VMware 2009 Annual Report Download - page 46

Table of Contents
2009. VMware View 4 represents a complete desktop virtualization solution that enables rapid adoption of virtualized desktops and establishes a
desktop as a managed service model. We have introduced, and expect to continue to introduce, more products that build on the vSphere
foundation through 2010 and beyond. Additionally, in the third quarter of 2009, we purchased SpringSource Global, Inc. (“SpringSource”),
which strengthens our product offering by extending our strategy to deliver solutions that can be hosted at customer data centers or at service
providers. This acquisition also supports our mission to simplify enterprise information technology and make customer environments more
efficient, scalable, and easier to manage.
Since mid-2008 and through most of 2009 we observed that customers responded to the economic downturn with reductions in budgets for
IT spending. As a result, customers were subjecting larger orders, such as ELAs, to a longer review process and in certain cases were purchasing
products to meet their immediate needs, foregoing larger discounts offered under ELAs. While the overall macroeconomic environment appears
to be improving and customers appear to be moving forward cautiously with their IT spending, we remain conservative in our planning and we
assume a slow economic recovery in which IT spending will continue to be tempered into 2010 and perhaps longer.
Although we are currently the leading provider of virtualization infrastructure software solutions, we face competitive threats to our
leadership position from a number of companies, some of which have significantly greater resources than we do, which could result in increased
pressure to reduce prices on our offerings. As a result, we believe it is important to continue to invest in strategic initiatives related to product
research and development, market expansion and associated support functions to expand our industry leadership. We believe that we will be able
to continue to meet our product development objectives through continued investment in our Company, supplemented with strategic hires and
acquisitions, funded through the operating cash flows generated from the sale of our existing products and services. We believe this is the
appropriate priority for the long-term health of our business.
In evaluating our results, we also focus on operating margin excluding stock-based compensation, employer payroll taxes on employee
stock transactions, amortization of intangible assets, the write-off of in-process research and development, acquisition-related items, and the net
effect of the amortization and capitalization of software development costs, as we believe this measure reflects our ongoing business in a manner
that allows meaningful period-to-period comparisons. We are not currently focused on short-term operating margin expansion, but rather on
investing at appropriate rates to support our growth and future product offerings in what may be a substantially more competitive environment.
Our maintenance-related services revenues are typically recognized ratably over periods from one to five years subsequent to the initial
contract, whereas most of our license revenues are generally recognized upon electronic shipment of the software. As a consequence, variability
in operating margin can result from differences in when we quote and contract for our services and when the cost is incurred. Our deferred
revenue, both current and long-
term, represents a liability on our consolidated balance sheets as the requirements of revenue recognition have not
yet been met and it consists of amounts received from customers and amounts billed but not collected for which revenue has not yet been
recognized. As of December 31, 2009, over 90% of our deferred revenue balance will be recognized as revenue with the passage of time or with
the delivery of professional services. The remainder is tied solely to product release events. We believe our overall deferred revenue balance
improves predictability of future revenues and that it is a key indicator of the health and growth of our business.
Historically, most of our revenue contracts with international channel partners were in U.S. Dollars, but a portion of our operating
expenses were, and continue to be, in currencies other than the U.S. Dollar. This currency difference between our revenues and operating
expenses historically caused variability in our operating margins due to fluctuations in the U.S. Dollar as compared to other currencies. In
conjunction with the general release of VMware vSphere in the second quarter of 2009, we started to invoice and collect in the Euro, the British
Pound, the Japanese Yen, and the Australian Dollar in their respective regions. As a result of invoicing in
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