8x8 2003 Annual Report Download - page 20

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consumer videophone systems approximating $1 million, resulting from our decision to terminate further
development and sales of these product lines in prior years, a slight decrease in IP telephony semiconductor sales, a
$300,000 decrease in media hub system revenues, and a $5.4 million decrease in revenue derived from our
videoconferencing semiconductor products. The decrease in media hub system revenues as compared to the prior
year period was due primarily to a decline in sales to a significant customer. The significant decrease in
videoconferencing semiconductor revenues was due primarily to a significant decrease in unit shipments, offset
partially by increases in average selling prices, or ASPs. Factors that contributed to the significant decrease in unit
shipments of our videoconferencing semiconductors as compared to the prior year include:
• Increased competition from other developers of semiconductors used in videoconferencing applications;
• The acquisition of two of our customers by a company that appears to have standardized its product
development efforts around technology supplied by one or more of our competitors;
• Increased competition from evolving PC-based videoconferencing applications which has resulted in reduced
demand for products marketed and sold by our customers that incorporate our videoconferencing
semiconductors; and
• Decreased corporate and consumer spending.
License and other revenues were $5.3 million in fiscal 2003, a decrease of $3.3 million from the $8.6 million
recorded in fiscal 2002. License and other revenues, the majority of which are considered to be non-recurring in
nature, consisted primarily of technology licenses and related maintenance revenues, as well as royalties earned
under such licenses. License and other revenues for both fiscal 2003 and 2002 included approximately $1.6 million
of non-cash revenue recognition associated with the license of our video monitoring technology to Interlogix in
fiscal 2001. The decrease in fiscal 2003 was primarily attributable to:
• A $1.2 million decrease in royalties earned by Netergy under a license agreement for certain of our video
compression technology. Royalty revenue recognized under this agreement totaled $750,000 for fiscal 2003 as
compared to approximately $2 million for fiscal 2002. The licensee’s obligations to pay royalties on shipments
of products that incorporate our technology terminated in the first quarter of fiscal 2003 upon payment of the
$750,000;
• A decrease of approximately $1 million in revenues associated with our license of service creation environment
(SCE) technology to Lucent and unified messaging technology to Milinx;
• A $1.1 million decrease in license revenue associated with our embedded IP telephony firmware technology,
e.g., Veracity VoIP software and Audacity-T2 based reference design kits marketed by Netergy; and
• A decrease of approximately $1.5 million in non-recurring license and maintenance revenues associated with
Netergy's videoconferencing technology.
These decreases were partially offset by:
• A $380,000 increase in license and maintenance revenues associated with Centile's hosted iPBX product; and
• Approximately $1.1 million of revenues recognized by Netergy under a contract to develop our next-generation
video compression semiconductor product that is accounted for using the percentage of completion method.
Profit estimates on this contract are revised periodically based on changes in facts; any loss is required to be
recognized immediately. Based on our cost estimates as of March 31, 2003, we recognized a loss
approximating $300,000 on this development contract in the quarter ended March 31, 2003, which has been
recorded in the Cost of License and Other Revenues line in the consolidated statements of operations.
Subsequent changes in our cost estimates could require us to recognize additional losses in a future period as the
revenues under this contract are fixed.
License revenues were $8.6 million in fiscal 2002, an increase of $3.2 million from the $5.4 million recognized in
fiscal 2001. License and other revenues recognized in fiscal 2002 consisted primarily of technology licenses and
related maintenance revenues, as well as royalties earned under such licenses. License and other revenues for fiscal
2001 also included $1.2 million of professional service revenues associated with our Canadian operations. No
professional service revenues were recognized in fiscal 2002 due to the elimination of the professional services
organization as part of the restructuring of our Canadian operations in the fourth quarter of fiscal 2001. The negative