The Company's 8.0% revenue increase in 1998 was primarily attributable to the revenue
growth of the XC4000X product family, which includes the XC4000EX and XC4000XL devices, as
well as revenue growth from the XC5200 and XC9500 product families. The revenue growth
from these products was offset by decreased revenues from the Company's first generation
products, including the Company's XC3000 product family and the Company's XC4000 family, a
mature second generation product line. New products, which include the XC4000X, Spartan
and XC9500 families, contributed nearly $70 million in revenue in fiscal 1998 compared to
approximately $7 million in fiscal 1997. Despite the significant growth in new product
revenues, fiscal 1998 revenues increased only 8.0% over fiscal 1997 as revenues were
impacted by an overall slowdown in the semiconductor market, increased price competition,
inventory reductions at end customers and a general economic downturn in the Asia Pacific
region. Fiscal 1997 revenues, as compared to fiscal 1996, were significantly impacted by
price competition as well as a semiconductor industry inventory correction, which reduced
Revenue contribution by programmable logic product line reflected a mix between
increased customer demand for low cost, medium range density programmable logic devices
(PLDs) and the functionality and performance provided by the Company's higher density and
higher speed programmable logic devices. Revenues from proprietary products, for which
there is no second source competitor, increased from 91.0% of aggregate revenues in 1997
to a record 94.1% in 1998. Deriving revenues from leading-edge programmable logic
solutions has been emphasized by the Company. The Company's corporate pricing strategy
aims to expand the market for its products by reducing sales prices proportional to cost
reductions achieved in the manufacturing of these products. The Company intends to
continue to actively pursue a strategy of broadening the markets it serves through the
enhancement of software design tools, availability of pre-defined cores of logic, the
introduction of architectures offering new functionality, and the reduction of IC prices
through continuous advancements in the silicon manufacturing process.
Revenues for the Company's first generation products, which include the XC2000, XC3000
and XC3100 families, represented 25.5% of total revenues in fiscal 1998, as compared to
32.2% in fiscal 1997. The Company's second generation products, including the XC4000,
XC4000X and XC5200 families, represented 58.3% of total revenues in fiscal 1998, as
compared to 53.2% in fiscal 1997. Combined revenues from the Company's XC4000 and XC4000X
product lines represented 49.0% of total revenues in fiscal 1998 compared to 46.5% in
fiscal 1997, a dollar increase of 13.7% to $300.7 million. Revenues from other
programmable logic products, which include the XC7000 and XC9500 CPLD families, HardWire
and serial proms, increased from 11.6% to 13.5% of total revenues in fiscal 1998 as
compared to the prior year, mostly due to the increased revenue from the XC9500 family.
Revenue from the XC9500 family increased from $2.3 million in 1997 to $13.9 million in
1998. No single end customer accounted for more than 5% of revenues in fiscal years 1998
or 1997 or 6% of revenues in 1996.
During fiscal 1998, the Company's total PLD unit sales increased 28%, as compared to
fiscal 1997. The average selling price for the highest volume PLD products decreased over
30% from fiscal 1997 prices while individual products within certain families experienced
price decreases in excess of 50% during the year. The Company believes that price
decreases are instrumental in expanding market share to the extent that the Company can
maintain acceptable returns. Price erosion has been common in the semiconductor industry,
as advances in both architecture and manufacturing process technology have permitted
continual reductions in cost. The Company relies upon introducing new products, which
incorporate advanced features and other price/performance factors such that higher average
selling prices and higher margins are achievable despite the price erosion on mature
Xilinx's software design tools are used by the Company's customers to implement designs
in the Company's programmable logic devices. Cumulative licenses for proprietary software
design tools sold to customers through the end of 1998 totaled approximately 42,000 units,
as compared to approximately 30,000 and 24,000 units at the end of 1997 and 1996,
respectively. The increase in software revenue seats resulted primarily from increased
demand for the Company's lower cost, easier to use Foundation Series software introduced
in fiscal 1997. Software revenues decreased from $17.1 million in both fiscal 1996 and
1997 to $16.5 million in fiscal 1998. Although software seats increased, software revenue
decreased 3.4% due to the change in the sales mix towards lower priced products as well as
price reductions for specific products. Software sales as a percentage of total revenues
represented approximately 3% of revenues in all years presented.
International revenues represented approximately 38%, 36% and 35% of total revenues for
1998, 1997 and 1996, respectively. International revenues are derived from customers in
Europe, Japan and Asia Pacific/Rest of World which represented approximately 23%, 10% and
5% of the Company's worldwide sales, respectively, in fiscal 1998. Revenue growth in
Europe and Asia Pacific/Rest of World over the past year was 11.9% and 26.6%,
respectively. Revenues from Japan were adversely impacted by the weakening yen, as yen
denominated revenues increased approximately 16% year-to-year but grew approximately 6%
when translated into US dollars at the then prevailing exchange rates.
| Percentage of revenue
*Includes write-off of discontinued product family of $5
million. Gross margin as a percentage of revenues was 62.3% excluding this charge.
The gross margin percentage remained consistent from fiscal 1997 to 1998, excluding the
impact of a $5.0 million write-off of the discontinued product family, as the selling
price reductions were offset by the favorable impact of lower wafer prices from wafer
suppliers, manufacturing process technology improvements, the impact of the strengthened
US dollar exchange rate against the yen, and improved yields. The increase in the cost of
revenues as a percentage of revenues in 1997 as compared to 1996 was primarily
attributable to selling price reductions and increased inventory reserves relating to an
expanded level of inventory, partially offset by the favorable impact of lower wafer costs
and improved yields. Over the past three years, Xilinx has also been able to offset much
of the erosion in gross margin percentages on more mature integrated circuits with
increased volumes of newer, proprietary, higher margin products, although no assurance can
be given that the Company will do so in the future. The Company recognizes that ongoing
price reductions for its integrated circuits are a significant element in expanding the
market for its products. Company management believes that gross margin objectives in the
range of 60% to 62% of revenues are consistent with expanding market share while realizing
acceptable returns, although there can be no assurance that future gross margins will be
in this range.
