8x8 2016 Annual Report Download - page 45

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The increase in cost of service revenue for fiscal 2015 from fiscal 2014 was primarily due to a $3.5 million increase in third party network service expenses, a $1.5
million increase in payroll and related expenses, a $1.0 million increase in depreciation, and a $0.3 million increase in stock-based compensation expenses.
Years Ended March 31, Year-over-Year Change
2016 2015 2014 2015 to 2016 2014 to 2015
(dollaramountsinthousands)
Cost of product revenue $ 20,168 $ 15,863 $ 15,170 $ 4,305 27.1% $ 693 4.6%
Percentage of product revenue 118.0% 111.7% 126.5%
The cost of product revenue consists primarily of IP telephones, estimated warranty obligations and direct and indirect costs associated with product purchasing,
scheduling, shipping and handling. We allocate a portion of service revenues to product revenues but these revenues are less than the cost of the product.
The increase in the cost of product revenue for fiscal 2016 from fiscal 2015 was primarily due to a $3.6 million increase in the shipment of equipment to our
business customers, a $0.3 million increase in freight costs, and a $0.2 million increase to warranty expense.
The increase in the cost of product revenue for fiscal 2015 from fiscal 2014 was primarily due to a $1.5 million increase in the shipment of equipment to our
business customers, a $0.1 million increase in freight costs, offset by a $0.9 million decrease in warranty expense.
RESEARCHANDDEVELOPMENTEXPENSES
Years Ended March 31, Year-over-Year Change
2016 2015 2014 2015 to 2016 2014 to 2015
(dollaramountsinthousands)
Research and development $ 24,040 $ 15,118 $ 11,633 $ 8,922 59.0% $ 3,485 30.0%
Percentage of total revenue 11.5% 9.3% 9.0%
Historically, our research and development expenses have consisted primarily of personnel, system prototype design, and equipment costs necessary for us to
conduct our development and engineering efforts. During the fiscal year ended March 31, 2016, we expensed all research and development costs as they were
incurred in accordance with ASC 985-20, CostsofSoftwaretoBeSold,Leased,orMarketed, and we capitalized $0.9 million of payroll and related costs in
accordance with ASC 350-40, GoodwillandOther-Internal-UseSoftware.
The increase in research and development expenses for fiscal 2016 from fiscal 2015 was primarily attributable to a $6.5 million increase in payroll and related
expenses, and a $1.4 million increase in stock-based compensation expenses, a $0.3 million increase in temporary personnel, consulting and outside service
expenses partially offset by $0.9 million of payroll and related costs capitalized in accordance with ASC 350-40.
The increase in research and development expenses for fiscal 2015 from fiscal 2014 was primarily attributable to a $0.8 million increase in payroll and related
expenses, a $0.8 million increase in temporary personnel, consulting and outside service expenses and a $0.5 million increase in stock-based compensation
expenses, partially offset by $1.5 million of payroll and related costs capitalized in accordance with ASC 350-40.
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