Adobe 2004 Annual Report Download - page 72

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72
will continue to monitor these and other relevant factors used to measure expected volatility for future
option grants.
Also, beginning with the third quarter of fiscal 2003, we decreased our estimate of the expected life of
new options granted to our employees from 3 years to 2.5 years. We based our expected life assumption on
historical experience as well as the terms and vesting periods of the options granted. The reduction in the
estimated expected life was a result of an analysis of our historical experience, including the same periods
of time used for our volatility analysis.
The assumptions used to value the option grants and purchase rights are stated as follows:
Revenue Recognition
Our revenue is derived from the licensing of application and server-based software products,
professional services, and maintenance and support. We recognize revenue when persuasive evidence of an
arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable
and collection is probable.
Product revenue
We recognize our product revenue upon shipment, provided collection is determined to be probable
and no significant obligations remain on our part. Our desktop application products revenue from
distributors is subject to agreements allowing limited rights of return, rebates, and price protection.
Accordingly we reduce revenue recognized for estimated future returns, price protection and rebates at the
time the related revenue is recorded. The estimates for returns are adjusted periodically based upon
historical rates of returns, inventory levels in the distribution channel and other related factors.
We provide free technical phone support to customers for our shrink-wrapped application products
under warranty. We record the estimated cost of free technical phone support upon shipment of software.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products
incorporating Adobe software, provided collection of such revenue is deemed probable.
Our product-related deferred revenue includes maintenance upgrade revenue and customer advances
under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is
included in our product revenue line item as the maintenance primarily entitles customers to receive
product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the
fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the
specified free upgrade expires.
Services and support revenue
Our services and support revenue is composed of professional services (such as consulting services and
training) and maintenance and support, primarily related to the licensing of our Intelligent Documents
server solution products. Our support revenue also includes technical support and developer support to
partners and developer organizations related to our desktop products.
Our professional services revenue is recognized using the percentage of completion method and is
measured monthly based on input measures, such as on hours incurred to date compared to total estimated
hours to complete, with consideration given to output measures, such as contract milestones when
Fiscal Years
2004 2003 2002
Expected life of options (in years) ..............................................
.
2.5 2.5 – 3 3
Expected life of purchase rights (in years)..................................
.
1.24 1.25 1.24
Volatility .....................................................................................
.
34 – 40% 40 – 66% 69%
Risk free interest rate ― options.................................................
.
2.18 – 3.11% 1.37 – 2.23% 2.14 – 4.14%
Risk free interest rate ― purchase rights ....................................
.
1.24 – 1.76% 1.12 – 1.74% 1.96 – 3.03%
Dividend yield ............................................................................
.
0.093 – 0.125% 0.125% 0.125%