Computer Associates 2008 Annual Report Download - page 41

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Price changes do not have a material impact on revenue in a given period as a result of our ratable subscription model.
Expenses
Cost of Licensing and Maintenance
Costs of licensing and maintenance includes technical support costs (previously reported as part of “Product
development and enhancements”), royalties (previously reported as part of “Commissions, royalties and bonuses”), and
other manufacturing and distribution costs (previously included within “Selling, general, and administrative”). The
remaining amounts previously reported under “Commissions, royalties and bonuses” have been allocated between
“Selling and marketing” and “General and administrative” expenses. For further information, refer to Note 1, “Significant
Accounting Policies,” in the Notes to the Consolidated Financial Statements. The increase in costs of licensing and
maintenance for fiscal 2008 and 2007 was primarily due to increased technical support costs for enhanced support
agreements we sell to our customers. Also contributing to the increase in fiscal 2008 was the negative impact of foreign
exchange.
Cost of Professional Services
Cost of professional services consists primarily of our personnel-related costs associated with providing professional
services and training to customers. For fiscal 2008, the cost of professional services increased primarily due to the
growth in professional services provided. Margins on professional services revenue were 9%, which represented a slight
increase over fiscal 2007. For fiscal 2007, the cost of professional services increased $63 million, or 24%, compared
with fiscal 2006, to $326 million. The increase was principally due to the increase in professional services revenue and
was partly offset by higher usage of external consultants, which lowered margins on professional services to 7% for
fiscal 2007, compared with 17% for fiscal 2006.
Amortization of Capitalized Software Costs
Amortization of capitalized software costs consists of the amortization of both purchased software and internally
generated capitalized software development costs. Internally generated capitalized software development costs relate to
new products and significant enhancements to existing software products that have reached the technological feasibility
stage.
The declines in amortization of capitalized software costs from fiscal 2007 to fiscal 2008 and from fiscal 2006 to fiscal
2007 were both principally due to the full amortization of certain capitalized software costs related to prior acquisitions.
Selling and Marketing
Selling and marketing expenses include the costs relating to our sales force, costs relating to our channel partners,
corporate and business marketing costs, and our customer training programs. Inclusive of a $69 million overall increase
due to foreign exchange, the decline in selling and marketing expenses for fiscal 2008 compared with fiscal 2007 was
primarily due to reduced personnel and office costs of $37 million, mostly due to savings realized in connection with
fiscal 2007 cost reduction and restructuring plan (fiscal 2007 Plan). For additional information refer to Note 3,
“Restructuring and Other,” in the Notes to the Consolidated Financial Statements. Partially offsetting these declines were
higher sales commissions of $23 million, primarily due to an increase in the aggregate value of contracts executed
during the year. Sales commissions are expensed in the period in which they are earned by employees, which is typically
upon the signing of a contract. For fiscal 2007 compared with fiscal 2006, the decline in selling and marketing expenses
was primarily due to lower commission costs of $86 million resulting from changes in our Incentive Compensation Plan
for our sales force as well as changes in our sales organization and sales coverage model. The changes to the Incentive
Compensation Plan included, among other changes, reducing accelerators in the plan (under which sales employees are
paid commissions at higher rates when they reach certain levels of quota achievement), revising quotas, and reducing
the number of people and functions paid on commissions as opposed to incentive compensation (bonus) plans. We
believe that the changes made to the Incentive Compensation Plan for fiscal 2007, as well as certain commission-
related process improvements, have enhanced our ability to control overall commissions expense and avoid unexpected
increases in commissions expense as occurred in the second half of fiscal 2006, as well as improve our ability to
effectively estimate, calculate, monitor, and timely pay sales commissions. The lower commission expense was partially
offset by higher bonus expenses resulting from acquisition-related retention payments and an increase in the number of
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