VMware 2011 Annual Report Download - page 23

Table of Contents
requires significant time and resources. In order to develop and expand our distribution channel, we must continue to expand and improve our
processes and procedures that support our channel, including our investment in systems and training, and those processes and procedures may
become increasingly complex and difficult to manage. The time and expense required for sales and marketing organizations of our channel
partners to become familiar with our product offerings, including our new product developments, may make it more difficult to introduce those
products to end users and delay end-user adoption of our product offerings.
We generally do not have long-term contracts or minimum purchase commitments with our distributors, resellers, system vendors and
systems integrators, and our contracts with these channel partners do not prohibit them from offering products or services that compete with
ours. Our competitors may be effective in providing incentives to existing and potential channel partners to favor products of our competitors or
to prevent or reduce sales of our products. Certain system vendors now offer competing virtualization products preinstalled on their server
products. Additionally, our competitors could attempt to require key distributors to enter into exclusivity arrangements with them or otherwise
apply their pricing or marketing leverage to discourage distributors from offering our products. Accordingly, our channel partners may choose
not to offer our products exclusively or at all. Our failure to maintain and increase the number of relationships with channel partners would likely
lead to a loss of end users of our products which would result in us receiving lower revenues from our channel partners. Three of our distributors
each accounted for more than 10% of revenues during 2011 , and we have experienced similar concentrations in prior periods. Our agreements
with distributors are typically terminable by either party upon 30 to 90 days' prior written notice to the other party, and neither party has any
obligation to purchase or sell any products under the agreements. While we believe that we have in place, or would have in place by the date of
any such termination, agreements with replacement distributors sufficient to maintain our revenues from distribution, if we were to lose the
distribution services of a significant distributor, such loss could have a negative impact on our results of operations until such time as we arrange
to replace these distribution services with the services of existing or new distributors.
The concentration of our product sales among a limited number of distributors and the weakness in credit markets increases our potential
credit risk. Additionally, weakness in credit markets could affect the ability of our distributors, resellers and customers to comply with the
terms of credit we provide in the ordinary course of business. Accordingly, if our distributors, resellers and customers find it difficult to
obtain credit or comply with the terms of their credit obligations, it could cause significant fluctuations or declines in our product revenues.
Three of our distributors each accounted for more than 10% of revenues during 2011 , and we have experienced similar concentrations in
prior periods. We anticipate that sales of our products to a limited number of distributors will continue to account for a significant portion of our
total product revenues for the foreseeable future. The concentration of product sales among certain distributors increases our potential credit
risks. For example, approximately 47% of our total accounts receivable as of December 31, 2011 was from three distributors. Some of our
distributors may experience financial difficulties, which could adversely impact our collection of accounts receivable. One or more of these
distributors could delay payments or default on credit extended to them. Our exposure to credit risks of our distributors may increase if our
distributors and their customers are adversely affected by global or regional economic conditions. Additionally, we provide credit to distributors,
resellers, and certain end-user customers in the normal course of business. Credit is generally extended to new customers based upon a credit
evaluation. Credit is extended to existing customers based on ongoing credit evaluations, prior payment history, and demonstrated financial
stability. We often allow distributors and customers to purchase and receive shipments of products in excess of their established credit limit. We
are unable to recognize revenue from such shipments until the collection of those amounts becomes reasonably assured. Any significant delay or
default in the collection of significant accounts receivable could result in an increased need for us to obtain working capital from other sources,
possibly on worse terms than we could have negotiated if we had established such working capital resources prior to such delays or defaults.
Any significant default could result in a negative impact on our results of operations and delay our ability to recognize revenue.
Our revenues, collection of accounts receivable and financial results may be adversely impacted by fluctuation of foreign currency exchange
rates. Although foreign currency hedges can offset some of the risk related to foreign currency fluctuations, we will continue to experience
foreign currency gains and losses in certain instances where it is not possible or cost effective to hedge our foreign currency exposures.
Our revenues and our collection of accounts receivable may be adversely impacted as a result of fluctuations in the exchange rates between
the U.S. Dollar and foreign currencies. For example, we have distributors in foreign countries that may incur higher costs in periods when the
value of the U.S. Dollar strengthens against foreign currencies. One or more of these distributors could delay payments or default on credit
extended to them as a result. Any significant delay or default in the collection of significant accounts receivable could result in an increased need
for us to obtain working capital from other sources. If we determine that the amount of accounts receivable to be uncollectible is greater than our
estimates, we would recognize an increase in bad debt expense, which would have a negative impact on our results of operations. In addition, in
periods when the value of the U.S. Dollar strengthens, we may need to offer additional discounts, reduce prices or offer other incentives to
mitigate the negative effect on demand.
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