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13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The text of this document may include forward-looking statements. Actual results may differ materially from those
described herein, depending on such factors as are described herein, including under “Certain Factors That May Affect Future
Results.”
Avid develops and provides digital film, video and audio editing and special effects software and hardware technologies to
create media content for information and entertainment applications. Integrated with the Company’s digital storage and
networking solutions, Avid’s products are used worldwide in film studios; video production and post-production facilities;
network, independent and cable television stations; recording studios; advertising agencies; government and educational
institutions; corporate communications departments; and by individual home users.
Results of Operations
The following table sets forth certain items from the Company's consolidated statements of operations as a percentage of net
revenues for the periods indicated:
For the year ended December 31,
1997 1996 1995
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 47.0% 55.7% 48.9%
Gross profit 53.0% 44.3% 51.1%
Operating Expenses:
Research and development 15.6% 16.2% 13.2%
Marketing and selling 25.5% 29.6% 26.5%
General and administrative 5.5% 5.6% 4.4%
Nonrecurring costs 6.7% 1.4%
Total operating expenses 46.6% 58.1% 45.5%
Operating income (loss) 6.4% (13.8)% 5.6%
Other income and expense, net 1.7% 0.8% 0.3%
Income (loss) before income taxes 8.1% (13.0)% 5.9%
Provision for (benefit from) income taxes 2.5% (4.1)% 2.1%
Net income (loss) 5.6% (8.9)% 3.8%
Net Revenues
The Company’s net revenues have been derived mainly from the sales of disk-based digital, nonlinear media editing systems
and related peripherals, licensing of related software, and sales of software maintenance contracts. Net revenues increased by
$42.3 million (9.9%) to $471.3 million in the year ended December 31, 1997 from $429.0 million in 1996. Net revenues
for the year ended December 31, 1996 of $429.0 million increased by $22.3 million (5.5%) from $406.7 million in 1995.
The increase during 1997 in net revenues was primarily the result of growth in unit sales of MCXpress products for
Macintosh and NT platforms, storage systems, and digital audio products. The increase in net revenues from 1995 to 1996
was primarily the result of worldwide growth in unit sales of the Media Composer product line and of digital audio products.
During 1997, the Company began shipments of new versions of MCXpress and Avid Xpress, AudioVision 4.0, Pro Tools
24, AvidNews and Mediashare F/C. To date, product returns of all products have been immaterial.
During 1997, the Company continued to shift an increasing proportion of its sales through indirect channels such as
distributors and resellers. Net revenues derived through indirect channels were greater than 60% of net revenue for the year
ended December 31, 1997, compared to greater than 40% of net revenue for 1996.