Adobe 2012 Annual Report Download - page 57

57
We must estimate certain royalty revenue amounts due to the timing of securing information from our customers. While
we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, our
assumptions and judgments regarding future products and services as well as our estimates of royalty revenue could differ from
actual events, thus materially impacting our financial position and results of operations.
Product revenue is recognized when the above criteria are met. We reduce the revenue recognized for estimated future
returns, price protection and rebates at the time the related revenue is recorded. In determining our estimate for returns and in
accordance with our internal policy regarding global channel inventory which is used to determine the level of product held by
our distributors on which we have recognized revenue, we rely upon historical data, the estimated amount of product inventory
in our distribution channel, the rate at which our product sells through to the end user, product plans and other factors. Our estimated
provisions for returns can vary from what actually occurs. Product returns may be more or less than what was estimated. The
amount of inventory in the channel could be different than what is estimated. Our estimate of the rate of sell-through for product
in the channel could be different than what actually occurs. There could be a delay in the release of our products. These factors
and unanticipated changes in the economic and industry environment could make our return estimates differ from actual returns,
thus materially impacting our financial position and results of operations.
In the future, actual returns and price protection may materially exceed our estimates as unsold products in the distribution
channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new
platforms, product updates or competing products. While we believe we can make reliable estimates regarding these matters, these
estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection reserves would change,
which would impact the total net revenue we report.
We recognize revenues for hosting services that are based on a committed number of transactions ratably beginning on the
date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees, and fees
billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these
fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending
on whether the revenue recognition criteria have been met.
Our consulting revenue is recognized on a time and materials basis 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 applicable.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as
expense on a straight-line basis over the requisite service period, which is generally the vesting period.
In fiscal 2012, the Executive Compensation Committee of Adobe's Board of Directors eliminated the use of stock option
grants for all employees and stock option grants to non-employee directors were minimal. In lieu of stock options, we granted
restricted stock units as the primary form of equity awards to employees. Stock option grants prior to fiscal 2012 continue to vest
over the requisite service period and had a material impact to stock-based compensation cost for fiscal 2012 and are expected to
have a material impact to stock-based compensation cost until the majority of stock options are fully vested.
We currently use the Black-Scholes option pricing model to determine the fair value of employee stock purchase plan
(“ESPP”) shares. This fair value is affected by our stock price as well as assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price volatility over the expected term of the awards, the expected term of
the awards, the risk-free interest rate, estimated forfeitures and expected dividends.
We use a 24-month expected term, which approximates our offering period. We estimate the volatility of our common stock
by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of
actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price
trends than historical volatility. We base the risk-free interest rate on zero-coupon yields implied from U.S. Treasury issues with
remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable
future and therefore use an expected dividend yield of zero in the option pricing model.
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense
only for those awards that are expected to vest.
If we use different assumptions for estimating stock-based compensation expense for ESPP shares in future periods or if
actual forfeitures differ materially from our estimated forfeitures for both ESPP shares and existing stock option grants that continue
Table of Contents