8x8 2004 Annual Report Download - page 22

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Sales to customers outside the United States represented 71%, 62%, and 61%, and of total revenues in the fiscal
years ended March 31, 2004, 2003 and 2002, respectively. The following table illustrates our net revenues by
geographic area. Revenues are attributed to countries based on the destination of shipment (in thousands):
Year Ende d Mar c h 3 1 ,
2004 2003 2002
United States..........................................................................
.
$2,728$4,218$5,777
Europe.....................................................................................
.
1,309 2,657 4,126
Taiwan.....................................................................................
.
4,163 1,569 2,026
Japan........................................................................................ 568 919 1,119
Other........................................................................................
.
540 1,640 1,643
$ 9,308 $ 11,003 $ 14,691
COST OF REVENUES AND GROSS PROFIT
The cost of product revenues consists of costs associated with system manufacturing, components, semiconductor
wafer fabrication, system and semiconductor assembly and testing performed by third-party vendors, and direct and
indirect costs associated with purchasing, scheduling, and quality assurance. Gross profit from product revenues was
$0.9 million, $3 million, and $3.4 million for the fiscal years ended March 31, 2004, 2003, and 2002, respectively.
Product gross margin was 34%, 52% and 57% for the fiscal years ended March 31, 2004, 2003, and 2002,
respectively.
The $2.1 million decrease in product gross profit and 18% decrease in product margin in fiscal 2004 as compared to
fiscal 2003 was primarily due to the costs of desktop terminal adapters (DTA 310) provided to Packet8 subscribers
upon activation. We generally do not charge Packet8 subscribers for the DTA 310s when they subscribe. In
accordance with EITF 00-21, a portion of Packet8 revenues is allocated to product revenues, but these revenues are
less than the cost of the DTA 310s. Gross profit from semiconductor sales decreased due to a decrease in total units
shipped and product mix, as fiscal 2004 includes significantly less high margin video semiconductor sales than fiscal
2003. For the year ended March 31, 2004, we reversed $116,000 of semiconductor product inventory that had been
previously written down or for which we had recorded purchase commitment reserves, and recorded $70,000 of
reserves against our non-IP videophone product inventory. We also reversed approximately $220,000 of warranty
reserves to cost of product revenues related to our video monitoring business as a result of a change in estimate of
our warranty exposure.
The $400,000 decrease in gross profit from product revenues in fiscal 2003 as compared to fiscal 2002 was
primarily due to a decrease in product revenues primarily attributable to lower ASPs, and a charge of approximately
$270,000 for non-cancelable purchase orders for IP telephony semiconductors recorded in the quarter ended March
31, 2003. The decreases in gross profit were partially mitigated by lower costs for our VoIP telephony
semiconductors resulting from a change in suppliers during fiscal 2003.
Gross profit from license and service revenues, which were largely nonrecurring, was $4 million, $3.8 million, and
$8.4 million in fiscal 2004, 2003, and 2002, respectively. Associated gross margins were 61%, 71%, and 98% in
fiscal 2004, 2003, and 2002. The increase in gross profit and decrease in gross margin was primarily attributable to
the large license and sale transaction with Leadtek closed during the third quarter of fiscal 2004 as described above
combined with lower margins experienced on Packet8 service revenues as compared to historical licensing
transactions. The decrease was also attributable to a decrease in royalty revenues that was related to the final
$750,000 payment received from a single customer of our MPEG video compression technology in the first quarter
of fiscal 2003.
The decrease in gross margin from fiscal 2002 to fiscal 2003 was due primarily to the reduction in license and
service revenues, and costs incurred to perform development services under revenue generating contracts in fiscal
2003, which included a loss approximating $300,000 in the quarter ended March 31, 2003.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel, system prototype design and fabrication, mask,
prototype wafer, and equipment costs necessary for us to conduct our development efforts. Research and
development costs, including software development costs, are expensed as incurred. Research and development
expenses were $2.7 million, $7.8 million, and $12.6 million for fiscal 2004, 2003, and 2002, respectively. The $5.1