VMware 2013 Annual Report Download - page 25

Table of Contents
The concentration of our product sales among a limited number of distributors and the weakness in credit markets increase our potential credit risk.
Additionally, weakness in credit markets could affect the ability of our distributors, resellers and customers to comply with the terms of credit we provide
in the ordinary course of business. Accordingly, if our distributors, resellers and customers find it difficult to obtain credit or comply with the terms of
their credit obligations, it could cause significant fluctuations or declines in our product revenues.
Three of our distributors each accounted for 10% or more of revenues during 2013 . We anticipate that sales of our products to a limited number of
distributors will continue to account for a significant portion of our total product revenues for the foreseeable future. The concentration of product sales
among certain distributors increases our potential credit risks. For example, approximately 45% of our total accounts receivable as of December 31, 2013
was
from our three largest distributors. Some of our distributors may experience financial difficulties, which could adversely impact our collection of accounts
receivable. One or more of these distributors could delay payments or default on credit extended to them. Our exposure to credit risks of our distributors may
increase if our distributors and their customers are adversely affected by global or regional economic conditions. Additionally, we provide credit to
distributors, resellers, and certain end-user customers in the normal course of business. Credit is generally extended to new customers based upon a credit
evaluation. Credit is extended to existing customers based on ongoing credit evaluations, prior payment history, and demonstrated financial stability. We
often allow distributors and customers to purchase and receive shipments of products in excess of their established credit limit. We are unable to recognize
revenue from such shipments until the collection of those amounts becomes reasonably assured. Any significant delay or default in the collection of
significant accounts receivable could result in an increased need for us to obtain working capital from other sources, possibly on worse terms than we could
have negotiated if we had established such working capital resources prior to such delays or defaults. Any significant default could result in a negative impact
on our results of operations and delay our ability to recognize revenue.
Our revenues, collection of accounts receivable and financial results may be adversely impacted by fluctuation of foreign currency exchange rates.
Although foreign currency hedges can offset some of the risk related to foreign currency fluctuations, we will continue to experience foreign currency
gains and losses in certain instances where it is not possible or cost effective to hedge our foreign currency exposures.
Our revenues and our collection of accounts receivable may be adversely impacted as a result of fluctuations in the exchange rates between the U.S.
Dollar and foreign currencies. For example, we have distributors in foreign countries that may incur higher costs in periods when the value of the U.S. Dollar
strengthens against foreign currencies. One or more of these distributors could delay payments or default on credit extended to them as a result. Any
significant delay or default in the collection of significant accounts receivable could result in an increased need for us to obtain working capital from other
sources. If we determine that the amount of accounts receivable that is uncollectible is greater than our estimates, we would recognize an increase in bad debt
expense, which would have a negative impact on our results of operations. In addition, in periods when the value of the U.S. Dollar strengthens, we may need
to offer additional discounts, reduce prices or offer other incentives to mitigate the negative effect on demand.
We invoice and collect in certain non-U.S. Dollar denominated currencies, thereby conducting a portion of our revenue transactions in currencies other
than the U.S. Dollar. Although this practice may alleviate credit risk from our distributors during periods when the U.S. Dollar strengthens, it shifts the risk of
currency fluctuations to us and may negatively impact our revenues, anticipated cash flows and financial results due to fluctuations in foreign currency
exchange rates, particularly the Euro, the British Pound, the Japanese Yen and the Australian Dollar relative to the U.S. Dollar. While variability in operating
margin may be reduced due to invoicing in certain of the local currencies in which we also recognize expenses, increased exposure to foreign currency
fluctuations will introduce additional risk for variability in revenue-related components of our consolidated financial statements.
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. Although we expect the gains and losses on our foreign currency forward contracts to generally offset the majority of the gains and
losses associated with the underlying foreign-
currency denominated assets and liabilities that we hedge, our hedging transactions may not yield the results we
expect. Additionally, we expect to continue to experience foreign currency gains and losses in certain instances where it is not possible or cost effective to
hedge our foreign currency exposures.
We may become involved in litigation and regulatory inquiries and proceedings that could negatively affect us.
From time to time, we are involved in various legal, administrative and regulatory proceedings, claims, demands and investigations relating to our
business, which may include claims with respect to commercial, product liability, intellectual property, employment, class action, whistleblower and other
matters. In the ordinary course of business, VMware also receives inquiries from and has discussions with government entities regarding the compliance of
its contracting and sales practices with laws and regulations. Such matters can be time-consuming, divert management’s attention and resources and cause us
to incur significant expenses. While no formal legal proceedings that could have a material impact on our financial condition or results
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