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Table of Contents
New Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13,
which amends revenue recognition guidance related to revenue recognition of multiple element arrangements. The new guidance states that if
vendor-specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required
to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price
method. The new guidance is effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new
or materially modified arrangements. We have determined that this accounting guidance is not applicable to our business and will not have an
impact on our financial statements.
In September 2009, the FASB issued ASU No. 2009-14, which amends the accounting guidance related to certain revenue arrangements
that include software elements. The new guidance amends the scope of “Software Revenue Recognition” guidance to exclude tangible products
that include software and non-software components that function together to deliver the product’s essential functionality. This guidance shall be
applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.
We have determined that this accounting guidance is not applicable to our business and will not have an impact on our financial statements.
In June 2009, the FASB issued Accounting Standards Codification No. 810, “Consolidation,” which amends the consolidation guidance
applicable to variable interest entities. This revision is effective as of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009. We do not expect the standard to have a material impact on our financial position and results of operations.
Foreign Exchange Risk
We operate in foreign countries which exposes us to market risk associated with foreign currency exchange rate fluctuations between the
U.S. Dollar and various foreign currencies, the most significant of which is the Euro.
International revenues as a percentage of total revenues were 49% in 2009, 48% in 2008 and 46% in 2007. Historically, our revenue
contracts were primarily denominated in U.S. Dollars. With the general release of VMware vSphere in May 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. The majority of our purchase
contracts are denominated in U.S. Dollars. However, a portion of our operating expenses, primarily the cost of personnel to deliver technical
support on our products and professional services, sales and sales support, and research and development, are denominated in foreign currencies,
primarily the Euro, the British Pound, the Indian Rupee, and the Australian Dollar. Revenues resulting from selling in local currencies, and costs
incurred in local currencies are exposed to foreign exchange rate fluctuations which can affect our operating income. As exchange rates vary,
operating margins may differ materially from expectations.
Operating expenses benefited by $28.0 million in 2009, and were negatively impacted by $10.6 million in 2008, respectively, due to
fluctuations in the exchange rates between the U.S. Dollar and foreign currencies as compared to the prior year period. Based upon planned
spending in 2010, if the Dollar weakened by 10% in 2010 in relation to the Euro, the British Pound, the Australian Dollar, the Canadian Dollar,
the Indian Rupee, and the Japanese Yen, this would result in additional expense of approximately $48 million. There are no meaningful
comparisons to prior periods of the effects on our revenues from fluctuations in exchange rates as we were not selling in local currencies in
comparable periods.
In July 2009, we initiated a program to manage our exposure to certain foreign currency fluctuations by entering into economic foreign
currency hedges related to a portion of our net outstanding monetary asset and liability positions. The gains and losses on our foreign currency
forward contracts generally offset the majority of
64
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK