SOURCE: VMware, Inc.

VMware, Inc.

January 25, 2010 16:01 ET

VMware Reports Fourth Quarter and Full Year 2009 Results

Annual Revenue Growth of 8% to $2.0 Billion With Fourth Quarter Year-Over-Year Growth of 18% to $608 Million

Annual GAAP Operating Margin of 11%; Non-GAAP Operating Margin of 24%

Annual GAAP Operating Cash Flows Growth of 23% to $986 Million; Free Cash Flows Growth of 39% to $840 Million

PALO ALTO, CA--(Marketwire - January 25, 2010) -   VMware, Inc. (NYSE: VMW), the global leader in virtualization solutions from the desktop through the datacenter to the cloud, today announced financial results for the fourth quarter and full year 2009:

  • Revenues for the fourth quarter were $608 million, an increase of 18% from the fourth quarter of 2008.
  • GAAP operating income for the fourth quarter was $71 million, a decrease of 30% from the fourth quarter of 2008. Non-GAAP operating income for the fourth quarter was $158 million, an increase of 17% from the fourth quarter of 2008.
  • GAAP net income for the fourth quarter was $56 million, or $0.14 per diluted share, compared to $111 million, or $0.29 per diluted share, for the fourth quarter of 2008. Non-GAAP net income for the quarter was $127 million, or $0.31 per diluted share, compared to $142 million, or $0.36 per diluted share, for the fourth quarter of 2008. 
  • GAAP operating cash flows for the fourth quarter were $284 million, an increase of 4% from the fourth quarter of 2008. Free cash flows for the quarter were $259 million, an increase of 45% from the fourth quarter of 2008.
  • Revenues for the full year 2009 were $2.0 billion, an increase of 8% from 2008.
  • GAAP operating income for the full fiscal year 2009 was $219 million, a decrease of 30% from 2008. Non-GAAP operating income for the year 2009 was $484 million, an increase of 3% from 2008.
  • GAAP net income for the full fiscal year 2009 was $197 million, or $0.49 per diluted share, compared to $290 million, or $0.73 per diluted share, for 2008. Non-GAAP net income for the year 2009 was $401 million, or $1.00 per diluted share, compared to $416 million, or $1.05 per diluted share, for 2008. 
  • GAAP operating cash flows for the full fiscal year 2009 were $986 million, an increase of 23% and free cash flows for the year were $840 million, an increase of 39%. 
  • Cash was more than $2.4 billion and deferred revenue was $1.3 billion as of December 31, 2009. Since the beginning of 2009, cash increased 35% and deferred revenue increased 52%.

U.S. revenues for 2009 grew 5% to $1.04 billion from 2008. International revenues grew 10% to $985 million from 2008.

Services revenues, which include software maintenance and professional services, were $304 million for the fourth quarter, an increase of 52% from the fourth quarter of 2008. 

"The quarter's strong performance, anchored by demand for vSphere, signals that virtualization is a key technology for customers who need to save money today, yet invest in a strategy that is central to the emerging cloud computing model," said Paul Maritz, president and chief executive officer. "We believe that VMware is well positioned to help take our customers on this evolutionary path forward, and our strategy is to expand our portfolio to better serve our customers who are looking to remove complexity from IT."

"We are pleased with our solid fourth quarter results driven by pent up customer demand and our successful upgrade promotion to Enterprise Plus," said Mark Peek, chief financial officer. "While the economy is slowly recovering, we have improved near-term visibility as customers move forward with their IT investments. We are planning first quarter revenues to be in the range of $580 and $600 million, an increase of 23% to 28% from the first quarter 2009. We expect annual 2010 revenue to be in the range of $2.45 and $2.55 billion, an increase of 21% to 26% from 2009."

Recent Highlights & Strategic Announcements

  • In October 2009, VMware announced positive momentum for vSphere 4, the industry's leading virtualization platform, including now more than 800,000 customer downloads since its been on the market in late May, and winning the prestigious Wall Street Journal 2009 Technology Innovation Award for software product of the year.
  • In November 2009, VMware announced the availability of VMware View 4, the industry's only purpose-built desktop virtualization solution, setting a new quality, cost and scale standard for desktop virtualization environments. 
  • In November 2009, EMC and Cisco, along with VMware, introduced the Virtual Computing Environment coalition to help customers accelerate pervasive virtualization and a transition to private cloud infrastructures.
  • In January 2010, VMware announced that it had entered into an agreement to acquire Zimbra, a leading vendor of email and collaboration software, from Yahoo! Inc. Zimbra is a 'cloud era' core IT solution that will be a building block in an expanding VMware portfolio of solutions that can be offered as a virtual appliance or by a cloud service provider.

