VMware 2012 Annual Report Download - page 60

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Table of Contents
We recognize license revenues from the sale of software licenses when risk of loss transfers, which is generally upon electronic shipment.
We primarily license our software under perpetual licenses through our channel of distributors, resellers, system vendors, systems integrators and
our direct sales force. To the extent we offer product promotions and the promotional products are not yet available and VSOE of fair value
cannot be established, the revenue for the entire order is deferred until such time as all product obligations have been fulfilled. We defer
revenues relating to products that have shipped into our channel until our products are sold through to the next tier of the channel. We estimate
and record reserves for products that are not sold through the channel based on historical trends and relevant current information. For software
sold by system vendors that is bundled with their hardware, unless we have a separate license agreement which governs the transaction, revenue
is recognized in arrears upon the receipt of binding royalty reports. The accuracy of our reserves depends on our ability to estimate the product
sold through the channels and could have a significant impact on the timing and amount of revenue we report.
We offer rebates to certain channel partners, which are recognized as a reduction of revenue at the time the related product sale is
recognized. When rebates are based on the set percentage of actual sales, we recognize the costs of the rebates as a reduction of revenue when
the underlying revenue is recognized. In cases where rebates are earned if a cumulative level of sales is achieved, we recognize the cost of the
rebates as a reduction of revenue proportionally for each sale that is required to achieve the target. The estimated reserves for channel rebates
and sales incentives are based on channel partners’
actual performance against the terms and conditions of the programs, historical trends and the
value of the rebates. The accuracy of these reserves for these rebates and sales incentives depends on our ability to estimate these items and
could have a significant impact on the timing and amount of revenue we report.
With limited exceptions, VMware’s return policy does not allow product returns for a refund. Certain distributors and resellers may rotate
stock when new versions of a product are released. We estimate future product returns at the time of sale. Our estimate is based on historical
return rates, levels of inventory held by distributors and resellers and other relevant factors. The accuracy of these reserves depends on our
ability to estimate sales returns and stock rotation among other criteria. If we were to change any of these assumptions or judgments, it could
cause a material increase or decrease in the amount of revenue that we report in a particular period. Returns have not been material to date and
have been in line with our expectations.
Our services revenues consist of software maintenance, professional services and software as a service subscriptions. Software as a service
subscriptions were not material in any period presented. We recognize software maintenance revenues ratably over the contract period.
Typically, our software maintenance contract periods range from one to five years. Professional services include design, implementation and
training. Professional services are not considered essential to the functionality of our products because services do not alter the product
capabilities and may be performed by customers or 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
and direct expenses incurred. Professional services engagements that are on a time and materials basis are recognized based upon hours incurred.
Revenues on all other professional services engagements are recognized upon completion. Software as a service revenues are recognized ratably
over the subscription period. If we were to change any of these assumptions or judgments regarding our services revenues, it could cause a
material increase or decrease in the amount of revenue that we report in a particular period.
Our software products are typically sold with software maintenance services. VSOE of fair value for software maintenance services is
established by the rates charged in stand-alone sales of software maintenance contracts. Our software products may also be sold with
professional services. VSOE of fair value for professional services is based upon the standard rates we charge for such services when sold
separately. 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.
Our multiple element arrangements typically fall into one or more of the following categories:
57
• Arrangements including undelivered elements for which VSOE of fair value has been established. Revenue for those undelivered items
is recognized ratably over the service period, or as the services are delivered. Revenue allocated to the delivered elements is recognized
upfront;
• Arrangements including specified product elements for which VSOE of fair value cannot be established. The entire arrangement fee is
deferred until either VSOE of fair value is established or the specified products are delivered;
• Arrangements including undelivered elements without VSOE of fair value that are not essential to the functionality of the delivered
products where all of the undelivered elements are delivered ratably over time. Revenue for the entire arrangement fee is recognized
ratably, once the services have commenced, over the longest delivery period;
• Arrangements including undelivered elements without VSOE of fair value that are not essential to the functionality of the delivered
products where one or more of the elements are not delivered ratably over time. The entire arrangement fee is deferred until VSOE of
fair value is established or only elements that are delivered ratably over time remain. At