Citrix 2007 Annual Report Download - page 89

CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company licenses most of its software products bundled with a one year contract for license updates
that provide the end-user with free enhancements and upgrades to the licensed product on a when and if available
basis. Customers may also elect to purchase subscriptions for license updates, when not bundled with the initial
product release or purchase. Technical support, product training or consulting services may be purchased
separately by the customer. Online services are sold separately. The Company allocates revenue to license
updates and any other undelivered elements of the arrangement based on VSOE of fair value of each element and
such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described
above have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is recognized
at the outset of the arrangement using the residual method as the product licenses are delivered. If management
cannot objectively determine the fair value of each undelivered element based on the VSOE of fair value,
revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair
value can be objectively determined.
In the normal course of business, the Company is not obligated to accept product returns from its
distributors under any other conditions, unless the product item is defective in manufacture, but it does provide
most of its distributors with stock balancing and price protection rights. Stock balancing rights permit distributors
to return products to the Company up to the forty-fifth day of the fiscal quarter, subject to ordering an equal
dollar amount of its other products prior to the last day of the same fiscal quarter. Price protection rights require
that the Company grants retroactive price adjustments for inventories of its products held by distributors or
resellers if it lowers its prices for such products. Product items returned to the Company under the stock
balancing program must be in new, unused and unopened condition. The Company establishes provisions for
estimated returns for stock balancing and price protection rights, as well as other sales allowances, concurrently
with the recognition of revenue. The provisions are established based upon consideration of a variety of factors,
including, 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 at both
December 31, 2007 and December 31, 2006. 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, 2007 and 2006. 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 XenApp product (formerly 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.
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