VMware 2007 Annual Report Download - page 59

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Table of Contents
Foreign Exchange Risk
International revenue as a percentage of total revenues was 46% in 2007, 44% in 2006 and 46% in 2005. Our revenue contracts are
denominated in U.S. dollars and the vast majority of our purchase contracts are denominated in U.S. dollars. A portion of our cost of revenues,
primarily the cost of personnel to deliver technical support on our products, and a portion of our operating expense related to sales and sales
support and research and development, are denominated in foreign currencies, primarily the Euro, the British pound, the Japanese yen, the Indian
rupee, the Australian dollar and the Canadian dollar. These costs and the resulting effect on operating income are exposed to foreign exchange
rate fluctuations. Upon consolidation, as exchange rates vary, operating costs may differ materially from expectations. The Company does not
hedge its exposure to foreign currency fluctuation. If the dollar weakened by 10% in relation to the Euro, this would result in additional expense
of approximately $18 million.
Interest Rate Risk
Our exposure to market risk relates primarily to the variable interest obligation on the note we incurred to fund an $800.0 dividend to EMC
in the form of a note. The dividend was declared in April 2007, but given retroactive effect as of December 31, 2006. Subsequent to receiving
the proceeds from the IPO in August 2007, we repaid $350.0 million of principal on the note. The note matures in April 2012 and bears an
interest rate of the 90-day LIBOR plus 55 basis points, with interest payable quarterly in arrears. The interest rate on the note payable as of
December 31, 2007 was 5.78%, and the weighted average interest rate on the note payable for 2007 was 5.86%. The note may be repaid, without
penalty, at any future point. If our interest rates were to instantaneously increase (decrease) 100 basis points from the December 31, 2007 rate,
our annual interest expense would increase (decrease) by $4.5 million.
55
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK