VMware 2010 Annual Report Download - page 20

Table of Contents
arrangements with them or otherwise apply their pricing or marketing leverage to discourage distributors from offering our products.
Accordingly, our channel partners may choose not to offer our products exclusively or at all. Our failure to maintain and increase the number of
relationships with channel partners would likely lead to a loss of end-users of our products which would result in us receiving lower revenues
from our channel partners. Three of our distributors each accounted for more than 10% of revenues in fiscal year 2010, and we have experienced
similar concentrations in prior years. Our agreements with distributors are typically terminable by either party upon 90 days’ prior written notice
to the other party, and neither party has any obligation to purchase or sell any products under the agreements. While we believe that we have in
place, or would have in place by the date of any such termination, agreements with replacement distributors sufficient to maintain our revenues
from distribution, if we were to lose the distribution services of a significant distributor, such loss could have a negative impact on our results of
operations until such time as we arrange to replace these distribution services with the services of existing or new distributors.
The concentration of our product sales among a limited number of distributors and the weakness in credit markets increases our potential
credit risk. Additionally, weakness in credit markets could affect the ability of our distributors, resellers and customers to comply with the
terms of credit we provide in the ordinary course of business. Accordingly, if our distributors, resellers and customers find it difficult to
obtain credit or comply with the terms of their credit obligations, it could cause significant fluctuations or declines in our product revenues.
Three of our distributors each accounted for more than 10% of revenues in fiscal year 2010, and we have experienced similar
concentrations in prior years. We anticipate that sales of our products to a limited number of distributors will continue to account for a
significant portion of our total product revenues for the foreseeable future. The concentration of product sales among certain distributors
increases our potential credit risks. For example, approximately 42% of our total accounts receivable as of December 31, 2010 was from three
distributors. Some of our distributors may experience financial difficulties, which could adversely impact our collection of accounts receivable.
One or more of these distributors could delay payments or default on credit extended to them. Our exposure to credit risks of our distributors
may increase if our distributors and their customers are adversely affected by the global economic downturn, or if there is a continuation or
worsening of the downturn. Additionally, we provide credit to distributors, resellers, and certain end-user customers in the normal course of
business. Credit is generally extended to new customers based upon a credit evaluation. Credit is extended to existing customers based on
ongoing credit evaluations, prior payment history, and demonstrated financial stability. Any significant delay or default in the collection of
significant accounts receivable could result in an increased need for us to obtain working capital from other sources, possibly on worse terms
than we could have negotiated if we had established such working capital resources prior to such delays or defaults. Any significant default
could result in a negative impact on our results of operations.
The large majority of our revenues have come from our data center virtualization products including our flagship VMware vSphere product
line. Decreases in demand for our data center virtualization products could adversely affect our results of operations and financial condition.
In fiscal year 2010, approximately 80% of our license revenues were from our data center virtualization and infrastructure solutions with
the balance from our other solutions. Although we are continuing to develop other applications for our virtualization technology such as our
cloud computing and end-user computing products, we expect that our data center virtualization products and related enhancements and
upgrades will constitute a majority of our revenue for the foreseeable future. Declines and variability in demand for our data center virtualization
products could occur as a result of:
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improved products or product versions being offered by competitors in our markets;
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competitive pricing pressures;
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failure to release new or enhanced versions of our data center virtualization products on a timely basis, or at all;