VMware 2011 Annual Report Download - page 43

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Table of Contents
software maintenance and license revenues in future periods. Due to our use of the U.S. Dollar as our functional currency, unearned revenue
remains at its historical rate when recognized into revenue while our operating expenses in future periods are based upon the foreign exchange
rates at that time.
Sources of Revenues
License revenues
Our license revenues consist of revenues earned from the licensing of our software products. These products are generally licensed on a
perpetual basis. License revenues are recognized when the elements of revenue recognition for the licensed software are complete, generally
upon electronic shipment of the software. 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. While some of our products are licensed on a
subscription basis, subscription license revenues are not a material part of our business.
Pricing models have generally been based upon the physical infrastructure, such as the number of physical desktop computers or server
processors, on which our software runs. We have recently begun to base pricing for some of our products on virtual, rather than purely physical,
virtual and cloud-based IT environments by enabling customers to align cost with actual use and value derived, rather than purely with hardware
configurations and capacity. Effective in the third quarter of 2010, we began pricing certain of our management solutions on a per-virtual-
machine basis. In the third quarter of 2011, we revised the pricing model for VMware vSphere 5 effective with its general availability. VMware
vSphere 5 will continue to be licensed perpetually on a per-processor basis. The two physical constraints, core and physical RAM, have been
eliminated, however, and replaced with a single virtualization-based entitlement of virtual memory, or vRAM, which can be shared across a
large pool of servers.
Software maintenance revenues
Software maintenance revenues are recognized ratably over the contract period. Our contract periods typically range from one to five years
and include renewals of software maintenance sold after the initial software maintenance period expires. Vendor-specific objective evidence
(“VSOE”) of fair value for software maintenance services is established by the rates charged in stand-alone sales of software maintenance
contracts. Customers receive various types of technical support based on the level of support purchased. Customers who are party to software
maintenance agreements with us are entitled to receive product updates and upgrades on a when-and-if-available basis.
Professional services revenues
Professional services include solution design, implementation and training. Professional services are not considered essential to the
functionality of our products, as these services do not alter the product capabilities and may be performed by our customers or by 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 incurred and estimated hours of completion. Professional
services engagements that are on a time and materials basis are recognized based on hours incurred. Revenues on all other professional services
engagements are recognized upon completion. Our professional services may be sold with software products or on a stand-alone basis. VSOE of
fair value for professional services is based upon the standard rates we charge for such services when sold separately.
Operating Expenses
Cost of license revenues
Our cost of license revenues principally consist of the amortization of capitalized software development costs and of intangibles, as well as
royalty costs in connection with technology licensed from third-party providers and the cost of fulfillment of our software. The cost of
of our software products.
Cost of services revenues
Our cost of services revenues include the costs of personnel and related overhead to deliver technical support for our products and to provide
our professional services.
Research and development expenses
Our research and development (“R&D”) expenses include the personnel and related overhead associated with the R&D of new product
offerings and the enhancement of our existing software offerings, net of amounts capitalized.
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