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Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
liabilities at the date of the financial statements. Estimates are used for, but not limited to, capitalized software development costs, receivable
valuation, certain accrued liabilities, useful lives of fixed assets, valuation of acquired intangibles, revenue reserves, income taxes, stock-based
compensation, and contingencies. Actual results could differ from those estimates.
Revenue Recognition
VMware derives revenues from the licensing of software and related services. VMware recognizes revenues when persuasive evidence of
an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.
The following summarizes the major terms of VMware’s contractual relationships with customers and the manner in which VMware
accounts for sales transactions.
License revenues
VMware recognizes revenues from the sale of software when risk of loss transfers, which is generally upon electronic shipment.
VMware licenses most of its software under perpetual licenses through its channel of distributors, resellers, x86 system vendors, systems
integrators and through its direct sales force. VMware defers revenues relating to products that have shipped into its channel until its products are
sold through the channel. VMware obtains sell-through information from distributors and certain resellers on a monthly basis. For VMware’s
channel partners who do not report sell-through data, VMware determines 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 the Company has a separate license agreement with the end user, revenue is recognized in arrears upon the receipt of binding royalty
reports.
For all sales, VMware uses one of the following to constitute evidence of an arrangement:
Sales through distributors and resellers are evidenced by a master distribution agreement, together with purchase orders or equivalent, on a
transaction-by-transaction basis.
With the exception of one of VMware’s desktop products, VMware’s 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. VMware estimates future product returns
at the time of sale. VMware’s estimate is based on historical return rates, levels of inventory held by distributors and resellers, and other relevant
factors. Returns have not been material to date and have been in line with the Company’s expectations.
VMware offers rebates to certain channel partners. When rebates are based on a set percentage of actual sales, VMware recognizes the
amount of the rebates as a reduction of revenues when the underlying revenue is recognized. When rebates are earned only if a cumulative level
of sales is achieved, VMware recognizes the amount of the rebates as a reduction of revenues proportionally for each sale that is required to
achieve the target.
73
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a purchase order or equivalent;
•
a license agreement and a purchase order or equivalent;
•
a license agreement which includes language that the agreement also serves as the purchase order; or
•
a master agreement and a binding royalty report.