Citrix 2005 Annual Report Download - page 50

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renewable฀ program฀ that฀ provides฀ subscribers฀ with฀ automatic฀ delivery฀ of฀ software฀ upgrades,฀ enhancements฀ and฀ maintenance฀
releases฀ when฀ and฀if฀they฀become฀available฀during฀ the฀ term฀of฀ subscription.฀Online฀ Services฀ revenues฀consist฀ primarily฀ of฀fees฀
related฀to฀online฀service฀agreements฀and฀are฀recognized฀ratably฀over฀the฀contract฀term.฀Technical฀Services฀revenues฀are฀comprised฀
of฀fees฀from฀technical฀support฀services฀which฀are฀recognized฀ratably฀over฀the฀contract฀term฀as฀well฀as฀revenues฀from฀product฀training฀
and฀certification,฀and฀consulting฀services฀revenue฀related฀to฀implementation฀of฀the฀Company’s฀products,฀which฀is฀recognized฀as฀
the฀services฀are฀provided.
The฀Company฀ licenses฀ its฀products฀ bundled฀ with฀ an฀ initial฀ subscription฀ for฀license฀updates฀ that฀provide฀ the฀ end-user฀ with฀ free฀
enhancements฀and฀upgrades฀to฀the฀licensed฀product฀on฀a฀when฀and฀if฀available฀basis.฀Customers฀may฀also฀elect฀to฀purchase฀technical฀
support,฀product฀training฀or฀ consulting฀services.฀The฀Company฀allocates฀revenue฀to฀license฀updates฀and฀any฀other฀undelivered฀
elements฀of฀the฀arrangement฀based฀on฀ VSOE฀of฀fair฀value฀of฀each฀element฀and฀such฀amounts฀are฀deferred฀until฀the฀applicable฀
delivery฀criteria฀ and฀other฀ revenue฀ recognition฀criteria฀described฀ above฀have฀been฀ met.฀The฀ balance฀of฀the฀revenue,฀net฀of฀ any฀
discounts฀inherent฀in฀the฀arrangement,฀is฀allocated฀to฀the฀delivered฀product฀using฀the฀residual฀method฀and฀recognized฀at฀the฀outset฀of฀
the฀arrangement฀as฀the฀product฀licenses฀are฀delivered.฀If฀management฀cannot฀objectively฀determine฀the฀fair฀value฀of฀each฀undelivered฀
element฀based฀on฀VSOE,฀revenue฀recognition฀is฀deferred฀until฀all฀elements฀are฀delivered,฀all฀services฀have฀been฀performed,฀or฀until฀
fair฀value฀can฀be฀objectively฀determined.
In฀the฀normal฀course฀of฀business,฀the฀Company฀does฀not฀permit฀product฀returns,฀but฀it฀does฀provide฀most฀of฀its฀distributors฀and฀
value-added฀resellers฀with฀stock฀balancing฀and฀price฀protection฀rights.฀Stock฀balancing฀rights฀permit฀distributors฀to฀return฀products฀to฀
the฀Company฀by฀the฀forty-fifth฀day฀of฀the฀fiscal฀quarter,฀subject฀to฀ordering฀an฀equal฀dollar฀amount฀of฀the฀Company’s฀other฀products฀
prior฀to฀the฀last฀day฀of฀the฀same฀fiscal฀quarter.฀Price฀protection฀rights฀require฀that฀the฀Company฀grant฀retroactive฀price฀adjustments฀
for฀inventories฀of฀products฀held฀by฀distributors฀or฀resellers฀if฀it฀lowers฀prices฀for฀such฀products.฀The฀Company฀establishes฀provisions฀
for฀estimated฀returns฀for฀stock฀balancing฀and฀price฀protection฀rights,฀as฀well฀as฀other฀sales฀allowances,฀concurrently฀with฀the฀recognition฀
of฀revenue.฀The฀provisions฀are฀established฀based฀upon฀consideration฀of฀a฀variety฀of฀factors,฀including,฀among฀other฀things,฀recent฀
and฀historical฀return฀rates฀for฀both฀specific฀products฀and฀distributors,฀estimated฀distributor฀inventory฀levels฀by฀product,฀the฀impact฀
