Avid 2004 Annual Report Download - page 31

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In connection with many of our product sale transactions, customers typically purchase a one-year maintenance and
support agreement. We recognize revenue from maintenance contracts on a ratable basis over their term. We recognize
revenue from training, installation or other services as the services are performed.
We use the residual method to recognize revenues when an order includes one or more elements to be delivered at
a future date and evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of
the undelivered element, typically maintenance and support, is deferred and the remaining portion of the total arrangement
fee is recognized as revenue related to the delivered element. If evidence of the fair value of one or more undelivered
elements does not exist, we defer all revenues and only recognize them when delivery of those elements occurs or when fair
value can be established. Fair value is typically based on the price charged when the same element is sold separately to
customers. However, in certain transactions, fair value is based on the renewal price of the undelivered element that is
granted as a contractual right to the customer. Our current pricing practices are influenced primarily by product type,
purchase volume, term and customer location. We review services revenues sold separately and corresponding renewal rates
on a periodic basis and update, when appropriate, our fair value for such services used for revenue recognition purposes to
ensure that it reflects our recent pricing experience.
In most cases, our products do not require significant production, modification or customization of software.
Installation of the products is generally routine, requires minimal effort and is not typically performed by us. However, a
growing number of transactions, those typically involving orders from end-users for a significant number of products for a
single customer site, such as news broadcasters, require that we perform an installation effort that we deem to be complex
and non-routine. In these situations, we do not recognize revenue for either the products shipped or the installation services
until the installation is complete. In addition, if such orders include a customer acceptance provision, no revenue is
recognized until the customer’s acceptance of the products and services has been received or the acceptance period has
lapsed.
Telephone support, enhancements and unspecified upgrades typically are provided at no additional charge during
the product's initial warranty period (generally between 30 days and twelve months), which precedes commencement of the
maintenance contracts. We defer the fair value of this support period and recognize the related revenue ratably over the
initial warranty period. We also from time to time offer certain customers free upgrades or specified future products or
enhancements. For each of these elements that is undelivered at the time of product shipment, we defer the fair value of the
specified upgrade, product or enhancement and recognize that revenue only upon later delivery or at the time at which the
remaining contractual terms relating to the upgrade have been satisfied.
In 2004, approximately 72% of our revenue was derived from indirect sales channels, including authorized
resellers and distributors. Within our Video segment, our resellers and distributors are generally not granted rights to return
products to us after purchase, and actual product returns from them have been insignificant to date. However, distributors
of our Avid Xpress DV, Avid Xpress Pro and Avid Mojo product lines have a contractual right to return a percentage of
prior quarter purchases. The return provision for these distributors has not had a material impact on our results of
operations. In contrast, some channel partners, particularly those who resell our Audio products, are offered limited rights
of return, stock rotation and price protection.
Channel partners within our Audio segment are granted return rights to return or exchange products on a case-by-
case basis but are not provided a contractual right to do so. In compliance with Statement of Financial Accounting
Standards (“SFAS”) No. 48, “Revenue Recognition When Right of Return Exists”, we record a provision for estimated
returns and other allowances, as a reduction of revenues, in the same period that related revenues are recorded.
Management estimates must be made and used in connection with establishing and maintaining a sales allowance for
expected returns and other credits. In making such estimates, we analyze historical returns and credits and the amounts of
products held by major resellers, and consider the impact of new product introductions, changes in customer demand,
current economic conditions, and other known factors. We maintain a rolling history of returns on a product-by-product
basis and analyze returns and credits by product category. Material differences may result in the amount and timing of our
revenue for any period if our estimates of potential product returns or other reseller credits prove to be materially different
from actual experience.
At the time of a sale transaction, we make an assessment of the collectibility of the amount due from the customer.
Revenue is recognized only if we are reasonably assured that collection will occur. In making this assessment, we consider
customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that
collection is not reasonably assured based upon our credit review process, revenue is recognized on a cash-collected basis to
the extent that the other criteria of SOP 97-2 and SAB 104 are satisfied. At the outset of the arrangement, we assess
whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. In