VMware 2007 Annual Report Download - page 44

Table of Contents
arrangement with EMC, we paid EMC income taxes of $86.4, $63.1 and $6.6 in 2007, 2006 and 2005, respectively, which differed from the
amounts owed on a separate return basis. The difference between these amounts is presented as a component of stockholder’s equity. In 2007,
we incurred interest expense with EMC, net, of $17.8. In 2006 and 2005, we earned interest income with EMC, net, of $0.3 and $2.1. Interest
income (expense) with EMC, net, consists both of interest that has been earned or incurred on our intercompany balance with EMC and from
interest expense on the note payable to EMC. In 2007, $26.6 of interest expense was recorded related to the note payable and was included in the
$17.8 interest expense with EMC, net recorded on the consolidated income statement.
Given that the financial amounts that we recorded through our intercompany transactions with EMC did not arise from transactions
negotiated at arms-length with an unrelated third party, the financial statements included herein may not necessarily reflect our results of
operations, financial position and cash flows had we engaged in such transactions with an unrelated third party during all periods presented.
Accordingly, our historical results should not be relied upon as an indicator of our future performance as a stand-alone company.
Income Statement Presentation
Sources of Revenue
License revenues . Our license revenues consist of revenues earned from the licensing of our software products. These products are
generally licensed on a perpetual basis and are generally priced based upon the number of physical desktops or server processors on which our
software runs.
Services revenues
. Our services revenues consist of software maintenance and professional services. Maintenance revenues are recognized
ratably over the contract period. Typically, our contract periods range from one to five years. Customers receive various types of product support
based on the level of support purchased. Customers who are party to maintenance agreements with us are entitled to receive product updates and
upgrades on a when-and-if-available basis.
Professional services include design, implementation and training. Professional services are not considered essential to the functionality of
our products, as these services do not alter the product capabilities and may be performed by our customers or other vendors. Professional
services engagements that have durations of ninety days or less are recognized in revenue upon completion of the engagement. Professional
services engagements of more than ninety days for which we are able to make reasonably dependable estimates of progress toward completion
are recognized on a proportional performance basis based upon the hours incurred. Revenue on all other professional services engagements is
recognized upon completion.
Costs of Revenues and Operating Expenses
Cost of license revenues. Our cost of license revenues principally consist of the cost of fulfillment of our software. This cost includes
product packaging and personnel and related overhead associated with the physical and electronic delivery of our software products. The cost
also includes amortization of capitalized software development costs.
Cost of services revenues. Our cost of services revenues includes the costs of the personnel and related overhead to deliver technical
support on our products, and to provide our professional services.
Research and development expenses . Our research and development, or R&D, expenses include the personnel and related overhead
associated with the research and development of new product offerings and the enhancement of our existing software offerings.
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