Adobe 2004 Annual Report Download - page 37

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37
With regard to our product backlog, our experience is that the actual amount of backlog at any particular
time may not be a meaningful indicator of future business prospects. For example, prior to the finalization and
release of new products, we may have significant levels of orders for new product releases. At the end of fiscal
2004, we had significant levels of such backlog due to the announced, but yet to be completed and released new
version of Acrobat and related products. Our backlog of unfulfilled orders at the end of fiscal 2004, other than those
associated with new product releases, those pending credit review and those due to the application of our global
channel inventory policy, was approximately 4% of reported fourth quarter fiscal 2004 revenue. The comparable
backlog at the end of our fiscal 2004 third quarter was approximately 8% of third quarter fiscal 2004 revenue.
Cost of Revenues
Fiscal
2004
% Change
2004 to 2003
Fiscal
2003
% Change
2003 to 2002 Fiscal
2002
Product ...................................... $ 86.6 8% $ 79.9 (18)% $ 96.9
Percentage of total revenues.. 5% 6% 8%
Services and support ................. 17.8 36% 13.1 76 % 7.4
Percentage of total revenues.. 1% 1% 1%
Total cost of revenues............ $ 104.4 12% $ 93.0 (11)% $ 104.3
Product
Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory,
amortization related to localization costs and acquired technologies, and the costs associated with the manufacturing
of our products. In fiscal 2002, cost of product revenue also included hosted server costs associated with the Adobe
DesignTeam.
Cost of product revenue increased during fiscal 2004 as compared to fiscal 2003 primarily due to licensing costs
as a result of litigation settlements that occurred in fiscal 2004 and an increase in localization costs related to our
product launches. These increases were partially offset by a decrease in overall material costs.
Cost of product revenue decreased during fiscal 2003 as compared to fiscal 2002 primarily due to product mix.
During fiscal 2003, we received higher licensing revenue versus shrink-wrapped product revenue, compared to
fiscal 2002, which resulted in lower material costs. Additionally, cost of product revenue for fiscal 2002 included
the amortization and impairment costs associated with the Adobe DesignTeam, which was discontinued during the
third quarter of fiscal 2002.
Services and Support
Cost of services and support revenue is composed primarily of employee-related costs and related costs incurred
to provide consulting services, training and product support.
Cost of services and support revenue increased during fiscal 2004 as compared to fiscal 2003 due to costs
associated with our Expert Support program that was initiated during the second quarter of fiscal 2004. Additionally,
cost of services and support revenue increased due to compensation and related benefits as a result of higher
headcount and incentive compensation related to increases in services and support activities in fiscal 2004.
Cost of services and support revenue increased during fiscal 2003 as compared to fiscal 2002 primarily due to
the acquisition of Accelio during the second quarter of fiscal 2002.