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Table of Contents
guidance by removing from its scope tangible products that contain both software and non-software components that function together to deliver
the product’
s functionality. These amended standards became effective for us for revenue arrangements entered into or materially modified on or
after January 1, 2011. We have determined that these new standards are not applicable to our business and will not have an impact on our
consolidated financial statements.
Consolidations
In December 2009, the FASB issued standards for consolidation of variable interest entities (“VIEs”)
primarily related to the determination
of the primary beneficiary of the VIE. These amended standards became effective for us on January 1, 2010. The adoption of these standards did
not have a material impact on our consolidated financial position and results of operations. These amended standards may, however, have an
impact on accounting for any changes to existing relationships or future investments.
Foreign Exchange Risk
We operate in foreign countries, which expose us to market risk associated with foreign currency exchange rate fluctuations between the
U.S. Dollar and various foreign currencies, the most significant of which is the Euro.
International revenues as a percentage of total revenues were 49% in 2010, 49% in 2009 and 48% in 2008. Historically, our revenue
contracts were primarily denominated in U.S. Dollars. In May 2009, we began to invoice and collect in the Euro, the British Pound, the Japanese
Yen and the Australian Dollar in their respective regions. Additionally, a portion of our operating expenses, primarily the cost of personnel to
deliver technical support on our products and professional services, sales and sales support and research and development, are denominated in
foreign currencies, primarily the Euro, the British Pound, the Australian Dollar and the Indian Rupee. Revenues resulting from selling in local
currencies and costs incurred in local currencies are exposed to foreign exchange rate fluctuations which can affect our operating income. As
exchange rates vary, operating margins may differ materially from expectations.
Operating expenses were negatively impacted by $4.1 million in 2010 and $10.6 million in 2008, and benefited by $28.0 million in 2009,
due to fluctuations in the exchange rates between the U.S. Dollar and foreign currencies as compared with the same period in the prior year. We
calculate the foreign currency impact on our operating expenses as the difference between operating expenses translated at current exchange
rates and the same expenses 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 will not be able to determine the year-over-
year impact of foreign currency fluctuations on our
revenues for the periods disclosed until we have a full year of prior-year comparable information.
To manage the risk associated with fluctuations in foreign currency exchange rates, we utilize derivative financial instruments, such as
foreign currency forward contracts. We enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets
and liabilities against movements in certain foreign exchange rates. Our foreign currency forward contracts are generally traded on a monthly
basis with a typical contractual term of one month. As of December 31, 2010, we had outstanding forward contracts with a total notional value of
$238.9 million. The fair value of these forward contracts was immaterial as of December 31, 2010. There can be no assurance that our hedging
activities will adequately protect us against the risks associated with foreign currency fluctuations. A hypothetical adverse foreign currency
exchange rate movement of 10% would have resulted in a potential loss in fair value of our foreign currency forward contracts of $23.9 million
as of December 31, 2010. This sensitivity analysis disregards any potentially offsetting gain that may be associated with the underlying foreign-
currency denominated assets and liabilities that VMware hedges.
67
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK