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In a settled enforcement action, the SEC charged VMware, Inc., with omission of material information in its disclosures concerning its order “backlog” and revenue management, in quarterly and annual Exchange Act reports, on earnings calls, and in earnings releases, during its 2019 and 2020 fiscal years.   According to the SEC, this information was necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.

The SEC alleged that beginning with the adoption of a new accounting standard for its FY2019, VMware began discretionarily holding back some sales orders, which were otherwise ready to be booked and recorded as revenue in the current quarter, in an effort to delay revenue and control the timing of revenue recognition, which was important to the company. These discretionary holds, which VMware referred to internally as “managed pipeline” or “MPL,” delayed the delivery of license keys to customers and thus, according to VMware’s revenue recognition policy, delayed the recognition of license revenue to the next quarter or service revenue to future quarters as services were performed. As a result, the SEC stated VMware shifted tens of millions of dollars in revenue into future quarters.

The SEC alleged VMware utilized discretionary holds if the company was on track to meet its financial guidance to securities analysts and investors. The holds then would be released shortly after the end of the quarter. This had the effect of increasing the amount of backlog that VMware reported in its Forms 10-Q and 10-K and delaying revenue recognition into future quarters.

According to the SEC, beginning with its Form 10-Q filed for Q1 FY19, VMware began disclosing in its filings that “[t]he amount and composition of [VMware’s] backlog will fluctuate period to period, and backlog is managed based upon multiple considerations, including product and geography,” but the disclosure omitted material information regarding the discretionary nature of VMware’s backlog, the extent to which VMware controlled the amount of its backlog, and how backlog was used to manage the timing of the company’s recognition of total and license revenue. In the SEC’s view VMware’s backlog practices during the relevant period were controlled for the purpose of determining in which quarters revenue would be recognized, and had the effect of obscuring the company’s financial results and avoiding revenue shortfalls versus company financial guidance and analysts’ estimates in at least three quarters during FY20, as well as full-year FY20.

The SEC charged VMware with non-scienter based provisions of the Securities Act and Exchange Act.  VMware agreed to pay a civil monetary penalty of $8,000,000.

VMware did not admit or deny the SEC’s findings.