Avid 2006 Annual Report Download - page 37

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$7 million relates to our acquisition of Sibelius in July 2006. The remaining increase represents continued strong
demand for our products in both the professional and home-user markets with increased revenues from the
M-Audio and live-sound VENUE product line, as well as from sales of the Digidesign Pro Tools|HD and LE systems.
The segment’s operating income increased due to slightly lower operating expenses than in 2005. We expect
operating expenses to increase for our Audio segment in 2007 as we invest for future growth in the division.
The Consumer Video segment was formed as part of our August 2005 acquisition of Pinnacle, so comparisons
of revenues and segment operating results for 2006 to 2005 are not meaningful. For the year ended December
31, 2006, this segment had net revenues of $127 million and an operating loss of $5 million. Net revenues and
operating results for 2006 were lower than expected, due in large part to product quality issues in our home editing
product line. To address the product reliability issues and improve operating efficiency of the business, we made
operational changes during 2006 and have been focusing on several initiatives, including product development,
marketing and sales efforts to generate consumer demand, and expansion of the sales channel. During the fourth
quarter of 2006, we also initiated a restructuring plan for this segment that we estimate will result in cost savings of
approximately $2 million annually. Net revenues increased throughout 2006, with an expected significant increase in
the fourth quarter due to the holiday buying season. We expect the Consumer Video segment’s operating results to
improve for the full year of 2007.
Segment operating income excludes stock-based compensation, amortization of intangible assets, impairment of
goodwill and intangible assets, in-process research and development expense and net restructuring costs. These
costs are not considered when evaluating the ongoing operating results of our segments.
The following table sets forth certain items from our consolidated statements of operations as a percentage of net
revenues for the periods indicated:
For the Year Ended December 31,
2006 2005 2004
Product revenues 88.8% 89.3% 89.6%
Services revenues 11.2% 10.7% 10.4%
Total revenues 100.0% 100.0% 100.0%
Cost of revenues 51.2% 47.0% 43.3%
Gross profit 48.8% 53.0% 56.7%
Operating expenses:
Research and development 15.5% 14.3% 16.1%
Marketing and selling 22.4% 22.0% 22.1%
General and administrative 6.9% 6.1% 6.0%
Amortization of intangible assets 1.6% 1.2% 0.6%
Impairment of goodwill and intangible assets 5.8% — 0.2%
Restructuring costs, net 0.3% 0.4% —
In-process research and development 0.1% 4.2% —
Total operating expenses 52.6% 48.2% 45.0%
Operating income (loss) (3.8%) 4.8% 11.7%
Interest and other income (expense), net 0.8% 0.7% 0.2%
Income (loss) before income taxes (3.0%) 5.5% 11.9%
Provision for (benefit from) income taxes 1.7% 1.1% (0.3%)
Net income (loss) (4.7%) 4.4% 12.2%
We derive a significant percentage of our revenue from sales to customers outside the United States. Such
international sales accounted for 57% of our net revenues for both 2006 and 2005, compared to 51% for 2004.
Our international business is, for the most part, transacted through international subsidiaries and generally in
the currency of the end-user customers. Therefore, we are exposed to the risk that changes in foreign currency
could materially impact, either positively or adversely, our revenues, net income and cash flow. To hedge against
the foreign exchange exposure of certain forecasted receivables, payables and cash balances of our foreign
subsidiaries, we enter into short-term foreign currency forward-exchange contracts. We record gains and losses