Avid 2006 Annual Report Download - page 47

Download and view the complete annual report

Please find page 47 of the 2006 Avid annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 109

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109

37
Sales to customers outside the United States accounted for 57% of our net revenues for 2005, compared to 51%
for 2004. Such international sales increased by $140.5 million, or 46.5%, in 2005 compared to 2004. The increase in
international sales in 2005 occurred in all regions and was due to the impact of the acquisitions of Pinnacle and M-
Audio and an increased number of large international broadcast sales.
Gross Profit
Cost of revenues consists primarily of costs associated with:
•฀ the procurement of components;
•฀ the assembly, testing and distribution of finished products;
•฀ warehousing; post-sales customer support costs related to maintenance contract revenue and other
services; and
•฀ royalties for third-party software and hardware included in our products.
Cost of revenues also includes amortization of technology, which represents the amortization of developed
technology assets acquired in the August 2005 Pinnacle acquisition and, to a lesser extent, the M-Audio, Sibelius,
Sundance, Medea and Wizoo acquisitions, and is described further in the Amortization of Intangible Assets section
below.
Gross margin fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party
hardware and software included in the systems sold, the offering of product upgrades, price discounts and other
sales-promotion programs, the distribution channels through which products are sold, the timing of new product
introductions, sales of aftermarket hardware products such as disk drives and currency exchange-rate fluctuations.
Comparison of 2006 to 2005
Years Ended December 31, 2006 and 2005
(dollars in thousands)
2006 Gross Margin 2005 Gross Margin Gross Margin
% Change
Product cost of revenues $388,483 52.0% $308,386 55.5% (3.5%)
Services cost of revenues 56,218 44.7% 45,274 45.2% (0.5%)
Amortization of intangible assets 21,193 – 11,027 – –
Total $465,894 48.8% $364,687 53.0% (4.2%)
The decrease in the product gross margin percentage in 2006, as compared to 2005, primarily reflects changes
in the mix of products sold in our Professional Video and Consumer Video segments, as well as reduced product
pricing due to competitive pressures, which were partially offset by increased volumes. In our Professional Video
segment, net revenues in 2006 reflected an increased percentage of products with lower gross margin than in 2005,
including the products acquired from the Pinnacle and Medea businesses. In our Consumer Video segment, the
percentage of revenues from our hardware-based TV viewing products, which have lower gross margin than our
home-editing products, has increased in 2006 compared to 2005.
The decrease in the services gross margin in 2006, as compared to 2005, primarily reflects higher personnel-related
costs of $9.2 million, which increased significantly in the last quarter of 2006, compared to the same period in 2005,
without a corresponding increase in revenues.