Avid 2006 Annual Report Download - page 72

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these products, the Company records revenue based on satisfying the criteria in Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
In connection with many of the Company’s product sale transactions, customers may purchase a maintenance and
support agreement. The Company recognizes revenue from maintenance contracts on a ratable basis over their
term. The Company recognizes revenue from training, installation or other services as the services are performed.
The Company uses the residual method to recognize revenues when an order includes one or more elements to
be delivered at a future date and evidence of the fair value of all undelivered elements exists. Under the residual
method, the fair value of the undelivered element, typically professional services or maintenance, is deferred
and the remaining portion of the total arrangement fee is recognized as revenues related to the delivered
elements. If evidence of the fair value of one or more undelivered elements does not exist, revenues are deferred
and recognized when delivery of those elements occurs or when fair value can be established. Fair value is
typically based on the price charged when the same element is sold separately to customers. However, in certain
transactions, fair value of maintenance is based on the renewal price that is offered as a contractual right to the
customer, provided that such renewal price in substantive. The Company’s current pricing practices are influenced
primarily by product type, purchase volume, term and customer location. Management reviews services revenues
sold separately and corresponding renewal rates on a periodic basis and updates, when appropriate, the fair value
for such services used for revenue recognition purposes to ensure that it reflects the Company’s recent pricing
experience.
In most cases, the products the Company sells do not require significant production, modification or customization
of software. Installation of the products is generally routine, requires minimal effort and is not typically performed
by the Company. However, certain transactions, typically those involving orders from end-users for a significant
number of products for a single customer site, such as news broadcasters, may require that the Company perform
an installation effort that is deemed to be non-routine and complex. In these situations, the Company does not
recognize revenue for either the products shipped or the installation services until the installation is complete. In
addition, if such orders include a customer acceptance provision, no revenue is recognized until the customer’s
acceptance of the products and services has been received or the acceptance period has lapsed.
Telephone support, enhancements and unspecified upgrades typically are provided at no additional charge
during the product’s initial warranty period (generally between 30 days and twelve months), which precedes
commencement of the maintenance contracts. The Company defers the fair value of this support period and
recognizes the related revenue ratably over the initial warranty period. The Company also from time to time offers
certain customers free upgrades or specified future products or enhancements. For each of these elements that
are undelivered at the time of product shipment and provided that the Company has vendor specific objective
evidence regarding the fair value of the undelivered element, the Company defers the fair value of the specified
upgrade, product or enhancement and recognizes that revenue only upon later delivery or at the time at which the
remaining contractual terms relating to the upgrade have been satisfied.
A significant portion of the Company’s revenue is derived from indirect sales channels, including authorized resellers
and distributors. Within the Company’s Professional Video segment, resellers and distributors are generally not
granted rights to return products to us after purchase, and actual product returns from them have been insignificant
to date. However, distributors of the Avid Media Composer, Avid Xpress Pro and Avid Mojo product lines have a
contractual right to return a percentage of prior quarter purchases. The return provision for these distributors has
not had a material impact on the Company’s results of operations. In contrast, some channel partners, particularly
the Company’s Audio and certain Consumer Video channel partners, are offered limited rights of return, stock
rotation, and price protection. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 48,
“Revenue Recognition When Right of Return Exists,” the Company records a provision for estimated returns and
other allowances, as a reduction of revenues, in the same period that related revenues are recorded. Management
estimates must be made and used in connection with establishing and maintaining a sales allowance for expected
returns and other credits. In making such estimates, the Company analyzes historical returns and credits and the
amounts of products held by major resellers and considers the impact of new product introductions, changes in
customer demand, current economic conditions and other known factors. The Company maintains a rolling history
of returns on a product-by-product basis and analyzes returns and credits by product category. The amount and
timing of the Company’s revenue for any period may be impacted if actual product returns or other reseller credits
prove to be materially different from the Company’s estimates. To date actual returns and other allowances have not
differed from management’s estimates.