Avid 2005 Annual Report Download - page 46

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32
product introductions, sales of aftermarket hardware products such as disk drives and currency exchange rate fluctuations, and the
timing and specific technology acquired through our acquisitions.
The following is a summary of our cost of revenues and gross margin percentages comparing the years ended December 31, 2005
and 2004:
Years Ended December 31, 2005 and 2004
(dollars in thousands)
% of Net % of Net Gross
Related Gross Related Gross Margin
2005 Revenues Margin % 2004 Revenues Margin % % Change
Product Cost of Revenues $308,386 44.5% 55.5% $220,246 41.7% 58.3% (2.8%)
Service Cost of Revenues 45,274 54.8% 45.2% 34,842 57.0% 43.0% 2.2%
Amortization of Technology 11,027 - - 408 - - -
Total $364,687 47.0% 53.0% $255,496 43.3% 56.7% (3.7%)
The decrease in product gross margin percentage for 2005, as compared to 2004, reflects primarily the change in product mix due
to the acquisitions of Pinnacle and M-Audio, as well as increased price reductions and promotions, which were partially offset by
increased volumes. The services gross margin increase for 2005, as compared to 2004, primarily reflects the impact of increased
revenue from maintenance contracts without a commensurate increase in our costs. Amortization of technology included in costs of
sales represents the amortization of developed technology assets resulting from the Pinnacle acquisition (on August 9, 2005) and, to
a lesser extent, the M-Audio and Wizoo acquisitions, which are discussed below under the caption “Amortization of and Impairment
of Intangible Assets”. As discussed below, we would expect the amortization of acquisition-related intangibles in 2006 to be higher
than in 2005, as it will include the full year impact of the Pinnacle and Wizoo acquisitions.
The following is a summary of our cost of revenues and gross margin percentages comparing the years ended December 31, 2004
and 2003:
Years Ended December 31, 2004 and 2003
(dollars in thousands)
% of Net % of Net Gross
Related Gross Related Gross Margin
2004 Revenues Margin % 2003 Revenues Margin % % Change
Product Cost of Revenues $220,246 41.7% 58.3% $183,304 43.1% 56.9% 1.4%
Service Cost of Revenues 34,842 57.0% 43.0% 26,069 56.1% 43.9% (0.9%)
Amortization of Technology 408 - - - - - -
Total $255,496 43.3% 56.7% $209,373 44.4% 55.6% 1.1%
The gross margin increase in 2004 reflects primarily a favorable impact of foreign currency exchange rates on revenue, especially
with respect to the euro. We also achieved reduced material and manufacturing overhead costs in the Professional Video segment
in 2004 as compared to 2003.
Research and Development
Research and development expenses include costs associated with the development of new products and enhancement of existing
products and consist primarily of employee salaries and benefits, facilities costs, depreciation, consulting and temporary help and
prototype and development expenses.
Years Ended December 31, 2005 and 2004
(dollars in thousands)
2005
Expenses
2004
Expenses Change % Change
Research and Development: $111,334 $94,940 $16,394 17.3%
Percentage of Net Revenues: 14.4% 16.1% (1.7%)