VMware plans to host a conference call today to review its fourth quarter and full year 2009 results and to discuss its financial outlook. The call is scheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed via the Web at http://ir.vmware.com. The Internet will be available live, and a replay will be available following completion of the live broadcast for approximately 30 days. 

About VMware

VMware delivers solutions for business infrastructure virtualization that enable IT organizations to energize businesses of all sizes. With the industry leading virtualization platform -- VMware vSphere™ -- customers rely on VMware to reduce capital and operating expenses, improve agility, ensure business continuity, strengthen security and go green. With 2009 revenues of $2 billion, more than 170,000 customers and 25,000 partners, VMware is the leader in virtualization which consistently ranks as a top priority among CIOs. VMware is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com.

 VMware is a registered trademark or trademark of VMware, Inc. in the United States and/or other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.

Use of Non-GAAP Financial Measures

Reconciliations of non-GAAP financial measures to VMware's financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables entitled "About Non-GAAP Financial Measures."

Forward-Looking Statements

Statements made in this press release which are not statements of historical fact are forward-looking statements and are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate, but are not limited, to our financial outlook for first quarter and full year 2010, continuing demand for virtualization and its expected role in cloud computing, the expected role of our technology platform in our customers' evolving IT strategies, the positioning of our company and our products in the IT market, expected expansion of our product portfolio and our visibility into customer demand in a changing economy. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) adverse changes in general economic or market conditions; (ii) delays or reductions in consumer or information technology spending; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into the virtualization market, and new product and marketing initiatives by our competitors; (iv) factors that affect timing of license revenue recognition such as product announcements and beta programs; (v) our customers' ability to develop, and to transition to, new products and computing strategies, (vi) the uncertainty of customer acceptance of emerging technology; (vii) changes in the willingness of customers to enter into longer term licensing and support arrangements; (viii) rapid technological and market changes in virtualization software and platforms for cloud and desktop computing; (ix) changes to product development timelines; (x) VMware's relationship with EMC Corporation, and EMC's ability to control matters requiring stockholder approval, including the election of VMware's board members; (xi) our ability to protect our proprietary technology; (xii) our ability to attract and retain highly qualified employees; and (xiii) fluctuating currency exchange rates.

These forward looking statements are based on current expectations and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. VMware disclaims any obligation to update any such forward-looking statements after the date of this release.

VMware, Inc.
           
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
           
  December 31,   December 31,
  2009   2008
           
ASSETS          
Current assets:          
    Cash and cash equivalents $ 2,486,461   $ 1,840,812
    Accounts receivable, less allowance for doubtful accounts of $2,525 and $1,690   534,196     338,014
    Due from EMC, net   26,402     --
    Deferred tax asset, current portion   63,360     44,573
    Income taxes receivable from EMC   2,967     111,050
    Other current assets   69,094     55,639
Total current assets   3,182,480     2,390,088
Property and equipment, net   402,356     418,212
Capitalized software development costs, net and other   169,293     134,553
Deferred tax asset, net of current portion   102,529     68,280
Intangible assets, net   94,557     56,984
Goodwill   1,115,769     771,088
        Total assets $ 5,066,984   $ 3,839,205
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
    Accounts payable $ 50,566   $ 74,708
    Accrued expenses   324,061     211,519
    Due to EMC, net   --     33,407
    Income taxes payable   10,462     15,761
    Deferred revenue, current portion   908,953     544,355
Total current liabilities   1,294,042     879,750
Note payable to EMC   450,000     450,000
Deferred revenue, net of current portion   416,345     325,634
Deferred tax liability   60,300     47,825
Other liabilities   103,346     65,929
        Total liabilities   2,324,033     1,769,138
Commitments and contingencies          
Stockholders' equity:          
    Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 102,785 and 90,448 shares   1,028     904
    Class B convertible common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares   3,000     3,000
    Additional paid-in capital   2,339,079     1,836,513
    Accumulated other comprehensive income   4,563     --
    Retained earnings   395,281     229,650
      Total stockholders' equity   2,742,951     2,070,067
          Total liabilities and stockholders' equity $ 5,066,984   $ 3,839,205
VMware, Inc.  
                       
