Symantec 1996 Annual Report Download - page 25

or retail stores are unable to sell. Symantec has experienced, and
may experience in the future, significant increases in pro d u c t
returns above historical levels from customers of acquire d c o m p a-
nies after an acquisition is completed. Symantec p re p a r es detailed
analyses of historical return rates when estimating anticip a t e d
returns and maintains re s e rves for product returns. In addition t o
detailed historical return rates, the Company’s estimation of
return re s e rves takes into consideration upcoming pro d u c t
upgrades, current market conditions, customer inve n t o ry bal-
ances and any other known factors that could impact anticipated
returns. Based upon returns experienced, the Company’s esti-
mates have been materially accurate. The impact of actual re t u r n s
on net re venues, net of such provisions, has not had a material
effect on the Company’s liquidity as the returns typically result in
the issuance of credit tow a rds future purchases as opposed to
cash payments to the distributors. Howe ve r, there can be no
assurance that future returns will not exceed the re s e rves estab-
lished by the Company or that future returns will not have a
material adverse effect on the operating results of the Company.
The Company’s product return re s e rve balances typically fluc-
tuate from period to period based upon the level and timing of
p roduct upgrade releases. Product return re s e rve balances at
Ma rc h 3 1 , 1996 we r e higher than re s e rve balances at Ma rc h 3 1 ,
1 9 9 5 . The increase was primarily related to the introduction of
Sy m a n t e c’s Wi n d ows 95 products during the last three quart e r s
of fiscal 1996, which had high sell-in volumes. The level of actual
p roduct returns and related product return re s e rves is largely a
factor of the level of product sell-in (gross re venue) fro m n o r m a l
sales activity and the replacement of obsolete quantities with the
c u r rent version of the Company’s product. As a result, gross re v-
enues generally move in the same direction as product re t u r n s .
Changes in the levels of product returns and related pro d u c t
return re s e rves are generally offset by changing levels of gro s s
re venue and, there f o re, do not typically have a material impact
on re p o r ted net re ve n u e s .
The Company operates with re l a t i vely little backlog; there f o re ,
if near-term demand for the Company’s products weakens in a
g i ven quart e r, there could be an immediate, material adve r s e
effect on net re venues and on the Company’s operating re s u l t s .
Symantec maintains a re s e a rch and development facility in
Santa Monica, California that was damaged during the January
1994 earthquake in Southern California. Much of the Company’s
administration, sales and marketing, manufacturing and
re s e a rch and development facilities are located on the we s t
coast of the United States. Future earthquakes or other natural
disasters could cause a significant disruption to the Company’s
operations and may cause delays in product development that
could adversely impact future revenues of the Company.
Also, Sy m a n t e c’s order entry department is located in Ore g o n ,
with shipments being made from a warehouse in California.
Order entry and shipping is similarly separated in Eu r ope. A dis-
ruption in communications between these facilities, part i c u l a r l y
at the end of a fiscal quart e r, would likely result in an unexpected
s h o r tfall in net re venues and could result in an adverse impact on
operating re s u l t s .
During the Ma r c h 1994 quart e r, Symantec introduced a new
p r oduct support program that provides a wide variety of fre e
and fee-based technical support services to its customers.
Symantec provides its customers with free support via electro n i c
and automated services as well as 90 days complimentary fre e
telephone support for certain of the Company’s products. In
addition, Symantec offers both individual users and corporate
customers a variety of fee-based support options for certain of
the Company’s products, designed to meet their individual tech-
nical support re q u i rements. Fee-based technical support serv i c e s
did not generate significant re venues in fiscal 1996, 1995 and
1994, and are not expected to generate material re venues in the
near future .
Gross Margin
Gross margin re p resents net re v enues less cost of re venues. Cost of
re venues consists primarily of manufacturing expenses, costs for
p r oducing manuals, packaging costs, royalties paid to third part i e s
under publishing contracts and amortization and write-off of cap-
i t a l i z ed software . A m o rtization of capitalized software, including
a m o rtization and the write-off of both purchased product rights
and capitalized software development expenses, totaled $19.1
million, $13.4 million and $20.5 million for fiscal 1996, 1995
and 1994, re s p e c t i ve l y. The significant increase in amort i z a t i o n
and write-off of purchased product rights and capitalized soft-
w a re development expenses in fiscal 1996 over fiscal 1995 was
the result of Sy m a n t e c’s decision to de-emphasize its continued
d e velopment and marketing efforts related to certain products as
well as De l r i n a’s write-off of previously capitalized software deve l-
opment costs of software designed to operate on Wi n d ows 3.1.
The decrease in such costs in fiscal 1995 from fiscal 1994 was
due to the write-off of certain previously capitalized software
costs by Central Point during fiscal 1994.
Gross margins decreased to 75% of net re venues in fiscal 1996
f r om 79% in fiscal 1995 and remained level with 75% in fiscal
1994. The decline in the gross margin percentage in fiscal 1996
c o m p a red to fiscal 1995 was due to an increase in the amort i z a-
tion and write-off of purchased product rights and capitalize d
s o f t w a r e development expenses noted above and increased re s e rve s
related to Delrina products designed to operate on Wi n d ow s 3 . 1 ,
as well as other products de-emphasized by Symantec during fiscal
1996. The increase in the gross margin percentage in fiscal 1995
c o m p a r ed to fiscal 1994 was largely due to the growth in higher
margin enterprise products, which are typically sold through site
licenses, as well as Sy m a n t e c’s ability to manufacture Central Po i n t
p r oducts with a lower cost stru c t u r e than Central Point. Due to
reduced amortization and write-off of purchased product rights,
Symantec believes that the gross margin percentage will incre a s e
to approximately 80% to 83% in Fiscal 1997 unless there is a sig-
nificant change in Sy m a n t e c ’s net re v e n u e s .
The microcomputer business software market has been subject