During fiscal 1997, the Company discontinued the XC8100 family of one-time programmable
antifuse devices. As a result, the Company recorded a pretax charge against earnings of
$5.0 million. This charge primarily related to the write-off of inventory and for
termination charges related to purchase commitments to foundry partners for
work-in-process wafers which had not completed the manufacturing process.
RESEARCH AND DEVELOPMENT.
|Research and development
| Percentage of revenue
The Company continued to increase the amount spent on research and development, as it
has done in each year of its fourteen-year history. During fiscal 1998, the increase in
research and development expenses was primarily attributable to the increased costs
associated with designing and developing new product architectures of complex, high
density devices as well as labor-related expenses. The increase in research and
development expenses from fiscal 1996 to 1997 was primarily attributable to increased
headcount and labor expenses, increased purchases of engineering wafers and increased
facility and support costs associated with an expanded scope of operations. The Company
remains committed to a significant level of research and development effort in order to
continue to compete aggressively in the programmable logic marketplace. Through March 31,
1998, the Company has received more than 200 US patents and maintains an active program of
filing for additional patents in the areas of software, IC architecture and design. As of
March 31, 1998, research and development personnel were split approximately 45% for
software development and 55% for IC design and process development. Xilinx has not
capitalized any of the costs associated with its software development.
MARKETING, GENERAL AND ADMINISTRATIVE.
|Marketing, general and
The 8.4% increase in marketing, general and administrative expenses in fiscal 1998 was
primarily attributable to increases in headcount and related employee expenses and to a
lessor extent an increase in legal expenses. Sales and support expenses have increased
each year due to increasing personnel and labor costs and greater commission expenses
associated with higher revenues. Sales and support expenses increased in fiscal 1997 over
1996 due to increased personnel and labor costs and increased commissions due to changes
in the revenue channel mix. The Company remains committed to controlling administrative
expenses. However, the timing and extent of future legal costs associated with the ongoing
enforcement of the Company's intellectual property rights are not readily predictable and
may significantly increase the level of general and administrative expenses in the future.
NON-RECURRING CHARGES. During fiscal 1996, the Company incurred a $19.4 million
non-recurring write-off of in-process technology relating to the acquisition of NeoCAD,
Inc. See Note 3 of Notes to Consolidated Financial Statements.
|Operating income, as
|Operating income before
write-off and non-recurring
The decrease in operating income as a percentage of revenues in 1998 from 1997, before
consideration of the write-off, is primarily a result of the 8.0% revenue growth in 1998
in comparison to a 13.2% increase year-to-year in research and development spending, and
an 8.4% increase in marketing, general and administrative spending. The decrease in
operating income in fiscal 1997 from 1996 was primarily a result of the 1.3% revenue
growth in 1997 in comparison to 10% increases year-to-year in both research and
development spending and marketing, general and administrative spending. Operating income
as a percentage of revenues could be adversely impacted in future years by the factors
discussed throughout this document, particularly those noted in "Factors Affecting
Future Operating Results."
INTEREST AND OTHER, NET.
|Interest income and other
| Percentage of revenue
The Company earns interest income on its cash, cash equivalents, short-term investments
and restricted investments. The amount of interest earned is a function of the balance of
cash invested as well as prevailing interest rates. The Company incurs interest expense on
the $250 million 5¼% convertible subordinated notes issued in November 1995. The
Company's investment portfolio contains tax-advantaged municipal securities, which have
pretax yields that are less than the interest rate on the convertible subordinated notes.
For financial reporting purposes, the Company effectively records the difference between
the pretax and tax-equivalent yields as a reduction in provision for taxes on income.
Interest and other income for 1998 remained consistent with the amount in 1997. In
1998, average cash and investment balances and average interest rates remained fairly
consistent with the prior year, resulting in comparable net interest and other income over
both years. The increase in interest income in fiscal 1997 over the prior year was
primarily attributable to higher investment portfolio balances and joint venture equity
income. As a result of the difference in interest income and expense yields and future
uses of the Company's investment portfolio, levels of net interest and other income could
decrease in the future.
PROVISION FOR INCOME TAXES.
|Provision for taxes on
*Includes non-recurring write-off of in-process technology
relating to the acquisition of NeoCAD. Excluding the write-off of in-process technology,
in fiscal 1996 the Company's effective tax rate was 36.5%.
The tax rate for fiscal 1998 as compared to fiscal 1997, as well as the tax rate for
fiscal 1997 as compared to fiscal 1996, was favorably impacted by legislation reinstating
the R&D Tax Credit as well as increased profits in foreign operations where the tax
rate is lower than the US rate.
JOINT VENTURE EQUITY INCOME. The Company records its 25% proportional ownership
of the net income of United Silicon Inc. (USIC), a wafer fabrication joint venture located
in Taiwan, as joint venture equity income. To date, USIC's net income has resulted
primarily from favorable foreign currency exchange gains as well as interest earned on its
investment portfolio. Through the second quarter of fiscal 1998, equity income was
immaterial and remains classified in "Interest income and other." The Company
expects to incur joint venture equity losses during most of fiscal 1999 as the USIC wafer
fabrication facility begins to ramp up production. Many of the expenses associated with
full foundry operation will be incurred in the early stages of limited production, and the
Company expects that profitability of the joint venture will occur, if at all, only after
a sufficient volume of wafer production is obtained.
INFLATION. To date, the effects of inflation upon the Company's financial
results have not been significant.