CONSOLIDATED STATEMENTS OF INCOME  
(in thousands, except per share amounts)  
(unaudited)  
                         
  For the Three Months Ended     For the Year Ended  
  December 31,     December 31,  
  2009   2008     2009   2008  
Revenues:                          
    License $ 304,206   $ 314,843     $ 1,029,442   $ 1,178,142  
    Services   303,995     199,760       994,495     702,885  
    608,201     514,603       2,023,937     1,881,027  
Operating expenses (1):                          
    Cost of license revenues   40,945     22,123       126,686     88,156  
    Cost of services revenues   66,561     49,827       233,042     215,949  
    Research and development   136,262     110,506       496,552     429,204  
    Sales and marketing   229,596     178,605       736,383     654,083  
    General and administrative   63,680     51,428       211,979     181,110  
Operating income   71,157     102,114       219,295     312,525  
Investment income   1,054     6,333       8,233     28,301  
Interest expense with EMC, net   (966 )   (5,095 )     (6,958 )   (18,316 )
Other income (expense), net   (4,008 )   (2,728 )     2,879     (3,225 )
Income before income taxes   67,237     100,624       223,449     319,285  
Income tax provision (benefit)   10,828     (10,830 )     26,351     29,152  
Net income $ 56,409   $ 111,454     $ 197,098   $ 290,133  
                           
Net income per weighted-average share, basic for Class A and Class B $ 0.14   $ 0.29     $ 0.50   $ 0.75  
                           
Net income per weighted-average share, diluted for Class A and Class B $ 0.14   $ 0.29     $ 0.49   $ 0.73  
                           
Weighted-average shares, basic for Class A and Class B   400,708     388,620       394,269     385,068  
Weighted-average shares, diluted for Class A and Class B   410,973     389,733       399,776     397,185  
___________                          
(1)  Includes stock-based compensation as follows:                          
    Cost of license revenues $ 320   $ 317     $ 1,293   $ 1,120  
    Cost of services revenues   3,933     2,769       14,874     13,485  
    Research and development   37,183     22,085       121,770     77,992  
    Sales and marketing   15,702     13,624       58,610     49,762  
    General and administrative   10,695     8,171       34,909     24,157  
                           
VMware, Inc.  
                               
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(in thousands)  
(unaudited)  
                               
  For the Three Months Ended     For the Year Ended  
  December 31,     December 31,  
  2009     2008     2009     2008  
                               
Cash flows from operating activities:                              
Net income $ 56,409     $ 111,454     $ 197,098     $ 290,133  
Adjustments to reconcile net income to net cash provided by operating activities:                              
Depreciation and amortization   56,756       41,091       198,486       158,628  
Stock-based compensation, excluding amounts capitalized   67,833       46,966       231,456       166,516  
Excess tax benefits from stock-based compensation   (13,376 )     (505 )     (26,214 )     (85,776 )
Gain on acquisition   --       --       (5,859 )     --  
Other   5,435       6,363       8,675       8,663  
Changes in assets and liabilities, net of acquisitions:                              
Accounts receivable   (279,392 )     (49,044 )     (193,610 )     (52,527 )
Other assets   (6,257 )     (6,260 )     (14,181 )     (21,910 )
Due to/from EMC, net   (49,706 )     (2,842 )     (64,762 )     40,348  
Accounts payable   12,699       10,958       (17,886 )     3,012  
Accrued expenses   90,393       40,499       124,685       22,930  
Income taxes receivable from EMC   --       (13,986 )     107,927       (111,050 )
Income taxes payable   21,509       (1,446 )     32,779       26,623  
Deferred income taxes, net   (14,281 )     1,065       (40,476 )     38,908  
Deferred revenue   335,669       88,499       447,498       315,633  
Net cash provided by operating activities   283,691       272,812       985,616       800,131  
                               
