Computer Associates 2006 Annual Report Download - page 54

Payments received in the current period that are attributable to later years of a license agreement have a positive
impact in the current period on billings and cash provided by continuing operating activities. Accordingly, to the
extent such payments are attributable to the later years of a license agreement, the license would provide a
correspondingly reduced contribution to billings and cash from operating activities during the license’s later years.
New Deferred Subscription Value — New deferred subscription value represents the total incremental value
(contract value) of software licenses sold in a period, which will be accounted for under our subscription
model of revenue recognition. In the second quarter of fiscal year 2005, we began offering more flexible
license terms to our channel partners’ end users, necessitating ratable recognition of revenue for the majority
of our indirect business. Prior to July 1, 2004, such channel license revenue had been recorded up-front on a sell-
through basis (when a distributor, reseller, or VAR sells the software product to its customers) and reported on the
“Software fees and other” line item in the Consolidated Statements of Operations. New deferred subscription value
excludes the value associated with single-year maintenance-only license agreements, license-only indirect sales,
and professional services arrangements and does not include that portion of bundled maintenance or unamortized
discounts that are converted into subscription revenue upon renewal of prior business model contracts.
New deferred subscription value is what we expect to collect over time from our customers based upon contractual
license agreements entered into during a reporting period. This amount is recognized as subscription revenue
ratably over the applicable software license term. The license agreements that contribute to new deferred
subscription value represent binding payment commitments by customers over periods generally up to three
years. Our new deferred subscription value typically increases in each consecutive fiscal quarter, with the fourth
quarter being the strongest. However, since new deferred subscription value is impacted by the volume and dollar
amount of contracts coming up for renewal and the amount of early contract renewals, the change in new deferred
subscription value, relative to previous periods, does not necessarily correlate to the change in billings or cash
receipts, relative to previous periods. The contribution to current period revenue from new deferred subscription
value from any single license agreement is relatively small, since revenue is recognized ratably over the applicable
license agreement term.
Weighted Average License Agreement Duration in Years — The weighted average license agreement duration in
years reflects the duration of all software licenses executed during a period, weighted to reflect the contract value of
each individual software license. The weighted average duration is impacted by the volume and dollar amount of
contracts coming up for renewal, and therefore may change from period to period and will not necessarily correlate
to the prior year periods. The annual weighted average duration of 3.03 and 3.10 years for the fiscal years 2006 and
2005, respectively, were derived from the following quarterly new deferred subscription revenue amounts and
quarterly weighted average durations in years from our direct business:
New Deferred
Subscription
Value from
Direct Sales
Weighted
Average
Duration
in Years
New Deferred
Subscription
Value from
Direct Sales
Weighted
Average
Duration in
Years
Fiscal Year 2006 Fiscal Year 2005
(in millions)
Fourth Quarter ........................ $ 969 2.89 $1,469 3.40
Third Quarter ......................... 730 3.46 845 2.95
Second Quarter ....................... 575 2.92 649 2.90
First Quarter ......................... 336 2.70 530 2.75
$2,610 3.03 $3,493 3.10
We believe license agreement durations averaging approximately three years increase the value customers receive
from our software licenses by giving customers the flexibility to vary their software mix as their needs change. We
also believe this flexibility improves our customer relationships and encourages greater accountability by us to each
of our customers. The increase in the weighted average durations for contracts signed in the fourth quarter of fiscal
year 2005 and the third quarter of fiscal year 2006 is due to several individual longer-term contracts signed during
those quarters (e.g., four to five years).
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