Citrix 2006 Annual Report Download - page 82

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among other things, recent and historical return rates
for both, specific products and distributors, estimated
distributor inventory levels by product, the impact of any
new product releases and projected economic conditions.
Actual product returns for stock balancing and price
protection provisions incurred are, however, dependent
upon future events, including the amount of stock
balancing activity by distributors and the level of distributor
inventories at the time of any price adjustments. The
Company continually monitors the factors that influence the
pricing of its products and distributor inventory levels and
makes adjustments to these provisions when it believes
actual returns and other allowances could differ from
established reserves. The Company’s ability to recognize
revenue upon shipment to distributors is predicated on its
ability to reliably estimate future stock balancing returns.
If actual experience or changes in market condition
impairs the Company’s ability to estimate returns, it would
be required to defer the recognition of revenue until the
delivery of the product to the end-user. Allowances for
estimated product returns amounted to approximately
$1.7 million and $2.3 million at December 31, 2006 and
December 31, 2005, respectively. The Company has not
reduced and has no current plans to reduce its prices
for inventory currently held by distributors. Accordingly,
there were no reserves required for price protection at
December 31, 2006 and 2005. The Company also records
estimated reductions to revenue for customer programs
and incentive offerings including volume-based incentives.
If market conditions were to decline, the Company could
take actions to increase its customer incentive offerings,
which could result in an incremental reduction to revenue at
the time the incentive is offered.
Product Concentration
The Company derives a substantial portion of its revenues
from its Presentation Server product and anticipates that
this product and future derivative products and product
lines based upon this technology will continue to constitute
a majority of its revenue. The Company could experience
declines in demand for products, whether as a result of
general economic conditions, new competitive product
releases, price competition, lack of success of its strategic
partners, technological change or other factors.
Cost of Revenues
Cost of product license revenues consists primarily of
hardware, product media and duplication, manuals,
packaging materials, shipping expense, server capacity
costs and royalties. In addition, the Company is a party
to licensing agreements with various entities, which give
the Company the right to use certain software code in
its products or in the development of future products
in exchange for the payment of fixed fees or amounts
based upon the sales of the related product. The licensing
agreements generally have terms ranging from one to five
years, and generally include renewal options. However,
some agreements may be perpetual unless expressly
terminated. Royalties and other costs related to these
agreements are included in cost of revenues. Cost of
services revenue consists primarily of compensation
and other personnel-related costs of providing technical
support and consulting, as well as, the Company’s online
services. Also included in cost of revenues is amortization
of product related intangible assets which includes
acquired core and product technology and
associated patents.
Foreign Currency
The functional currency of each of the Company’s wholly-
owned foreign subsidiaries is the U.S. dollar. Monetary
assets and liabilities of the subsidiaries are remeasured into
U.S. dollars at year end exchange rates, and revenues and
expenses are remeasured at average rates prevailing during
the year. Remeasurement and foreign currency transaction
(losses) gains of approximately $(0.2) million, $(0.4) million
and $1.8 million for the years ended December 31, 2006,
2005, and 2004, respectively, are included in other
(expense) income, net, in the accompanying consolidated
statements of income.
Derivatives and Hedging Activities
In accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its
related interpretations and amendments, the Company
records derivatives as either assets or liabilities on the
balance sheet and measures those instruments at fair
value. For derivatives that are designated as and qualify
as effective cash flow hedges, the portion of gain or