VMware 2009 Annual Report Download - page 65

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Table of Contents
Our services revenues consist of software maintenance and professional services. We recognize software maintenance revenues ratably
over the contract period. Typically, our contract periods range from one to five years. Professional services include design, implementation and
training. Professional services are not considered essential to the functionality of our products because services do not alter the product
capabilities and may be performed by customers or other vendors. Professional services engagements performed for a fixed fee, for which we are
able to make reasonably dependable estimates of progress toward completion are recognized on a proportional performance basis based on hours
and direct expenses incurred. Professional services engagements that are on a time and materials basis are recognized based upon hours incurred.
Revenues on all other professional services engagements are recognized upon completion. If we were to change any of these assumptions or
judgments regarding our services revenues, it could cause a material increase or decrease in the amount of revenue that we report in a particular
period.
Our software products are typically sold with software maintenance services. VSOE of fair value for software maintenance services is
established by the rates charged in stand-alone sales of software maintenance contracts or the stated renewal rate for software maintenance
included in the license agreement. Our software products may also be sold with professional services. VSOE of fair value for professional
services is based upon the standard rates we charge for such services when sold separately. The revenues allocated to the software license
included in multiple element contracts represent the residual amount of the contract after the fair value of the other elements has been
determined.
Customers under software maintenance agreements are entitled to receive updates and upgrades on a when-and-if-available basis, and
various types of technical support based on the level of support purchased. In the event specific features or functionalities, entitlements or the
release number of an upgrade or new product have been announced but not delivered, and customers will receive that upgrade or new product as
part of a current software maintenance contract, a specified upgrade is deemed created and product revenues are deferred on purchases made
after the announcement date until delivery of the upgrade or new product. 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. We have a history of selling such upgrades or new products on a stand-alone basis. We are
required to exercise judgment in determining whether VSOE exists for each undelivered element based on whether our pricing for these
elements is sufficiently consistent with the sale of these elements on a stand-alone basis. This determination could cause a material increase or
decrease in the amount of revenue that we report in a particular period.
Capitalized Software Development Costs
Costs related to R&D are generally charged to expense as incurred. Capitalization of material development costs of software to be sold,
leased, or otherwise marketed are subject to capitalization beginning when technological feasibility has been established and ending when the
product is available for general release. Judgment is required in determining when technological feasibility is established. Changes in judgment
as to when technological feasibility is established, or changes in our business, including our go-to-market strategy, would likely materially
impact the amount of costs capitalized. For example, if the length of time between technological feasibility and general availability declines in
the future, the amount of costs capitalized would likely decrease. In addition, our R&D expenses and amounts capitalized as software
development costs may not be comparable to our peer companies due to differences in judgment as to when technological feasibility has been
reached or differences in judgment regarding when the product is available for general release. Generally accepted accounting principles require
annual amortization expense of capitalized software development costs to be the greater of the amounts computed using the ratio of current gross
revenue to a product’s total current and anticipated revenues, or the straight-line method over the product’s remaining estimated economic life.
To date, we amortized these costs using the straight-line method as it is the greater of the two amounts. The ongoing assessment of the
recoverability of these costs requires considerable judgment by management with respect to
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