3Ware 2005 Annual Report Download - page 29

Gross Profit. The following table presents net revenues, cost of revenues and gross profit for fiscal years
ended March 31, 2005 and March 31, 2004 (dollars in thousands):
Fiscal Years Ended March 31,
Increase
(Decrease) Change
2005 2004
Amount
%ofNet
Revenue Amount
%ofNet
Revenue
Net revenues ........................... $253,756 100.0% $131,177 100.0% $122,579 93.4%
Cost of revenues ........................ 123,253 48.6% 57,601 43.9% 65,652 114.0%
Gross profit ........................... $130,503 51.4% $ 73,576 56.1% $ 56,927 77.4%
The increase in gross profit for the year ended March 31, 2005 was primarily attributable to the increase in
revenues, offset by an increase of $14.4 million and $825,000 of amortization of developed technology and
purchased inventory fair value adjustment included in our cost of revenues, respectively.
The amortization of purchased intangible assets included in cost of revenues during the year ended March
31, 2005 was $23.3 million compared to $9.0 million for the year ended March 31, 2004. The increase is a result
of our fiscal 2005 acquisitions. Based on the amount of capitalized purchased intangibles on the balance sheet as
of March 31, 2005, we expect amortization expense for purchased intangibles charged to cost of revenues to be
$17.6 million and $14.5 million for each of the fiscal years ending March 31, 2006, and 2007 and $50.4 million
for fiscal periods thereafter, respectively. 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 years ended March
31, 2005 and March 31, 2004 (in thousands):
Fiscal Years Ended March 31,
Increase
(Decrease) Change
2005 2004
Amount
%ofNet
Revenue Amount
%ofNet
Revenue
Research and development ................ $118,665 46.8% $112,594 85.8% $ 6,071 5.4%
Selling, general and administrative ......... $ 59,821 23.6% $ 45,121 34.4% $14,700 32.6%
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 increase in R&D of 5.4% for the year
ended March 31, 2005, respectively, was primarily due to higher payroll, the related benefits expense, and
facilities costs of approximately $18.8 million, resulting from our fiscal 2004 and fiscal 2005 acquisitions, offset
by lower design costs and software and equipment depreciation costs of approximately $7.0 million and $5.7
million, respectively, resulting from our restructuring initiatives. We believe that a continued commitment to
R&D is vital to our goal of maintaining a leadership position with innovative communications, storage and
embedded products. Currently, R&D expenses are focused on the development of communications, storage, and
embedded products and we expect to continue this focus. Future acquisitions of businesses may result in
substantial additional on-going costs.
Since the start of fiscal 2003, we have invested a total of approximately $363.1 million in the research and
development of new products, including higher-speed, lower-power and lower-cost products, products that
combine the functions of multiple existing products into single highly integrated products, and other products to
complete our portfolio of communications and storage products. For most products developed by us, due to their
complexity and the complexity of our OEM customers’ equipment, it often takes several years to complete
development and qualification. We have not yet generated significant revenues from many of these new products
for two additional reasons. First, the dramatic and extended downturn in the telecommunications market has
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