VMware 2010 Annual Report Download - page 49

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Table of Contents
weighted-average remaining term of arrangements where revenue will be recognized ratably is approximately 1.8 years. Additionally, unearned
revenues of $191.8 are related to software license revenue, which will be recognized upon the shipment of either existing or future products and
is classified as current unearned revenue. Future products include, in some cases, emerging products that are offered as part of product
promotions where the purchaser of an existing product is entitled to receive a promotional product at no additional charge. We regularly offer
product promotions, generally as a strategy to build awareness of our emerging products. To the extent promotional products are not yet
available, the revenue for the entire order is deferred until such time as all product obligations have been fulfilled. The remaining unearned
revenues of $131.7 relate to professional services and will be recognized when the services are delivered. We believe our overall unearned
revenue balance improves predictability of future revenues and that it is a key indicator of the health and growth of our business.
Until the second quarter of 2009, most of our revenue contracts with international channel partners were denominated in U.S. Dollars, but a
portion of our operating expenses were, and continue to be, denominated in currencies other than the U.S. Dollar. This currency difference
between our revenues and operating expenses historically caused variability in our operating margins due to fluctuations in the U.S. Dollar as
compared with other currencies. In the second quarter of 2009, we started to invoice and collect in the Euro, the British Pound, the Japanese Yen
and the Australian Dollar in their respective regions. As a result of invoicing in these local currencies in which we also have expenses,
variability
in operating margin due to foreign currency fluctuations has been reduced. However, increased exposure to foreign currency fluctuations
introduces additional risk for variability in revenue-related components of our consolidated financial statements when these locally denominated
revenues are remeasured into U.S. Dollars. We calculate the foreign currency impact on our revenues as the difference between revenues
translated at current exchange rates and the same revenues translated at prior-period exchange rates. Given that we began to invoice and collect
in currencies other than the U.S. Dollar during the second quarter of 2009, we are not able to determine the full year-over-year impact of foreign
currency fluctuations on our revenues. The uncertainty and volatility of currency fluctuations will continue to impact our results. In order to
manage our exposure to foreign currency fluctuations, since July 2009, we have entered into foreign currency forward contracts to hedge a
portion of our net outstanding monetary assets and liabilities against movements in certain foreign exchange rates. These forward contracts are
not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts
are reported in other income (expense), net in the consolidated statements of income. The gains and losses on our foreign currency forward
contracts generally offset the majority of the gains and losses associated with the underlying foreign-currency denominated assets and liabilities
that we hedge.
Our Relationship with EMC
As of December 31, 2010, EMC owned 33,012,000 shares of Class A common stock and all 300,000,000 shares of Class B common stock,
representing approximately 80% of our total outstanding shares of common stock and 97% of the combined voting power of our outstanding
common stock.
In April 2010, we acquired certain software product technology and expertise from EMC’s Ionix IT management business for cash
consideration of $175.0. EMC retained the Ionix brand and will continue to offer customers the products acquired by us, pursuant to the ongoing
reseller agreement we have with EMC. The net assets and expertise acquired from EMC constituted a business and were accounted for as a
business combination between entities under common control pursuant to generally accepted accounting principles (“GAAP”).
See Note E to the
consolidated financial statements included elsewhere in this filing for further information. In the fourth quarter of 2010, we paid $10.6 of
contingent amounts to EMC in accordance with the asset purchase agreement.
Pursuant to the ongoing reseller arrangement with EMC that commenced in 2009, EMC bundles our products and services with EMC’s
hardware and sells them to end-users. In 2010 and 2009, we recognized
46