Adobe 2014 Annual Report Download - page 46

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We expect that the amount of unbilled deferred revenue backlog will change from period to period due to certain factors,
including the timing and duration of large customer subscription, SaaS and managed service agreements, varying billing cycles
of these agreements, the timing of customer renewals, the timing of when unbilled deferred revenue backlog is to be billed, changes
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 typically 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
2014 Fiscal 2013 Fiscal 2012 % Change 2014-2013 % Change 2013-2012
Product ........................................................................ $ 97.1 $ 138.2 $ 121.7 (30)% 14%
Percentage of total revenue....................................... 2% 3% 3%
Subscription ................................................................ 335.5 278.1 219.1 21 % 27%
Percentage of total revenue....................................... 8% 7% 5%
Services and support ................................................... 189.5 170.3 143.0 11 % 19%
Percentage of total revenue....................................... 5% 4% 3%
Total cost of revenue................................................... $ 622.1 $ 586.6 $ 483.8 6 % 21%
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
2014-2013 % Change 2013-2012
Amortization of purchased intangibles and technology license arrangements....................... (20)% 27%
Cost of sales............................................................................................................................ (4) (8)
Royalty cost ............................................................................................................................ (2) —
Excess and obsolete inventory................................................................................................ 1 (4)
Various individually insignificant items................................................................................. (5) (1)
Total change......................................................................................................................... (30)% 14%
Cost of product revenue decreased during fiscal 2014 as compared to fiscal 2013 primarily due to decreases in amortization
of purchased intangibles and technology license arrangements, cost of sales and royalty costs, slightly offset by an increase in
excess and obsolete inventory. Amortization of purchased intangibles and technology license arrangements decreased as compared
with the year-ago period as we entered into certain technology licensing arrangements for which payments of $26.5 million related
to historical use of certain technology licensing arrangements were expensed as cost of product revenue during fiscal 2013. Cost
of sales decreased as compared with the year-ago period due to decreases in the number of perpetual units sold and associated
packaging costs as we continue to focus our development and sales efforts on Creative Cloud. Royalty cost decreased as compared
to the year-ago period primarily due to decreases in revenue from our perpetual offerings. Excess and obsolete inventory increased
as compared to the year-ago period as a result of changes in reserve requirements for CS6 shrink boxes as we have discontinued
the general availability of CS6 on a perpetual licensing basis.
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 was capitalized and is being amortized on a straight-line basis over the estimated useful lives ranging
from five to ten years. 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 a decline in the number of
perpetual units sold and packaging costs associated with our CS6 products as we focus our 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.