Cash flows from investing activities:                              
Additions to property and equipment   (23,462 )     (58,011 )     (103,375 )     (191,596 )
Capitalized software development costs   (15,087 )     (37,005 )     (68,611 )     (90,900 )
Purchase of investments   (3,200 )     --       (34,665 )     (1,750 )
Business acquisitions, net of cash acquired   --       (47,917 )     (356,278 )     (138,569 )
Decrease in restricted cash   --       32       549       928  
Net cash used in investing activities   (41,749 )     (142,901 )     (562,380 )     (421,887 )
                               
Cash flows from financing activities:                              
Proceeds from issuance of common stock   61,143       22,690       227,666       190,107  
Excess tax benefits from stock-based compensation   13,376       505       26,214       85,776  
Shares repurchased for tax withholdings on vesting of restricted stock   (6,161 )     (3,666 )     (31,467 )     (44,483 )
Net cash provided by financing activities   68,358       19,529       222,413       231,400  
Net increase in cash and cash equivalents   310,300       149,440       645,649       609,644  
Cash and cash equivalents at beginning of the period   2,176,161       1,691,372       1,840,812       1,231,168  
Cash and cash equivalents at end of the period $ 2,486,461     $ 1,840,812     $ 2,486,461     $ 1,840,812  
VMware, Inc.  
                                                 
RECONCILIATION OF GAAP TO NON-GAAP DATA  
For the Three Months Ended December 31, 2009  
(in thousands, except per share amounts)  
(unaudited)  
                         
    GAAP     Stock-Based Compensation     Employer Payroll Tax on Employee Stock Transactions     Intangible Amortization     Acquisition Related Items     Capitalized Software Development Costs (1)     Stock-Based Compensation Included in Capitalized Software Development     Non-GAAP, as adjusted  
                                                                 
Operating expenses:                                                                
    Cost of license revenues   $ 40,945     $ (320 )   $ (6 )   $ (3,262 )     --     $ (27,604 )     --     $ 9,753  
    Cost of services revenues   $ 66,561       (3,933 )     (135 )     (266 )     --       --       --     $ 62,227  
    Research and development   $ 136,262       (37,183 )     (626 )     (67 )     --       18,148       (3,061 )   $ 113,473  
    Sales and marketing   $ 229,596       (15,702 )     (283 )     (390 )     --       --       --     $ 213,221  
    General and administrative   $ 63,680       (10,695 )     (122 )     (124 )     (828 )     --       --     $ 51,911  
                                                                 
Operating income   $ 71,157       67,833       1,172       4,109       828       9,456       3,061     $ 157,616  
                                                                 
Income before income taxes   $ 67,237       67,833       1,172       4,109       828       9,456       3,061     $ 153,696  
                                                                 
Income tax provision   $ 10,828       9,463       135       1,562       --       4,738       339     $ 27,065  
                                                                 
Quarterly tax rate     16.1 %                                                     17.6 %
                                                                 
Net income   $ 56,409       58,370       1,037       2,547       828       4,718       2,722     $ 126,631  
                                                                 
Net income per weighted-average share, basic for Class A and Class B (2)   $ 0.14     $ 0.15     $ 0.00     $ 0.01     $ 0.00     $ 0.01     $ 0.01     $ 0.32  
                                                                 
Net income per weighted-average share, diluted for Class A and Class B (3)   $ 0.14     $ 0.14     $ 0.00     $ 0.01     $ 0.00     $ 0.01     $ 0.01     $ 0.31  
                                                                 
(1)  For the fourth quarter of 2009, VMware capitalized $18.1 million (including $3.1 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $27.6 million for the fourth quarter of 2009.  
                                                                 
(2) Calculated based upon 400,708 basic weighted-average shares for Class A and Class B.                  
                                                                 
(3) Calculated based upon 410,973 diluted weighted-average shares for Class A and Class B.                  
VMware, Inc.          
                                             
RECONCILIATION OF GAAP TO NON-GAAP DATA          
For the Three Months Ended December 31, 2008          
(in thousands, except per share amounts)          
(unaudited)          
                           
    GAAP     Stock-Based Compensation     Employer Payroll Tax on Employee Stock Transactions     IPR&D and Intangible Amortization     Capitalized Software Development Costs (1)     Stock-Based Compensation Included in Capitalized Software Development     Non-GAAP, as adjusted  
                                                         
