VMware 2009 Annual Report Download - page 64

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Table of Contents
stock price, as well as assumptions regarding a number of subjective variables. These variables include the expected stock price volatility over
the term of the awards, the risk-free interest rate associated with the expected term of the awards, expected dividends and actual and projected
employee stock option exercise behaviors. If any of the assumptions used in the Black-Scholes option pricing model change significantly, stock-
based compensation expense may differ materially in the future from that recorded in the current period.
The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from
our current estimates, such amounts will be recorded as an adjustment in the period the estimates are revised. Should our actual forfeitures differ
from our estimates, this could have a material impact on our financial statements.
Revenue Recognition
We derive revenues from the licensing of software and related services. We recognize revenues when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable. Determining whether and when
some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount
of revenue we report.
We recognize license revenues from the sale of software when risk of loss transfers, which is generally upon electronic shipment. We
primarily license our software under perpetual licenses through our channel of distributors, resellers, x86 system vendors, systems integrators
and our direct sales force. We defer revenues relating to products that have shipped into 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 certain 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 channel
partners who do not report sell-through data, we determine sell-through based on payment of such distributors’ and certain resellers’ accounts
receivable balances and other relevant factors. For software sold by x86 system vendors that is bundled with their hardware, unless we have a
separate license agreement with the end user, 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 certain channel partners, which are recognized as a reduction of revenue at the time the related product sale is
recognized. 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 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.
With the exception of one of our desktop products, our 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. We estimate future product returns at the time of sale.
Our estimate is based on historical return rates, levels of inventory held by distributors and resellers 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. Returns
have not been material to date and have been in line with our expectations.
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