VMware 2010 Annual Report Download - page 80

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Table of Contents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
product returns at the time of sale based on historical return rates, levels of inventory held by distributors and resellers, and other relevant
factors. Returns have not been material to date and have been in line with VMware’s expectations.
VMware offers rebates to certain channel partners. When rebates are based on a set percentage of actual sales, VMware recognizes the
amount of the rebates as a reduction of revenues when the underlying revenue is recognized. When rebates are earned only if a cumulative level
of sales is achieved, VMware recognizes the amount of the rebates as a reduction of revenues proportionally for each sale that is required to
achieve the target.
VMware also offers marketing development funds to certain channel partners. VMware records the amount of the marketing development
funds, based on the maximum potential liability, as a reduction of revenues at the time the underlying revenue is recognized.
Services revenues
Services revenues consist of software maintenance and professional services. VMware recognizes software maintenance revenues ratably
over the contract period, which typically ranges from one to five years. Professional services include design, implementation and training.
Professional services are not considered essential to the functionality of VMware’
s products as these 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 VMware is 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.
Multiple-element arrangements
VMware software products are typically sold with software maintenance services. 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. VMware software products may also be sold with professional
services. VSOE of fair value for professional services is based upon the standard rates VMware charges for such services when sold separately.
VMware perpetual software products may be sold with products licensed on a subscription basis. VSOE of fair value for subscription license
products is established by the rates charged in stand-alone sales of subscription license products. 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 VMware is 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 functionality, 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. On occasion, VSOE of fair value of
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