VMware 2007 Annual Report Download - page 68

Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
not report sell-through data, VMware determines sell-through based on payment of such distributors’ and certain resellers’ accounts receivable
balances and other relevant factors. For x86 system vendors, revenue is recognized in arrears upon the receipt of binding royalty reports.
For all sales, VMware uses a purchase order, a license agreement and a purchase order or a master agreement and binding royalty report as
evidence of an arrangement. Sales through distributors and resellers are evidenced by a master license agreement, together with purchase orders,
on a transaction-by-transaction basis.
The Company’s return policy does not allow end-users to return products for a refund. Certain distributors and resellers may rotate stock
when new versions of a product are released. VMware estimates future product returns at the time of sale. VMware’s estimate is based on
historical return rates, levels of inventory held by distributors and resellers and other relevant factors.
VMware offers rebates to certain of its channel partners. When rebates are based on a set percentage of actual sales, VMware recognizes
the cost of the rebates as a reduction of revenue when the underlying revenue is recognized. When rebates are earned only if a cumulative level
of sales is achieved, VMware recognizes the cost of the rebates as a reduction of revenue proportionally for each sale that is required to achieve
the target.
VMware also offers marketing development funds to its channel partners. VMware records the cost of the marketing development funds,
based on the maximum potential liability, as a reduction of revenue at the time the underlying revenue is recognized.
Services revenue
Services revenue consists of software maintenance and professional services. VMware recognizes maintenance revenues ratably over the
contract period. 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.
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 VMware is 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.
Multiple element arrangements
VMware’s software products are typically sold with maintenance and/or professional services. Vendor-specific objective evidence
(“VSOE”)
of fair value for professional services is based upon the standard rates VMware charges for such services when sold separately. VSOE
of fair value 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 the 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 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.
The amount and elements to be deferred are dependent on whether the company has established VSOE of fair value for the upgrade or new
product. VSOE of fair value of these upgrades or new products is established based upon the price set by management. VMware has a history of
selling these upgrades or new products on a stand-alone basis.
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