Adobe 2013 Annual Report Download - page 45

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45
in customer financial circumstances and foreign currency fluctuations. Additionally, the unbilled deferred revenue backlog for
multi-year subscription agreements that are billed annually is typically higher at the beginning of the contract period, lower prior
to renewal and increases when the agreement is renewed. Accordingly, fluctuations in unbilled deferred revenue backlog may not
be a reliable indicator of future business prospects and the related revenue associated with these contractual commitments.
Cost of Revenue (dollars in millions)
Fiscal
2013 Fiscal
2012 Fiscal
2011 % Change
2013-2012 % Change
2012-2011
Product $ 138.2 $ 121.7 $ 125.7 14% (3)%
Percentage of total revenue 3% 3% 3%
Subscription 278.1 219.1 194.0 27% 13 %
Percentage of total revenue 7% 5% 5%
Services and support 170.3 143.0 118.2 19% 21 %
Percentage of total revenue 4% 3% 3%
Total cost of revenue $ 586.6 $ 483.8 $ 437.9 21% 10 %
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.
Fluctuations in cost of product revenue are due to the following:
% Change
2013-2012 % Change
2012-2011
Amortization of purchased intangibles and technology license arrangements 27% (1)%
Cost of sales (8) (6)
Excess and obsolete inventory (4) 2
Various individually insignificant items (1) 2
Total change 14% (3)%
Cost of product revenue increased during fiscal 2013 as compared to fiscal 2012 primarily due to an increase in amortization
of purchased intangibles and technology license arrangements offset by decreases in cost of sales and excess and obsolete inventory.
Amortization of purchased intangibles and technology license arrangements increased as we entered into certain technology
licensing arrangements totaling $51.8 million in the first quarter of fiscal 2013. Of this cost, an estimated $25.3 million was related
to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives
ranging from five to ten years. We estimated that the remaining cost of approximately $26.5 million was related to historical use
of licensing rights and was expensed as cost of product revenue in fiscal 2013. In connection with certain of these licensing
arrangements, we have the ability to acquire additional rights to use technology in the future. Cost of sales primarily decreased
due to the decrease in the number of perpetual units sold and packaging costs associated with our CS6 products. During May 2013,
we announced that, while we will continue to offer and support CS6 products, we plan to focus our future creative development
efforts on our Creative Cloud offering. Excess and obsolete inventory decreased due to decreased reserve requirements for CS6
as we continue to transition to more of a subscription based model.
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.
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.
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