Adobe 2004 Annual Report Download - page 93

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93
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are short-term
investments, primarily fixed-income securities, derivatives, hedging foreign currency and interest rate risk,
and accounts receivable.
Our investment portfolio consists of investment-grade securities diversified among security types,
industries, and issuers. Our cash and investments are held and managed by recognized financial institutions
that follow Adobe’s investment policy. Our policy limits the amount of credit exposure to any one security
issue or issuer, and we believe no significant concentration of credit risk exists with respect to these
investments.
We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges
through a policy that establishes counterparty limits. We also have minimum rating requirements for all
bank counterparties.
Credit risk in receivables is limited to OEM partners, dealers and distributors of hardware and software
products to the retail market, and to customers whereby we license software directly. Management believes
that any risk of loss is reduced due to the diversity of our customers and geographic sales areas. A credit
review is completed for our new distributors, dealers, and OEM partners. We also perform ongoing credit
evaluations of our customers’ financial condition and require letters of credit or other guarantees, whenever
deemed necessary. The credit limit given to the customer is based on our risk assessment of their ability to
pay, country risk, and other factors and is not contingent on the resale of the product or on the collection of
payments from their customers. We also purchase credit insurance to mitigate credit risk in some foreign
markets where we believe it is warranted. If we license our software to a customer where we have a reason
to believe the customer’s ability to pay is not probable, due to country risk or credit risk, we will not
recognize the revenue. We will revert to recognizing the revenue on a cash basis, assuming all other criteria
for revenue recognition has been met. For discussion of significant customers as of December 3, 2004, see
Note 17.
We derive a significant portion of our OEM PostScript and Other licensing revenue from a small
number of OEM partners. Our OEM partners on occasion seek to renegotiate their royalty arrangements.
We evaluate these requests on a case-by-case basis. If an agreement is not reached, a customer may decide
to pursue other options, which could result in lower licensing revenue for us.
Note 17. Industry Segment, Geographic Information, and Significant Customers
We have four reportable segments: Digital Imaging and Video, Creative Professional, Intelligent
Documents, and OEM PostScript and Other. The Digital Imaging and Video segment provides users with
software for creating, editing, enhancing and sharing digital images and photographs, digital video, audio
and animations. The Creative Professional segment provides software for professional page layout,
professional Web page layout, graphic and illustration creation, technical document publishing and
business publishing. Additionally, this segment provides Photoshop and Acrobat Professional as part of its
Adobe Creative Suite products. The Intelligent Documents segment provides electronic document
distribution software that allows users to create, enhance, annotate and securely send Adobe PDF files that
can be shared, viewed, navigated and printed exactly as intended on a broad range of hardware and
software platforms. In addition, this segment provides server-based solutions for enterprises, in the areas of
document generation, document process management, document collaboration, and document control and
security. The OEM PostScript and Other segment includes printing technology used to create and print
simple or visually rich documents with precision.
The accounting policies of the operating segments are the same as those described in Note 1. With the
exception of goodwill, we do not identify or allocate our assets by operating segment. See Note 5 for the
allocation of goodwill to our reportable segments.