Hypercom Corporation Annual Report - CiteSeer

Costs of Revenue and Gross Profit
Costs of revenue include the costs of raw materials, manufacturing and service labor, overhead and subcontracted manufacturing
costs, telecommunication cost, and inventory valuation provisions. Costs of revenue also include amortization of certain intangible
assets. Total gross profit as a percent of revenue increased to 31.6% during 2009 from 28.5% during 2008.
Products Gross Profit
Products gross profit excluding amortization was 34.9% in 2009 compared to 31.5% in 2008. The products gross profit increase is
principally due to higher gross margins on TeT product sales, changes in product mix for countertop, mobile, and multilane products,
as well as cost reductions gained from our third party contract manufacturers. In addition, gross profit in 2008 was negatively
impacted by costs associated with the shut down of our China manufacturing plant totaling approximately $2.5 million and additional
liabilities recorded of approximately $4.2 million primarily related to excess components at our third-party contract manufacturers.
Services Gross Profit
Services gross profit excluding amortization was 24.4% in 2009 compared to 22.7% in 2008. The increase in the gross profit
percentage from 2009 to 2008, is principally due to the decision to exit a marginally profitable service contract with a large customer
in Brazil during the third quarter of 2009 combined with a $1.0 million extended warranty sale to a third party that met the criteria of
revenue. This was partially offset by $1.3 million of restructuring charges incurred in Brazil and Australia.
Operating Expenses
Research and development — Research and development expenses as a percent of revenue were 10.9% in 2009 compared to
10.6% in 2008. Research and development expenses consist mainly of software and hardware engineering costs and the cost of
development personnel. Research and development expenses decreased approximately $1.4 million or 3.1% in 2009 compared to
2008, primarily due to $2.2 million of lower professional expenses for projects in Germany. This decrease was offset by additional
expenses from the acquisition of TeT, which was not included in our results for the first quarter of 2008.
Selling, general and administrative — Selling, general and administrative expenses as a percent of revenue was 18.4% for 2009
and 18.7% for 2008. Sales and marketing expenses, administrative personnel costs, and facilities operations are the primary
components of selling, general and administrative expenses. Selling, general and administrative expense decreased approximately $6.5
million or 8.0% in 2009 compared to 2008. The decrease is primarily due to lower integration costs from the TeT acquisition,
including reductions of $2.0 million in professional fees and $1.5 million of legal expenses. In addition as part of our continued effort
to reduce costs there were reductions of $1.5 million of travel and entertainment and $0.7 million in marketing expenses. Stock-based
compensation expense decreased by $1.5 million primarily due to lower fair value of new grants due to the decrease in our share price.
Also, due to lower revenue in 2009 when compared to 2008, commission expense decreased by $1.9 million. These were offset by a
$2.0 million increase in bonus expense and $1.1 million of depreciation expense related to development expenses for internal use
software as a result of our integration of TeT.
Impairment of goodwill and intangible assets — We performed our annual goodwill impairment test during the fourth quarter of
2009 and determined that there was no impairment needed as of December 31, 2009. During the fourth quarter of 2008, we concluded
that the economic environment and the significant declined in our share price compared to our net book value represented significant
adverse events, and therefore, we evaluated our goodwill and long-lived assets for impairment as of December 31, 2009. Our
evaluation of goodwill and long-lived assets resulted in the recognition of asset impairment charges totaling $67.8 million for 2008,
primarily related to our acquisition of TeT on April, 1, 2008.
Amortization of purchased intangibles — Amortization of purchased intangibles expense decreased approximately $0.2 million
or 6.0% in 2009, compared to 2008, primarily related to lower exchange rates.
Interest income, interest expense, and foreign currency
We recognized $0.3 million in interest income in 2009 compared to $1.5 million in 2008. This decrease is principally attributable
to lower average cash, cash equivalent, and short-term investment balances in 2009 compared to 2008 due to the acquisition of TeT.
We incurred interest expense of $11.0 million in 2009 compared to $6.8 million in 2008. The increase in interest expense is
primarily due to the acquisition financing of TeT that occurred on April 1, 2008. Interest expense includes amortization of the fair
value of warrants that were accounted for as a debt discount, resulting in additional interest expense of $6.7 million in 2009 and $4.6
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