VMware 2010 Annual Report Download - page 67

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Table of Contents
rebates and sales incentives are based on channel partners’
actual performance against the terms and conditions of the programs, historical trends
and the value of the rebates. The accuracy of these reserves for these rebates and sales incentives depends on our ability to estimate these items
and could have a significant impact on the timing and amount of revenue we report.
With limited exceptions, VMware’s return policy does not allow product returns for a refund. Certain distributors and resellers may rotate
stock when new versions of a product are released. We estimate future product returns at the time of sale. Our estimate is based on historical
return rates, levels of inventory held by distributors and resellers and other relevant factors. The accuracy of these reserves depends on our
ability to estimate sales returns and stock rotation among other criteria. If we were to change any of these assumptions or judgments, it could
cause a material increase or decrease in the amount of revenue that we report in a particular period. Returns have not been material to date and
have been in line with our expectations.
Our services revenues consist of software maintenance and professional services. We recognize software maintenance revenues ratably
over the contract period. Typically, our contract periods range from one to five years. Professional services include design, implementation and
training. Professional services are not considered essential to the functionality of our products because services do not alter the product
capabilities and may be performed by customers or other vendors. Professional services engagements performed for a fixed fee, for which we are
able to make reasonably dependable estimates of progress toward completion are recognized on a proportional performance basis based on hours
and direct expenses incurred. Professional services engagements that are on a time and materials basis are recognized based upon hours incurred.
Revenues on all other professional services engagements are recognized upon completion. If we were to change any of these assumptions or
judgments regarding our services revenues, it could cause a material increase or decrease in the amount of revenue that we report in a particular
period.
Our software products are typically sold with software maintenance services. 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. If we are unable to establish VSOE of fair value for one of the undelivered elements included in a multiple-element contract, the
revenue is deferred until VSOE of fair value for the undelivered element has been established or the element has been delivered. If the element
involves time-based delivery, the entire arrangement is recognized ratably over the delivery period.
Customers under software maintenance agreements are entitled to receive updates and upgrades on a when-and-if-available basis, and
various types of technical support based on the level of support purchased. In the event specific features or functionalities, entitlements or the
release number of an upgrade have been announced but not delivered, and customers will receive that upgrade as part of a current software
maintenance contract, a specified upgrade is deemed created and product revenues are deferred on purchases made after the announcement date
until delivery of the upgrade. The amount and elements to be deferred are dependent on whether the company has established VSOE of fair
value for the upgrade. VSOE of fair value of these upgrades is established based upon the price set by management. We have a history of selling
such upgrades on a stand-alone basis. We are required to exercise judgment in determining whether VSOE exists for each undelivered element
based on whether our pricing for these elements is sufficiently consistent with the sale of these elements on a stand-alone basis. This
determination could cause a material increase or decrease in the amount of revenue that we report in a particular period.
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