Adobe 2012 Annual Report Download - page 65

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Product
Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization
related to localization costs, purchased intangibles and acquired rights to use technology and the costs associated with the
manufacturing of our products.
Cost of product revenue decreased due to the following:
% Change
2012-2011 % Change 2011-2010
Cost of sales............................................................................................................................ (6)% — %
Excess and obsolete inventory................................................................................................ 2 —
Amortization of purchased intangibles................................................................................... (1) 6
Royalty cost ............................................................................................................................ — (3)
Various individually insignificant items................................................................................. 2 (4)
Total change......................................................................................................................... (3)% (1)%
Cost of product revenue decreased during fiscal 2012 as compared to fiscal 2011 primarily due to decrease in cost of sales
and amortization of purchase intangibles, offset by increases in excess and obsolete inventory. Cost of sales decreased primarily
due to a decrease in packaging costs associated with our CS6 products. Amortization of purchased intangibles decreased primarily
due to certain intangible assets purchased through our acquisitions in prior years that were fully amortized in fiscal 2012. Excess
and obsolete inventory increased primarily due to increased reserve requirements for Adobe Creative Suite 5 and Adobe Creative
Suite 5.5 products necessitated by the launch of CS6 in the second quarter of fiscal 2012.
Cost of product revenue decreased during fiscal 2011 as compared to fiscal 2010 primarily due to decrease in royalty costs,
offset by increase in amortization of purchase intangibles. Royalty costs decreased primarily due to a decrease in obligations to
certain key vendors. Amortization of purchased intangibles increased primarily due to amortization expense associated with
intangible assets purchased through acquisitions during fiscal 2011 and our Day acquisition in the fourth quarter of 2010.
Subscription
Cost of subscription revenue consists of expenses related to operating our network infrastructure, including depreciation
expenses and operating lease payments associated with computer equipment, data center costs, salaries and related expenses of
network operations, implementation, account management and technical support personnel, amortization of intangible assets and
allocated overhead. We enter into contracts with third-parties for the use of their data center facilities and our data center costs
largely consist of the amounts we pay to these third-parties for rack space, power and similar items.
Cost of subscription revenue increased in fiscal 2012 due to the following:
% Change
2012-2011
Amortization of purchased intangibles ................................................................................................................ 6%
Hosted server costs............................................................................................................................................... 7
Total change....................................................................................................................................................... 13%
Cost of subscription revenue increased during fiscal 2012 as compared to fiscal 2011 primarily due to increased amortization
of purchased intangibles and hosted server costs. Amortization of purchased intangibles increased primarily due to increased
amortization of intangible assets associated with our acquisition of Efficient Frontier in the first quarter of fiscal 2012. Hosted
server costs increased primarily due to increases in compensation and related benefits driven by additional headcount and hosting
expenses associated with the launch of our Creative Cloud services in the second quarter of fiscal 2012. Also contributing to the
increase in hosted server costs is the increase in depreciation expense from higher capital expenditures in prior years and data
center costs related to higher transaction volumes in our Adobe Marketing Cloud services and Creative Cloud.
Cost of subscription revenue remained relatively stable during fiscal 2011 as compared to fiscal 2010 primarily due to
decreased amortization of purchased intangibles resulting from certain intangible assets purchased through our acquisition of
Omniture that were fully amortized in fiscal 2011. This was offset in part by increases in costs associated with compensation and
related benefits driven by additional headcount and increases in data center costs related to higher transaction volumes in our
Adobe Marketing Cloud services.
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