Hypercom Corporation Annual Report - CiteSeer

Net Revenues
Net revenues increased approximately $144.7 million or 50.0% in 2008 compared to 2007. This increase was comprised of an
increase of $114.3 million or 55.4% in products revenues, and $30.4 million or 36.5% in services revenues.
Of the $114.3 million increase in products revenues during 2009, $109.5 million is attributable to the acquisition of TeT.
Excluding the additional TeT products revenues, the increase in products revenues of $4.9 million is a result of increases in unattended
sales in SEMEA and $3.2 million in Asia-Pacific. Other increases in revenue were due primarily to increases in multi-lane sales in the
Americas and NEMEA of $5.3 million offset primarily by decreases in mobile sales in the Americas and SEMEA of $4.5 million.
Of the $30.4 million increase in services revenue during 2008, the majority is attributable to the acquisition of TeT. Other areas of
changes in the services revenue were due to growth in our service operations due to higher volume type services in Brazil of $6.1
million offset by a decline of $5.0 million in Mexico as the result of the loss of a significant service contract whereby our customer
was acquired and changed their outsource strategy. Offsetting this net increase was the billing and collection of past service contract
fees in Brazil during 2007 of $4.6 million. This collection did not re-occur during 2008.
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 28.5% during 2008 from 25.8% during 2007. Amortization expense
included in costs of revenue increased by $2.7 million or 840.4% in 2008 compared to 2007 due to the acquisition of TeT on April 1,
2008.
Products Gross Profit
Products gross profit excluding amortization was 31.5% in 2008 compared to 27.4% in 2007. 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 efficiencies gained in 2009 from transitioning to contract manufacturing during the first half of 2008. Offsetting some of
those gains in margin in 2008 were costs associated with the shut down of our China manufacturing plant totaling approximately $2.5
million and excess inventory contingencies of approximately $4.2 million related to excess components at our third-party contract
manufacturers. We expect to see continued efficiencies gained from our move to a contract manufacturing model in the future,
although actual results may be materially different than our expectations. In addition, gross profit in 2007 was negatively impacted by
approximately $9.6 million of charges for inventory not in compliance with industry security standards as well as other costs to begin
the transition to contract manufacturing.
Services Gross Profit
Services gross profit excluding amortization was 22.7% in 2008 compared to 22.2% in 2007. Services gross profit during 2007
was impacted by the collection of service contract fees in Brazil of $4.6 million that had no associated costs, as all costs had been
written off in 2004 due to uncertainties regarding realization. Excluding this collection at 100% margin, the services gross profit was
17.6% in 2007. The increase in the gross profit percentage from 2007 to 2008, excluding the service contract fees in Brazil, is
principally due to the acquisition of TeT and improved cost controls in Brazil during 2008. Offsetting these increases were decreases
in gross profit in our Mexico and Australian service businesses.
Operating Expenses
Research and development — Research and development expenses consist mainly of software and hardware engineering costs
and the cost of development personnel. Research and development expenses increased approximately $17.2 million or 59.6% in 2008
compared to 2007, primarily related to the acquisition of TeT. Excluding TeT, research and development expenses decreased $5.5
million from 2007 to 2008, primarily due to the re-prioritization of projects of $2.6 million, lower consulting fees of $1.1 million and
lower salaries, bonus and severance of $2.8 million. Research and development expenses as a percent of revenue were 10.6% in 2008
compared to 9.9% in 2007. The increase as a percentage of revenue is due to the acquisition of TeT and the research and development
expenditures needed to support the maintenance of two product lines.
Selling, general and administrative — Sales and marketing expenses, administrative personnel costs, and facilities operations
make up the selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $22.0
million or 36.7% in 2008 compared to 2007, primarily related to the acquisition of TeT. Excluding TeT, selling, general and
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