VMware 2010 Annual Report Download - page 48

Table of Contents
In evaluating our results, we also focus on operating margin excluding certain expenses included in our total operating expenses calculated
in accordance with GAAP. The expenses excluded are stock-based compensation, the net effect of the amortization and capitalization of
software development costs and certain other expenses consisting of employer payroll taxes on employee stock transactions, amortization of
intangible assets and acquisition-related items. We believe this measure reflects our ongoing business in a manner that allows meaningful period-
to-period comparisons. We are not currently focused on short-term operating margin expansion, but rather on investing at appropriate rates to
support our growth and future product offerings in what may be a substantially more competitive environment.
We have developed a multi-channel distribution model to expand our presence and to reach various segments of the industry. In 2010 we
derived over 85% of our sales from our channel partners, which include distributors, resellers, system vendors and systems integrators. Sales to
our channel partners often involve three tiers of distribution: a distributor, a reseller and an end-user customer. Our sales force works
collaboratively with our channel partners to introduce them to customers and new sales opportunities. As we expand geographically, we expect
to continue to add additional channel partners. The remainder of our sales is primarily derived from purchases made directly by end-user
customers.
From late 2008 and through most of 2009, macroeconomic conditions deteriorated globally and we observed that customers responded to
the economic downturn with reductions in IT spending. Since the fourth quarter of 2009 and through 2010, we have benefited, along with the IT
industry, from pent-up demand for IT products and services. While the overall macroeconomic environment has improved since late 2009, and
while we believe that our customers continue to adopt our product platform as a strategic investment that enables substantial cost savings and
improves efficiency and flexibility for their business, we continue to be cautious about the macroeconomic environment and the volatility we are
observing in the world economy. We expect to continue to manage our resources prudently, while making key investments in support of our
long-term growth objectives.
The majority of our contracts include both perpetual software licenses and ongoing software maintenance contracts. License revenues are
recognized when the elements of revenue recognition for the licensed software are complete, generally upon electronic shipment of the software.
Software maintenance revenues are typically recognized ratably over the term of the software maintenance period, i.e. over periods from one to
five years subsequent to the initial contract, and include renewals of software maintenance sold after the initial software maintenance period
expires. We also recognize revenues from professional services provided to our customers primarily as services are performed. Vendor-specific
objective evidence (“VSOE”) of fair value for software maintenance services is established by the rates charged in stand-alone sales of software
maintenance contracts or the stated renewal rate for software maintenance included in the license agreement. Our software products may also be
sold with professional services. VSOE of fair value for professional services is based upon the standard rates we charge for such services when
sold separately. The revenues allocated to the software license included in multiple-element contracts represent the residual amount of the
contract after the fair value of the other elements has been determined.
As a consequence of the timing differences in the recognition of license revenues and software maintenance revenues, variability in
operating margin can result from differences in when we quote and contract for our services and when the cost is incurred. Variability in
operating margin can also result when we recognize our foreign denominated unearned maintenance revenues in future periods. Due to our use
of the U.S. Dollar as our functional currency, unearned revenue remains at its historical rate when recognized into revenue while our operating
expenses in future periods are based upon the foreign exchange rates at that time. Our unearned revenue, both current and long-
term, represents a
liability on our consolidated balance sheets as the requirements of revenue recognition have not yet been met, and it consists of amounts received
from customers and amounts billed but not collected for which revenue has not yet been recognized.
Our unearned revenues consist of unearned software maintenance revenues, unearned professional services revenues and unearned license
revenues. As of December 31, 2010, total unearned revenues were $1,860.1, an increase of 40% from the previous year. Of the total, $1,536.6
will be recognized ratably over terms from one to five years, and is comprised of $1,461.3 of software maintenance revenue and $75.3 of license
revenue. The
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