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Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware accounts for sales transactions.
License revenues
VMware recognizes revenues from the sale of software licenses when risk of loss transfers, which is generally upon electronic shipment.
VMware licenses most of its software under perpetual licenses through its channel of distributors, resellers, system vendors, systems
integrators and through its direct sales force. VMware also licenses certain software products on a subscription basis. To the extent VMware
offers product promotions and the promotional products are not yet available and VSOE of fair value cannot be established, the revenue for the
entire order is deferred until such time as all product obligations have been fulfilled. Revenues relating to products that have shipped into a
channel are deferred until the products are sold through to the next tier of the channel. For software sold by system vendors that is bundled with
their hardware, unless the Company has a separate license agreement which governs the transaction, revenue is recognized in arrears upon the
receipt of binding royalty reports.
For all sales, VMware uses one of the following to constitute evidence of an arrangement:
Sales through distributors and resellers are evidenced by a master distribution agreement, together with purchase orders or equivalent, on a
transaction-by-transaction basis.
VMware’s return policy only allows product returns for a refund in very limited circumstances. In addition, certain distributors and resellers
may rotate stock when new versions of a product are released. VMware estimates future product returns at the time of sale based on historical
return rates. Returns have not been material to date.
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. The difference
between the maximum potential liability recorded and the actual amount paid out has not been material to date.
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
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. 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.
65
•
a purchase order or equivalent;
•
a license agreement and a purchase order or equivalent;
•
a license agreement which includes language that the agreement also serves as the purchase order; or
•
a master agreement and a binding royalty report.