Citrix 2005 Annual Report Download - page 26

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Page฀24
Cost฀of฀product฀licenses฀revenues฀decreased฀$9.7฀million฀in฀2004฀as฀compared฀to฀2003฀due฀primarily฀to฀a฀decrease฀in฀royalties฀
due฀to฀the฀expiration฀of฀certain฀license฀agreements.฀Cost฀of฀services฀revenues฀increased฀$10.0฀million฀in฀2004฀compared฀to฀2003฀
primarily฀due฀to฀the฀addition฀of฀our฀Online฀Services฀division฀resulting฀from฀the฀February฀2004฀Expertcity฀acquisition.฀Amortization฀
of฀core฀and฀product฀technology฀decreased฀$4.9฀million฀in฀2004฀as฀compared฀to฀2003฀primarily฀due฀to฀the฀reclassification฀of฀certain฀
intangible฀tax฀assets฀related฀to฀a฀2001฀acquisition฀from฀a฀product฀technology฀intangible฀asset฀to฀goodwill฀resulting฀in฀an฀approximately฀
$7.2฀million฀reduction฀in฀amortization฀expense฀partially฀offset฀by฀an฀increase฀in฀amortization฀expense฀related฀to฀core฀and฀product฀
technology฀intangible฀assets฀acquired฀in฀the฀Expertcity฀acquisition.
Gross฀Margin
Gross฀margin฀as฀a฀percent฀of฀revenue฀was฀93.6%฀for฀2005,฀96.4%฀for฀2004฀and฀94.7%฀for฀2003.฀The฀decrease฀in฀gross฀margin฀as฀
a฀percentage฀of฀net฀revenue฀in฀2005฀compared฀to฀2004฀was฀primarily฀due฀to฀the฀increase฀in฀cost฀of฀revenues฀as฀discussed฀above.฀
We฀currently฀expect฀our฀gross฀margin฀to฀decrease฀slightly฀in฀2006฀due฀to฀the฀factors฀discussed฀above฀under฀Cost฀of฀Revenues.
Operating฀Expenses
Our฀ results฀of฀operations฀are฀subject฀to฀fluctuations฀in฀foreign฀currency฀exchange฀rates.฀In฀ order฀to฀minimize฀the฀impact฀on฀our฀
operating฀results,฀we฀generally฀initiate฀our฀hedging฀of฀currency฀exchange฀risks฀one฀year฀in฀advance฀of฀anticipated฀foreign฀currency฀
expenses.฀As฀a฀result฀of฀this฀practice,฀foreign฀currency฀denominated฀expenses฀will฀be฀higher฀in฀the฀current฀year฀if฀the฀dollar฀was฀
weak฀in฀the฀prior฀year.฀If฀the฀dollar฀is฀strong฀in฀the฀current฀year,฀most฀of฀the฀benefits฀will฀be฀reflected฀in฀our฀operating฀costs.฀There฀
is฀a฀risk฀that฀there฀will฀be฀fluctuations฀in฀foreign฀currency฀exchange฀rates฀beyond฀the฀one฀year฀time฀frame฀for฀which฀we฀hedge฀our฀
risk.฀Because฀the฀dollar฀was฀weak฀in฀2004,฀operating฀expenses฀were฀generally฀higher฀in฀2005,฀although฀there฀is฀some฀moderating฀
impact฀due฀to฀a฀stronger฀dollar฀since฀April฀2005.
Research฀and฀Development฀Expenses
Year฀Ended฀December฀31, 2005฀฀
Compared฀to
2004฀
Compared฀to
(In฀thousands) 2005 2004 2003 2004 2003
Research฀and฀development $฀108,687 $฀86,357 $฀64,443 $฀22,330 $฀21,914
Research฀and฀development฀expenses฀consisted฀primarily฀of฀personnel-related฀costs.฀We฀expensed฀substantially฀all฀development฀
costs฀included฀in฀the฀research฀and฀development฀of฀our฀products฀and฀new฀functionality฀added฀to฀our฀existing฀products฀as฀incurred฀
except฀for฀certain฀core฀technologies฀with฀alternative฀future฀uses.฀Research฀and฀development฀expenses฀increased฀approximately฀
$22.3฀million฀for฀the฀year฀ended฀December฀31,฀2005฀compared฀to฀the฀year฀ended฀December฀31,฀2004฀primarily฀due฀to฀an฀increase฀
in฀staffing฀and฀related฀personnel฀costs฀due฀to฀the฀Net6฀and฀the฀2005฀Acquisitions,฀and฀to฀a฀lesser฀extent,฀due฀to฀increased฀staffing฀
and฀personnel฀costs฀related฀to฀our฀Access฀Suite฀of฀products.฀We฀currently฀expect฀research฀and฀development฀expenses฀to฀increase฀
moderately฀in฀2006฀due฀to฀the฀full฀year฀impact฀of฀our฀2005฀Acquisitions,฀due฀to฀continued฀investments฀in฀our฀business฀including฀the฀
hiring฀of฀personnel,฀and฀additional฀compensation฀expense฀related฀to฀the฀adoption฀of฀SFAS฀No.฀123R.
Research฀and฀development฀expenses฀increased฀approximately฀$21.9฀million฀during฀2004฀as฀compared฀to฀2003฀primarily฀due฀to฀
increased฀headcount฀and฀related฀personnel฀costs,฀as฀well฀as฀an฀increase฀in฀staffing฀and฀associated฀personnel฀costs฀related฀to฀our฀
Expertcity฀acquisition.
Sales,฀Marketing฀and฀Support฀Expenses
Year฀Ended฀December฀31, 2005฀฀
Compared฀to
2004฀
Compared฀to
(In฀thousands) 2005 2004 2003 2004 2003
Sales,฀marketing฀and฀support $฀393,420 $3฀37,566 $฀252,749 $฀55,854 $฀84,817
Sales,฀marketing฀and฀support฀expenses฀consisted฀primarily฀of฀personnel-related฀costs,฀including฀sales฀commissions,฀and฀the฀costs฀of฀
marketing฀programs฀aimed฀at฀increasing฀revenue,฀such฀as฀advertising,฀trade฀shows,฀public฀relations฀and฀other฀market฀development฀
programs.฀Sales,฀marketing฀and฀support฀expenses฀increased฀approximately฀$55.9฀million฀for฀the฀year฀ended฀December฀31,฀2005฀
compared฀to฀the฀year฀ended฀December฀31,฀2004฀primarily฀due฀to฀an฀increase฀in฀headcount฀and฀the฀associated฀increase฀in฀salaries,฀
commissions฀and฀other฀variable฀compensation฀and฀employee฀related฀expenses,฀as฀well฀as฀an฀increase฀in฀staffing฀and฀related฀personnel฀
costs฀due฀to฀the฀2005฀Acquisitions฀and,฀to฀a฀lesser฀extent,฀the฀full฀year฀impact฀of฀our฀2004฀Acquisitions.฀Additionally,฀we฀increased฀
our฀utilization฀of฀personnel฀for฀revenue฀generating฀activities฀for฀the฀year฀ended฀December฀31,฀2005฀as฀compared฀to฀the฀year฀ended฀
Citrix฀Systems,฀Inc.
Management’s฀Discussion฀and฀Analysis฀of฀Financial฀Condition฀and฀Results฀of฀Operations฀
(Continued)