VMware 2007 Annual Report Download - page 56

Table of Contents
We recognize license revenue from the sale of software when risk of loss transfers, which is generally upon shipment or electronic transfer.
We license our software under perpetual licenses, through our direct sales force and through our channel of distributors, resellers, x86 system
vendors and systems integrators. We defer revenue relating to products that have shipped to our channel until our products are sold through the
channel. We estimate and record reserves for products that are not sold through the channel based on historical trends and relevant current
information. We obtain sell-through information from distributors and resellers on a monthly basis and reconcile any estimates, if necessary,
made in the previous month. Historically, actual information has not differed materially from the related estimate. For our indirect channel
partners who do not report sell-through data, we determine sell-through information based on such distributors’ and resellers’ accounts
receivable balances and other relevant factors. For x86 system vendors, revenue is recognized in arrears upon the receipt of binding royalty
reports. The accuracy of our reserves depends on our ability to estimate the product sold through the channels and could have a significant
impact on the timing and amount of revenue we report.
We offer rebates to channel partners, which are recognized as a reduction of revenue at the time the related product sale is recognized. We
account for marketing development funds and sales incentives to channel partners as a reduction of revenue. When rebates are based on the set
percentage of actual sales, we recognize the costs of the rebates as a reduction of revenue when the underlying revenue is recognized. In cases
where rebates are earned if a cumulative level of sales is achieved, we recognize the cost of the rebates as a reduction of revenue proportionally
for each sale that is required to achieve the target. The estimated reserves for channel rebates and sales incentives are based on channel partners’
actual performance against the terms and conditions of the programs, historical trends and the value of the rebates. The accuracy of these
reserves for these rebates, marketing development funds and sales incentives depends on our ability to estimate these items and could have a
significant impact on the timing and amount of revenue we report.
Although our return policy does not allow end-users to return products for a refund, we may accept returns from time to time. Channel
partners may also rotate stock when new versions of a product are released. The product returns reserve is based on historical experience of
actual product returns, estimated channel inventory levels, the timing of new product introductions and promotions and other relevant factors.
The accuracy of these reserves depends on our ability to estimate sales returns and stock rotation among other criteria. If we were to change any
of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
Our services revenue consists of software maintenance and professional services. We recognize maintenance revenues ratably over the
contract period. Professional services include design, implementation and training. Professional services are not considered essential to the
functionality of our products because 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 90 days or less are recognized in revenue upon completion of the engagement.
Professional services engagements of more than 90 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 engagements is recognized
upon completion. However, if we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the
amount of revenue that we report in a particular period.
Our software products are sold with maintenance and/or professional services. Vendor-specific objective evidence (“VSOE”) of fair value
of professional services is based upon the standard rates we charge for such services when sold separately. VSOE for maintenance services is
established by the rates charged in stand-alone sales of maintenance contracts or the stated renewal rate for maintenance included in the license
agreement. The revenue allocated to software license included in multiple element contracts represents the residual amount of the contract after
the fair value of the other elements has been determined.
Customers under maintenance agreements are entitled to receive product updates and upgrades on a when-and-if-available basis. In the
event upgrades or new products have been announced but not delivered, product revenue is deferred after the announcement date until delivery
occurs unless we have established VSOE
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