Operating expenses:                                                        
    Cost of license revenues   $ 22,123     $ (317 )     --     $ (3,145 )   $ (11,456 )     --     $ 7,205  
    Cost of services revenues   $ 49,827       (2,769 )     (4 )     --       --       --     $ 47,054  
    Research and development   $ 110,506       (22,085 )     (79 )     (6,576 )     48,008       (11,003 )   $ 118,771  
    Sales and marketing   $ 178,605       (13,624 )     (23 )     (897 )     --       --     $ 164,061  
    General and administrative   $ 51,428       (8,171 )     (7 )     (657 )     --       --     $ 42,593  
                                                         
Operating income   $ 102,114       46,966       113       11,275       (36,552 )     11,003     $ 134,919  
                                                         
Income before income taxes   $ 100,624       46,966       113       11,275       (36,552 )     11,003     $ 133,429  
                                                         
Income tax provision (benefit)   $ (10,830 )     5,918       39       3,911       (9,171 )     1,834     $ (8,299 )
                                                         
Quarterly tax rate     -10.8 %                                             -6.2 %
                                                         
Net income   $ 111,454       41,048       74       7,364       (27,381 )     9,169     $ 141,728  
                                                         
Net income per weighted-average share, basic for Class A and Class B (2)   $ 0.29     $ 0.11     $ 0.00     $ 0.02     $ (0.08 )   $ 0.02     $ 0.36  
                                                         
Net income per weighted-average share, diluted for Class A and Class B (3)   $ 0.29     $ 0.11     $ 0.00     $ 0.02     $ (0.08 )   $ 0.02     $ 0.36  
                                                         
(1)  For the fourth quarter of 2008, VMware capitalized $48.0 million (including $11.0 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $11.5 million for the fourth quarter of 2008.
                                                         
(2) Calculated based upon 388,620 basic weighted-average shares for Class A and Class B.          
                                                         
(3) Calculated based upon 389,733 diluted weighted-average shares for Class A and Class B.          
                                                         
VMware, Inc.  
                                                 
RECONCILIATION OF GAAP TO NON-GAAP DATA  
For the Year Ended December 31, 2009  
(in thousands, except per share amounts)  
(unaudited)  
                         
    GAAP     Stock-Based Compensation     Employer Payroll Tax on Employee Stock Transactions     Intangible Amortization     Acquisition Related Items     Capitalized Software Development Costs (1)     Stock-Based Compensation Included in Capitalized Software Development     Non-GAAP, as adjusted  
                                                                 
Operating expenses:                                                                
    Cost of license revenues   $ 126,686     $ (1,293 )   $ (17 )   $ (11,669 )     --     $ (82,915 )     --     $ 30,792  
    Cost of services revenues   $ 233,042       (14,874 )     (182 )     (266 )     --       --       --     $ 217,720  
    Research and development   $ 496,552       (121,770 )     (1,684 )     (107 )     --       83,514       (14,903 )   $ 441,602  
    Sales and marketing   $ 736,383       (58,610 )     (647 )     (1,594 )     --       --       --     $ 675,532  
    General and administrative   $ 211,979       (34,909 )     (404 )     (498 )     (1,601 )     --       --     $ 174,567  
                                                                 
Operating income   $ 219,295       231,456       2,934       14,134       1,601       (599 )     14,903     $ 483,724  
                                                                 
Other income (expense), net   $ 2,879       --       --       --       (5,859 )     --       --     $ (2,980 )
                                                                 
Income before income taxes   $ 223,449       231,456       2,934       14,134       (4,258 )     (599 )     14,903     $ 482,019  
                                                                 
Income tax provision   $ 26,351       43,170       669       5,018       --       3,002       2,779     $ 80,989  
                                                                 
Annual tax rate     11.8 %                                                     16.8 %
                                                                 
Net income   $ 197,098       188,286       2,265       9,116       (4,258 )     (3,601 )     12,124     $ 401,030  
                                                                 
Net income per weighted-average share, basic for Class A and Class B (2)   $ 0.50     $ 0.48     $ 0.01     $ 0.02     $ (0.01 )   $ (0.01 )   $ 0.03     $ 1.02  
                                                                 
Net income per weighted-average share, diluted for Class A and Class B (3)   $ 0.49     $ 0.47     $ 0.01     $ 0.02     $ (0.01 )   $ (0.01 )   $ 0.03     $ 1.00  
                                                                 
(1)  For the year ended December 31, 2009, VMware capitalized $83.5 million (including $14.9 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $82.9 million for the year ended December 31, 2009.
                                                                 
