Revenue, Unearned Revenue and Remaining Performance Obligations

6 Months Ended

Jul. 31, 2020

Revenue from Contract with Customer [Abstract]

Revenue, Unearned Revenue and Remaining Performance Obligations

Revenue, Unearned Revenue and Remaining Performance Obligations

Revenue

Contract Assets

A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets include fixed fee professional services where transfer of services has occurred in advance of the Company’s right to invoice. Contract assets are classified as accounts receivables upon invoicing. Contract assets are included in other current assets on the condensed consolidated balance sheets. Contract assets were $39 million and $26 million as of July 31, 2020 and January 31, 2020, respectively. Contract asset balances will fluctuate based upon the timing of the transfer of services, billings and customers’ acceptance of contractual milestones.

Contract Liabilities

Contract liabilities consist of unearned revenue, which is generally recorded when VMware has the right to invoice or payments have been received for undelivered products or services.

Customer Deposits

Customer deposits include prepayments from customers related to amounts received for contracts that include certain cancellation rights. Purchased credits eligible for redemption of VMware’s hosted services (“cloud credits”) are included in customer deposits until the cloud credit is consumed or is contractually committed to a specific hosted service. Cloud credits are redeemable by the customer for the gross value of the hosted offering. Upon contractual commitment for a hosted service, the net value of the cloud credits that are expected to be recognized as revenue when the obligation is fulfilled will be classified as unearned revenue.

As of July 31, 2020, customer deposits related to customer prepayments and cloud credits of $277 million were included in accrued expenses and other, and $149 million were included in other liabilities on the condensed consolidated balance sheets. As of January 31, 2020, customer deposits related to customer prepayments and cloud credits of $247 million were included in accrued expenses and other, and $143 million were included in other liabilities on the condensed consolidated balance sheets.

Deferred Commissions

Deferred commissions are classified as current or non-current based on the duration of the expected period of benefit. Deferred commissions, including the employer portion of payroll taxes, included in other current assets as of July 31, 2020 and January 31, 2020 were $24 million and $13 million, respectively. Deferred commissions included in other assets were $994 million and $938 million as of July 31, 2020 and January 31, 2020, respectively.

Amortization expense for deferred commissions was included in sales and marketing on the condensed consolidated statements of income and was $106 million and $206 million during the three and six months ended July 31, 2020, respectively, and $89 million and $178 million during the three and six months ended August 2, 2019, respectively.

Unearned Revenue

Unearned revenue as of the periods presented consisted of the following (table in millions):

	July 31,		January 31,
	2020		2020
Unearned license revenue	$	11	$	19
Unearned subscription and SaaS revenue	1,619		1,534
Unearned software maintenance revenue	6,696		6,700
Unearned professional services revenue	1,059		1,015
Total unearned revenue	$	9,385	$	9,268

Unearned subscription and SaaS revenue is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.

Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized over time on a ratable basis over the contract duration. The weighted-average remaining contractual term as of July 31, 2020 was approximately two years. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.

Total billings and revenue recognized during the three months ended July 31, 2020 were $2.0 billion and $1.8 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses. Total billings and revenue recognized during the six months ended July 31, 2020 were $3.7 billion and $3.6 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses. During the three and six months ended July 31, 2020, VMware also acquired $27 million and $30 million, respectively, in unearned revenue in connection with business combinations.

Revenue recognized during the three and six months ended August 2, 2019 was $1.6 billion and $3.1 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses.

Remaining Performance Obligations

Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.

As of July 31, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.3 billion, of which approximately 54% is expected to be recognized as revenue over the next twelve months and the remainder thereafter. As of January 31, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.3 billion, of which approximately 54% was expected to be recognized as revenue during fiscal 2021, and the remainder thereafter.