3Ware 2004 Annual Report Download - page 35

Gross Profit.The following table presents net revenue, cost of revenue and gross profit for fiscal year
ended March 31, 2004 and March 31, 2003 (in thousands):
Fiscal Years Ended March 31,
Increase
(Decrease) Change
2004 2003
Amount
%ofNet
Revenue Amount
%ofNet
Revenue
Net revenue ............................. $131,177 100.0% $101,591 100.0% $29,586 29.1%
Cost of revenues .......................... 57,601 43.9% 61,900 60.9% (4,299) -6.9%
Gross profit ............................. $ 73,576 56.1% $ 39,691 39.1% $33,885 85.4%
The increase in gross profit in 2004 was primarily attributable to the reduced fixed cost of manufacturing
overhead of approximately $16.0 million as a result of the permanent closure of our internal wafer fabrication
facility in March 2003 and the effects of the workforce reductions, as well as decreased stock-based
compensation charges included in cost of revenues of $2.0 million for the year ended March 31, 2004. In
addition, during the year ended March 31, 2004, we recognized a benefit of approximately $1.1 million related to
the sales of inventory which had been previously reserved. Partially offsetting the increases in gross margin were
increases in the amortization of purchased intangible assets included in costs of revenues.
The amortization of purchased intangible assets included in cost of revenues during the year ended
March 31, 2004 was $10.4 million, compared to $6.3 million for the year ended March 31, 2003. The increase
came as a result of the acquisition of JNI Corporation on October 28, 2003 and our acquisition of the PRS
business on September 30, 2003. Based on the amount of capitalized purchased intangibles on the balance sheet
of March 31, 2004, we expect amortization expense for purchased intangibles charged to cost of revenues to be
$5.1 million for each of the fiscal years ending March 31, 2005, 2006 and 2007. We expect the amortization of
purchased intangible assets included in cost of revenues, in absolute dollars, to increase in the first quarter of
fiscal 2005 as a result of the acquisition of 3ware, Inc. on April 1, 2004 and the Embedded Processor Business on
May 5, 2004. Future acquisitions of businesses may result in substantial additional charges which would impact
the gross margin in future periods.
Research and Development and Selling, General and Administrative Expenses.The following table
presents research and development and selling, general and administrative expenses for fiscal year ended
March 31, 2004 and March 31, 2003 (in thousands):
Fiscal Years Ended March 31,
Increase
(Decrease) Change
2004 2003
Amount
%ofNet
Revenue Amount
%ofNet
Revenue
Research and development ................. $112,594 85.8% $131,909 129.8% $(19,315) -14.6%
Selling, general and administrative ........... 45,121 34.4% 59,588 58.7% (14,467) -24.3%
Research and Development. Research and development, or R&D, expenses consist primarily of salaries
and related costs of employees engaged in research, design and development activities, costs related to
engineering design tools, subcontracting costs and facilities expenses. The decrease in R&D for the year ended
March 31, 2004 was primarily due to lower payroll and related benefits expense of approximately $9.6 million,
resulting from our workforce reductions and lower software and equipment depreciation costs of approximately
$8.7 million, resulting from our restructuring initiatives. These decreases were partially offset by increases in
payroll and related benefits resulting from the acquisition of JNI Corporation on October 28, 2003 and our
acquisition of the PRS business on September 30, 2003. We believe that a continued commitment to R&D is vital
to our goal of maintaining a leadership position with innovative communications and storage products. Currently,
R&D expenses are focused on the development of products for the communications and storage equipment
markets, and we expect to continue this focus. We expect R&D expenses in absolute dollars to increase in the
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