(2) Calculated based upon 394,269 basic weighted-average shares for Class A and Class B.                
                                                                 
(3) Calculated based upon 399,776 diluted weighted-average shares for Class A and Class B.                  
VMware, Inc.        
                                           
RECONCILIATION OF GAAP TO NON-GAAP DATA        
For the Year Ended December 31, 2008        
(in thousands, except per share amounts)        
(unaudited)        
                       
    GAAP     Stock-Based Compensation     Employer Payroll Tax on Employee Stock Transactions     IPR&D and Intangible Amortization     Capitalized Software Development Costs (1)     Stock-Based Compensation Included in Capitalized Software Development     Non-GAAP, as adjusted  
                                                         
Operating expenses:                                                        
    Cost of license revenues   $ 88,156     $ (1,120 )   $ (28 )   $ (11,278 )   $ (51,641 )     --     $ 24,089  
    Cost of services revenues   $ 215,949       (13,485 )     (224 )     --       --       --     $ 202,240  
    Research and development   $ 429,204       (77,992 )     (2,814 )     (6,576 )     113,649       (22,749 )   $ 432,722  
    Sales and marketing   $ 654,083       (49,762 )     (1,257 )     (3,586 )     --       --     $ 599,478  
    General and administrative   $ 181,110       (24,157 )     (519 )     (2,599 )     --       --     $ 153,835  
                                                         
Operating income   $ 312,525       166,516       4,842       24,039       (62,008 )     22,749     $ 468,663  
                                                         
Income before income taxes   $ 319,285       166,516       4,842       24,039       (62,008 )     22,749     $ 475,423  
                                                         
Income tax provision (benefit)   $ 29,152       33,020       1,284       8,516       (16,668 )     4,512     $ 59,816  
                                                         
Annual tax rate     9.1 %                                             12.6 %
                                                         
Net income   $ 290,133       133,496       3,558       15,523       (45,340 )     18,237     $ 415,607  
                                                         
Net income per weighted-average share, basic for Class A and Class B (2)   $ 0.75     $ 0.35     $ 0.01     $ 0.04     $ (0.12 )   $ 0.05     $ 1.08  
                                                         
Net income per weighted-average share, diluted for Class A and Class B (3)   $ 0.73     $ 0.34     $ 0.01     $ 0.04     $ (0.12 )   $ 0.05     $ 1.05  
                                                         
(1)  For the year ended December 31,2008, VMware capitalized $113.6 million (including $22.7 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $51.6 million for the year ended December 31, 2008.
                                                         
(2) Calculated based upon 385,068 basic weighted-average shares for Class A and Class B.                  
                                                         
(3) Calculated based upon 397,185 diluted weighted-average shares for Class A and Class B.                
VMware, Inc.  
                       
REVENUE BY TYPE  
(in thousands)  
(unaudited)  
                       
  For the Three Months Ended     For the Year Ended  
  December 31,     December 31,  
  2009     2008     2009     2008  
Revenues:                              
    License $ 304,206     $ 314,843     $ 1,029,442     $ 1,178,142  
    Services:                              
        Software maintenance   246,236       160,491       823,789       555,906  
        Professional services   57,759       39,269       170,706       146,979  
    Total services   303,995       199,760       994,495       702,885  
  $ 608,201     $ 514,603     $ 2,023,937     $ 1,881,027  
                               
Percentage of revenues:                              
    License   50.0 %     61.2 %     50.9 %     62.6 %
    Services:                              
        Software maintenance   40.5 %     31.2 %     40.7 %     29.6 %
        Professional services   9.5 %     7.6 %     8.4 %     7.8 %
    Total services   50.0 %     38.8 %     49.1 %     37.4 %
    100.0 %     100.0 %     100.0 %     100.0 %
                               
VMware, Inc.  
           
RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES  
TO FREE CASH FLOWS  
(A NON-GAAP FINANCIAL MEASURE)  
For the Three Months Ended December 31, 2009 and 2008  
(in thousands)  
(unaudited)  
           
  For the Three Months  
  Ended December 31,  
  2009     2008  
GAAP cash flows from operating activities $ 283,691     $ 272,812  
Capitalized software development costs   (15,087 )     (37,005 )
Excess tax benefits from stock-based compensation   13,376       505  
Additions to property and equipment   (23,462 )     (58,011 )
               
Free cash flows $ 258,518     $ 178,301  
VMware, Inc.  
           
RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES  
TO  FREE CASH FLOWS  
(A NON-GAAP FINANCIAL MEASURE)  
For the Year Ended December 31, 2009 and 2008  
(in thousands)  
(unaudited)  
           
     
  For the Year Ended  
  Ended December 31,  
  2009     2008  
GAAP cash flows from operating activities $ 985,616     $ 800,131  
Capitalized software development costs   (68,611 )     (90,900 )
Excess tax benefits from stock-based compensation   26,214       85,776  
Additions to property and equipment   (103,375 )     (191,596 )
               
Free cash flows $ 839,844     $ 603,411  

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding VMware's results, we have disclosed in this press release the following non-GAAP financial measures: non-GAAP operating income, non-GAAP net income and free cash flows. VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These non-GAAP financial measures differ from GAAP in that they exclude stock-based compensation, employer payroll tax on employee stock transactions, amortization of intangible assets, acquisition related items, and the net effect of the amortization and capitalization of software development costs, each as discussed below.

VMware's management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, to evaluate VMware's financial performance and the performance of its individual functional groups, and to evaluate the ability of operations to generate cash and to calculate bonus payments. Management believes these non-GAAP financial measures reflect VMware's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in VMware's business, as they exclude expenses that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating VMware's operating results and future prospects in the same manner as management and comparing financial results across accounting periods and to those of peer companies. Additionally, management believes information regarding free cash flows provides investors and others with an important perspective on the cash available to make strategic acquisitions and investments, to repurchase shares, to fund ongoing operations and to fund other capital expenditures.

Management believes these non-GAAP financial measures are useful to investors and others in assessing VMware's operating performance due to the following factors:

  • Stock-based compensation. Although stock-based compensation is an important aspect of the compensation of VMware's employees and executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock-based compensation is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. In addition, we account for stock-based compensation under GAAP, which requires that we report the excess income tax benefit from stock-based compensation as a financing cash flow rather than as an operating cash flow. We have added this benefit back to our calculation of free cash flows in order to generally classify cash flows arising from income taxes as operating cash flows.
  • Employer payroll tax on employee stock transactions. The amount of employer payroll taxes on stock-based compensation is dependent on VMware's stock price and other factors that are beyond our control and do not correlate to the operation of the business.
  • Amortization of intangible assets. VMware does not acquire businesses on a predictable cycle. Additionally, the GAAP presentation of amortization of intangible assets includes the effects of EMC's acquisition of VMware in January 2004. Therefore, VMware believes that the presentation of non-GAAP financial measures that adjust for the amortization of intangible assets and the write-off of in-process research and development, provides investors and others with a consistent basis for comparison across accounting periods. 
  • Acquisition related items. Acquisition related items include direct costs of acquisitions, such as transaction fees, which vary significantly and are unique to each acquisition. Acquisition related items also include the gain on VMware's initial investment in SpringSource Global, Inc., which was remeasured to fair value immediately before VMware's acquisition of SpringSource.
  • Amortization and capitalization of software development costs. Amortization and capitalization of software development costs can vary significantly depending upon the timing of products reaching technological feasibility and being made generally available. In addition, we exclude the capitalization of software from our free cash flows to better convey management's view of operating cash flows. If we did not capitalize costs under generally accepted accounting guidance, our GAAP operating cash flows would be lower as a result of additional expense recognized within net income and paid out in cash during the period.

Additionally, we believe that the non-GAAP financial measure, free cash flows, is meaningful to investors because we review cash flows generated from operations after taking into consideration capital expenditures because we consider capital expenditures to be a necessary component of ongoing operations. As discussed above, we also exclude capitalization of software development costs and the excess income tax benefit from stock-based compensation from our measure of free cash flows.

The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense that affect VMware's operations. Specifically, in the case of stock-based compensation, if VMware did not pay out a portion of its compensation in the form of stock-based compensation and related employer payroll taxes, the cash salary expense included in costs of revenues and operating expenses would be higher, which would affect VMware's cash position. VMware compensates for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP and should not be considered measures of VMware's liquidity. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Management encourages investors and others to review VMware's financial information in its entirety and not rely on a single financial measure.

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