VMware 2012 Annual Report Download - page 24

Table of Contents
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. Two of our distributors
each accounted for 10% or more of revenues during 2012 . 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.
Two of our distributors each accounted for 10% or more of revenues during 2012 . 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 35% of our total
accounts receivable as of December 31, 2012 was from our two largest 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.
We invoice and collect in certain non-U.S. Dollar denominated currencies, thereby conducting a portion of our revenue transactions in
currencies other than the U.S. Dollar. Although this program may alleviate credit risk from our distributors during periods when the U.S. Dollar
strengthens, it shifts the risk of currency fluctuations to us and may negatively impact our revenues, anticipated cash flows and financial results
due to fluctuations in foreign currency exchange rates, particularly the
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