fiscal 2002, we anticipate that gross margin will be approximately 92% of revenue after the
proposed acquisition of Accelio Corporation (‘‘Accelio’’).
Operating Expenses
Research and Development
2001 Change 2000 Change 1999
Research and development .......... $224.1 (7)% $240.2 22% $197.5
Percentage of total revenue .......... 18.2% 19.0% 19.4%
Research and development expenses consist principally of salary and benefit expenses for software
developers, contracted development efforts, related facilities costs, and expenses associated with computer
equipment used in software development.
Research and development expenses decreased $16.1 million, or 7%, in fiscal 2001 compared to fiscal
2000, primarily due to decreased incentive compensation expenses and lower company bonuses. In
addition, research and development expenses also decreased due to lower contractor and professional fees
as less development work was performed through outside sources. These decreases were partially offset by
increased salary and benefit expenses related to headcount growth to support product development efforts.
Research and development expenses increased $42.7 million, or 22%, in fiscal 2000 compared to fiscal
1999, primarily due to higher incentive compensation expenses associated with the improvement in our
financial performance in fiscal 2000 over fiscal 1999 and higher salary and benefit expenses as a result of
headcount growth.
We believe that investments in research and development, including the recruiting and hiring of
software developers, are critical to remain competitive in the marketplace and are directly related to
continued timely development of new and enhanced products. We will continue to focus on long-term
opportunities available in the new Network Publishing economy and make significant investments in the
development of our application software products, including those targeted for the growing digital imaging
and digital video franchises. We expect research and development expenses to increase in absolute dollars
in fiscal 2002. As communicated on December 13, 2001, we are targeting research and development
expenses in the first quarter of fiscal 2002 to be 20-21% of revenue. For fiscal year 2002, we are targeting
such expenditures also to be 20-21% of revenue.
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