VMware 2013 Annual Report Download - page 67

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
other revenue recognition criteria have been met. When perpetual software license arrangement is offered with new products that become available on a when
and if available basis, revenue associated with these arrangements are recognized ratably over the subscription period.
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 royalty reports.
VMware’s return policy only allows product returns for a refund in very limited circumstances. VMware estimates future product returns at the time of
sale based on historical return rates. Returns have not been material to date.
Rebates
Rebates are offered to certain channel partners. When rebates are based on a set percentage of actual sales, rebates are recognized as a reduction of
revenues as the underlying revenue is recognized. When rebates are earned upon achievement of a cumulative level of sales, rebates are recognized as a
reduction of revenues proportionally for each sale that is required to achieve the target.
Marketing development funds are also offered to certain channel partners. The obligation for marketing development funds is based upon the maximum
potential liability and is also recognized as a reduction of revenues concurrent with the recognition of the underlying revenue. The difference between the
maximum potential liability recognized and the actual amount paid out has not been material to date.
Services Revenues
Services revenues generally consist of software maintenance, training, technical support, and consulting services. Software maintenance and technical
support offerings entitle customers to receive major and minor product upgrades on a when and if available basis and technical support. Revenues relating to
software maintenance and technical support offerings are generally recognized 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. Revenues for 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. Revenue for professional services engagements billed on a time and materials basis are recognized as the hours are
incurred. Revenues on all other professional services engagements are recognized upon completion.
Multiple-Element Arrangements
VMware enters into software-related multiple element revenue arrangements in which a customer may purchase a combination of software, maintenance
and technical support, training, and consulting services. If a product or service included in a software-related multiple element arrangements has not been
delivered, and is not considered essential to the functionality of the delivered products or services, fair value of each undelivered product and/or service using
vendor-specific objective evidence (“VSOE”)
must be determined. VSOE is used to allocate a portion of the price to the undelivered products and/or services
and the residual method is used to allocate the remaining portion to the delivered products and services. Absent VSOE, revenue is deferred until the earlier of
the point at which VSOE of fair value exists for any undelivered products or services, or until all elements of the arrangement have been delivered. However,
if the only undelivered element is software maintenance and technical support, the entire arrangement fee is recognized ratably over the performance period.
Changes in assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of
revenue that VMware reports in a particular period.
VSOE of fair value for an undelivered element is based on historical stand-alone sales to third parties. In determining VSOE of fair value, VMware
requires that the selling prices for a product or service fall within a reasonable pricing range. VMware established VSOE for its software maintenance and
technical support services, consulting services and training.
In the event VMware publicly announce specific features or functionalities, entitlements or the release number of an upgrade that has not been made
available, and customers will receive that upgrade as part of a current software maintenance contract, a specified upgrade is deemed created. As a result of the
specified upgrade, revenues are deferred on purchases made after the announcement date until delivery of the upgrade for those purchases that include the
current version of the product subject to the announcement.
Multiple element arrangements may be bundled with a commitment to deliver a product that has not yet been made available. Revenue specific to these
arrangements is deferred until all product obligations have been fulfilled. In addition,
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