And all the warnings. GI and SA are "Consumer" customers? Consumers don't buy headends?...............................
Professional Services and Customer Support
DiviCom's DiviSys (TM) technology integration group provides consulting
and implementation services to DiviCom customers worldwide. DiviSys draws
upon its expertise in broadcasting television, communications networking
and compression technology to design, integrate and install complete
business solutions. DiviSys offers a broad range of services including
program management, budget analysis, technical design and planning, parts
inventory management, building and site preparation, equipment installation
and integration, end-to-end system testing and comprehensive customertraining.
The DiviSys group also has extensive experience in integrating DiviCom
products with numerous third-party products and services. This includes the
procurement and integration of encoders, multiplexers, system/network
controllers, ATM and TCP/IP network equipment, NVOD servers, modulators,
transmitters, antennas, downlink systems, satellite dishes/IRDs, subscriber
management systems, conditional access systems for pay-per-view, electronic
program guides and diagnostics/quality assurance tools.
DiviTec (TM) is DiviCom's customer service and support organization. The
DiviTec Service Agreement provides for a customized set of services for
ongoing maintenance, support-on-demand and customer training. This service
is designed to meet each customer's specific needs in order to maximize the
benefits they receive from DiviCom products and systems.
Changing Product Mix; Dependence on Decoder Products
While C-Cube offers a number of products for a variety of applications,
beginning in the second quarter of 1995, sales of the Company's CL480
family of products have represented a significant percentage of the
Company's total net revenues. The Company expects that revenues from its
MPEG-1 decoder products including the CL480 and CL680 families of products
will decrease as a percentage of total revenues, but continue to account
for a significant portion of its product revenues in 1998.* C-Cube expects
that price competition will continue to result in declining average selling
prices for this family of products.* The Company has implemented several
programs that have reduced costs associated with these families of
products. In the event that increases in unit sales and other manufacturing
efficiencies of these families of products do not offset decreasing sales
prices in the future, the Company's business and results of operations
would be materially and adversely affected. C-Cube anticipates that overall
gross margin may decrease as a result of a number of factors including
anticipated declines in average selling prices over time.* The timing of
volume shipments and the life cycles of the Company's products are
difficult to predict due in large measure to the emerging nature of the
markets for C-Cube's products, the future effect of product enhancements by
11<PAGE>
the Company and its current and future competitors. Declines in demand for
the Company's products, particularly the CL480 and CL680 families of
products, whether as a result of competition, technological change or
otherwise, would have a material adverse effect on C-Cube's business and
results of operations.Customers
The following table lists certain of the Company's end customers:<TABLE>
<CAPTION> Market Customers
-------------- -----------------------------------------------------
<S> <C> <C>
Idall Malata
Consumer Samsung ChangHong
SAST Xiamin Solid
GI Scientific Atlanta
-------------- -----------------------------------------------------
Communications NDS NEC
Comsat ABL
Dell Kasan
-------------- -----------------------------------------------------
Computer Toshiba NEC
Diamond Quadrant International
-------------- -----------------------------------------------------</TABLE>
During 1997 one customer accounted for 20% of the Company's net
revenues. During 1996 one customer accounted for 12% of the Company's net
revenues. During 1995 two customers accounted for 14% and 10% of the
Company's net revenues, respectively. There can be no assurance that such
customers will continue to account for a significant percentage of the
Company's revenues in the future.Research and Development
C-Cube believes that the continued introduction of new products in its
target markets is essential to its growth. As of December 31, 1997, the
Company had 347 full-time employees engaged in research and development.
Expenditures for research and development in 1997, 1996 and 1995 were
approximately $64.2 million, $44.2 million and $14.3 million, respectively.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The markets for the Company's products are characterized by rapidly
changing technology and evolving industry standards. In addition, markets
for C-Cube's products are characterized by intense price competition. As
the markets for the Company's products develop and competition increases,
C-Cube anticipates that product life cycles will shorten and average
selling prices will decline.* In particular, average selling price and
product gross margin for each of the Company's products will decline as
such products mature and as per order unit volumes for such products
increase.* The Company's operating results will depend to a significant
extent on its ability to continue to successfully introduce new products on
a timely basis and to reduce costs of existing products.* In particular,
C-Cube currently intends to announce several new products over the next
year, including next generation MPEG-1 and MPEG-2 decoders.* There can be
no assurance that these products will be successfully developed or will
achieve market acceptance, and these products are not expected to
contribute significantly to revenues in the first half of 1998. The failure
of any of these products to be successfully introduced and achieve market
acceptance could have a material adverse effect on the Company's business
and results of operations. In addition, the Company continues to sell a
number of earlier generation products; any failure to manage the transition
to new products effectively would have a material adverse effect on the
Company's business and results of operations. The success of new product
introductions is dependent on several factors, including proper new product
definition, product cost, timely completion and introduction of new product
designs, quality of new products, differentiation of new products from
those of the Company's competitors and market acceptance of C-Cube's and
its customers' products. As a result, the Company believes that continued
significant expenditures for research and development will be required in
the future.* Because of the complexity of its products, C-Cube has
experienced delays from time to time in completing development and
introduction of new products, and, as a result, has from time to time not
achieved the market share anticipated for such products. There can be no
assurance that such delays will not be encountered in the development and
introduction of future products, including the products currently expected
to be announced over the next year. There can be no assurance that the
Company will successfully identify new product opportunities and develop
12<PAGE>
and bring new products to market in a timely manner, that products or
technologies developed by others will not render C-Cube's products or
technologies obsolete or noncompetitive, or that the Company's products
will be selected for design into the products of its targeted customers.
The failure of any of the Company's new product development efforts could
have a material adverse effect on C-Cube's business and results ofoperations. |