of฀any฀new฀product฀releases฀and฀projected฀economic฀conditions.฀Actual฀product฀returns฀for฀stock฀balancing฀and฀price฀protection฀
provisions฀incurred฀are,฀however,฀dependent฀upon฀future฀events,฀including฀the฀amount฀of฀stock฀balancing฀activity฀by฀distributors฀
and฀the฀level฀of฀distributor฀inventories฀at฀the฀time฀of฀any฀price฀adjustments.฀The฀Company฀continually฀monitors฀the฀factors฀that฀influence฀
the฀pricing฀of฀its฀products฀and฀distributor฀inventory฀levels฀and฀makes฀adjustments฀to฀these฀provisions฀when฀it฀believes฀actual฀returns฀and฀
other฀allowances฀could฀differ฀from฀established฀reserves.฀The฀Company’s฀ability฀to฀recognize฀revenue฀upon฀shipment฀to฀distributors฀
is฀predicated฀on฀its฀ability฀to฀reliably฀estimate฀future฀stock฀balancing฀returns.฀If฀actual฀experience฀or฀changes฀in฀market฀condition฀
impairs฀the฀Company’s฀ability฀to฀estimate฀returns,฀it฀would฀be฀required฀to฀defer฀the฀recognition฀of฀revenue฀until฀the฀delivery฀of฀the฀
product฀to฀the฀end-user.฀Allowances฀for฀estimated฀product฀returns฀amounted฀to฀approximately฀$2.3฀million฀at฀December฀31,฀2005฀
and฀December฀31,฀2004.฀The฀Company฀has฀not฀reduced฀and฀has฀no฀current฀plans฀to฀reduce฀its฀prices฀for฀inventory฀currently฀held฀by฀
distributors฀or฀resellers.฀Accordingly,฀there฀were฀no฀reserves฀required฀for฀price฀protection฀at฀December฀31,฀2005฀and฀December฀31,฀2004.฀
The฀Company฀also฀records฀estimated฀reductions฀to฀revenue฀for฀customer฀programs฀and฀incentive฀offerings฀including฀volume-based฀
incentives.฀If฀market฀conditions฀were฀to฀decline,฀the฀Company฀could฀take฀actions฀to฀increase฀its฀customer฀incentive฀offerings,฀which฀
could฀result฀in฀an฀incremental฀reduction฀to฀revenue฀at฀the฀time฀the฀incentive฀is฀offered.
Product฀Concentration
The฀Company฀ derives฀a฀substantial฀ portion฀ of฀ its฀revenues฀ from฀ its฀Citrix฀ Presentation฀ Server฀product฀ and฀anticipates฀ that฀ this฀
product฀and฀future฀derivative฀products฀and฀product฀lines฀based฀upon฀this฀technology฀will฀continue฀to฀constitute฀a฀majority฀of฀its฀
revenue.฀The฀Company฀could฀experience฀declines฀in฀demand฀for฀products,฀whether฀as฀a฀result฀of฀general฀economic฀conditions,฀new฀
competitive฀product฀releases,฀price฀competition,฀lack฀of฀success฀of฀its฀strategic฀partners,฀technological฀change฀or฀other฀factors.
Cost฀of฀Revenues
Cost฀of฀product฀license฀revenues฀consists฀primarily฀of฀hardware,฀product฀media฀and฀duplication,฀manuals,฀packaging฀materials,฀
shipping฀expense,฀server฀capacity฀costs฀and฀royalties.฀In฀addition,฀the฀Company฀is฀a฀party฀to฀licensing฀agreements฀with฀various฀
entities,฀which฀give฀the฀Company฀the฀right฀to฀use฀certain฀software฀code฀in฀its฀products฀or฀in฀the฀development฀of฀future฀products฀in฀
exchange฀for฀the฀payment฀of฀a฀fixed฀fee฀or฀certain฀amounts฀based฀upon฀the฀sales฀of฀the฀related฀product.฀The฀licensing฀agreements฀
generally฀have฀terms฀ranging฀from฀one฀to฀five฀years,฀and฀generally฀include฀renewal฀options.฀However,฀some฀agreements฀may฀be฀
perpetual฀unless฀expressly฀terminated.฀Royalties฀and฀other฀costs฀related฀to฀these฀agreements฀are฀included฀in฀cost฀of฀revenues.฀Cost฀
Citrix฀Systems,฀Inc.
Notes฀to฀Consolidated฀Financial฀Statements฀(Continued)