VMware 2009 Annual Report Download - page 51

Table of Contents
complements these efforts. Our sales force works with our channel partners to introduce them to customers and new sales opportunities. Our
channel partners also introduce our sales force to their customers.
Historically, most of our revenue contracts with international customers were denominated in U.S. Dollars. In conjunction with the general
release of VMware vSphere in the second quarter of 2009, we began to invoice and collect in the Euro, the British Pound, the Japanese Yen, and
the Australian Dollar in their respective regions. While variability in operating margin due to foreign exchange fluctuations is reduced as a result
of invoicing in these local currencies in which we also have expenses, additional risk of variability in revenues due to foreign currency
fluctuations is introduced when these locally denominated revenues are remeasured into U.S. Dollars.
The macroeconomic environment continues to generate some uncertainty around how much will be spent on IT over the foreseeable future.
We believe that our customers continue to adopt our product platform as a strategic investment that delivers substantial cost savings, improved
efficiency and flexibility for their business; however, we also believe that our customers continue to move forward cautiously with their
spending. Although we experienced an increase in customer spending in the fourth quarter of 2009 which we believe is in response to previously
suppressed demand and fiscal year-end spending trends, we continue to plan conservatively for 2010.
License Revenues
Software license revenues were $1,029.4 in 2009, $1,178.1 in 2008, and $905.4 in 2007, representing a year-over-year decrease of $148.7
or 13% in 2009 and a year-over-year increase of $272.8 or 30% in 2008. We believe a significant majority of the license revenues decrease in
2009 compared with 2008 was the result of the overall difficult macroeconomic environment and the related challenges that our customers faced,
including reduced budgets for IT spending. Despite the generally quick return-on-investment of virtualization, the economic environment has
slowed capital expenditures. Organizations typically update their IT infrastructure when adopting virtualization, but the hardware investment is a
capital outlay that is several times larger than that of our software. For the revenue growth in 2008 compared with 2007, we believe a significant
majority is the result of greater demand for our virtualization product offerings attributable to wider industry acceptance of virtualization as part
of organizations’ IT infrastructure, a broadened product portfolio and expansion of our network of indirect channel partners.
We have promoted the adoption of virtualization and built long-
term relationships with our customers through the adoption of ELAs. ELAs
continue to be an important component of our revenue growth and are offered both directly and through certain channel partners. ELAs are core
to our strategy to build long-term relationships with customers as they commit to our virtualization infrastructure software solutions in their data
centers. ELAs provide a base from which to sell additional products, such as our application and infrastructure management suite and our
disaster recovery products. Under a typical ELA, a portion of the revenues is attributed to the license and recognized immediately, but the
remainder is deferred and recognized as services maintenance revenues in future periods. In addition, ELAs typically include an initial
maintenance period that is longer than other types of license sales.
Although we recognized license revenues on two of the largest ELAs in our history during the first quarter of 2009, we continued to
observe an overall decrease in the average dollar value of our ELAs in 2009 as compared with 2008. The decrease in size of our ELAs was
primarily due to a customer shift from large ELAs to small and medium-sized ELAs, and we believe this trend was correlated to the global
economic environment. In addition, during 2009, customers purchased our solutions in smaller quantities to meet their immediate needs,
foregoing larger discounts offered under ELAs.
We divide our license revenues into two classes: (1) virtualization platforms and (2) other products. Virtualization platforms include our
data center products and desktop virtualization products. Our data center products include a hypervisor for system-partitioning the software
environment from its underlying infrastructure
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