Adobe 2001 Annual Report Download - page 37

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Due to the factors noted above, our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings, or any delay in the release
of any product or upgrade, compared to analysts’ or investors’ expectations could cause, and has caused in
the past, an immediate and significant decline in the trading price of our common stock. Additionally, we
may not learn of such shortfalls or delays until late in the fiscal quarter, which could result in an even more
immediate and greater decline in the trading price of our common stock. Finally, we participate in a highly
dynamic industry. In addition to factors specific to us, changes in analysts’ earnings estimates for us or our
industry and factors affecting the corporate environment, our industry, or the securities markets in general
will often result in significant volatility of our common stock price.
Critical Accounting Policies
We have identified the following as critical accounting policies to our company: revenue recognition,
accounting for our marketable and non-marketable fixed income and equity securities, and accounting for
leases of property and equipment.
Revenue Recognition
We recognize application products revenue upon shipment, net of estimated returns, provided that
collection is determined to be probable and no significant obligations remain. Application product revenue
from distributors is subject to agreements allowing limited rights of return, rebates, and price protection.
Accordingly, we reduce revenue recognized for estimated future returns, price protection when given, and
rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically
based upon historical rates of returns, inventory levels in the distribution channel, and other related
factors. The estimates and reserves for rebates and price protection are based on historical rates. While
management believes it can make reliable estimates for these matters, nevertheless unsold products in
these distribution channels are exposed to rapid changes in consumer preferences or technological
obsolescence due to new operating environments, product updates or competing products. Accordingly, it
is possible that these estimates will change in the near future or that the actual amounts could vary
materially from our estimates and that the amounts of such changes could seriously harm our business.
We provide free technical phone support to customers who are under warranty for support. We accrue
the estimated cost of free technical phone support upon shipment of software and amortize the accrued
internal and external cost of telephone support to sales and marketing expense.
We also license software with post-contract customer support (‘‘PCS’’) for two years. PCS includes
rights to upgrades, when and if available, a limited period of telephone support, updates, and bug fixes.
Statement of Position 97-2 (‘‘SOP 97-2’’), ‘‘Software Revenue Recognition,’’ as amended, generally
requires revenue earned on software arrangements involving multiple elements to be allocated to each
element based on the relative fair value of the elements. The arrangement fee for multiple-element
arrangements is allocated to each element of the arrangement, such as maintenance and support services,
based on the relative fair values of the elements. We determine the fair value of each element in multi-
element arrangements based on vendor-specific objective evidence (‘‘VSOE’’). VSOE for each element is
based on the price charged when the same element is sold separately. If evidence of fair value of all
undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue
is recognized using the residual method. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. Revenue
allocated to maintenance and support is recognized ratably over the maintenance term (typically two
years).
We record OEM licensing revenue, primarily royalties, when OEM partners ship products
incorporating Adobe software, provided collection of such revenue is deemed probable. We have no
remaining obligations in relation to such licensing revenue.
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