SOURCE: VMware, Inc.

VMware, Inc.

January 28, 2013 16:01 ET

VMware Reports Record Fourth Quarter and Full Year 2012 Results

Annual Revenue Growth of 22% to a Record $4.61 Billion With Fourth Quarter Year-Over-Year Growth of 22% to a Record $1.29 Billion; Annual Operating Margin 18.9%; Non-Gaap Operating Margin a Record 32.4%; Fourth Quarter Operating Margin 19.5%; Non-Gaap Operating Margin a Record 32.8%

PALO ALTO, CA--(Marketwire - Jan 28, 2013) - VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the fourth quarter and full year of 2012:

  • Revenues for the fourth quarter were $1.29 billion, an increase of 22% from the fourth quarter of 2011.

  • Operating income for the fourth quarter was $253 million, an increase of 18% from the fourth quarter of 2011. Non-GAAP operating income for the fourth quarter was $424 million, an increase of 25% from the fourth quarter of 2011.

  • Net income for the fourth quarter was $206 million, or $0.47 per diluted share, compared to $200 million, or $0.46 per diluted share, for the fourth quarter of 2011. Non-GAAP net income for the quarter was $349 million, or $0.81 per diluted share, compared to $266 million, or $0.62 per diluted share, for the fourth quarter of 2011.

  • Fourth quarter Non-GAAP diluted EPS was $0.81, an increase of 30.6% from the fourth quarter of 2011.

  • Operating cash flows for the fourth quarter were $493 million, a decrease of 12% from the fourth quarter of 2011. Free cash flows for the quarter were $412 million, a decrease of 19% from the fourth quarter of 2011.

  • Revenues for 2012 were $4.61 billion, an increase of 22% from 2011.

  • Operating income for 2012 was $872 million, an increase of 19% from 2011. Non-GAAP operating income for 2012 was $1.49 billion, an increase of 28% from 2011.

  • Net income for 2012 was $746 million, or $1.72 per diluted share, compared to $724 million, or $1.68 per diluted share, for 2011. Non-GAAP net income for 2012 was $1.24 billion, or $2.85 per diluted share, compared to $936 million, or $2.17 per diluted share, for 2011.

  • Annual Non-GAAP diluted EPS was $2.85, an increase of 31.4% from 2011.

  • Operating cash flows for 2012 were $1.90 billion, a decrease of 6% and free cash flows for the year were $1.66 billion, a decrease of 7% from 2011.

  • Cash, cash equivalents and short-term investments were $4.63 billion and unearned revenue was $3.46 billion as of December 31, 2012.

U.S. revenues for 2012 grew 22% to $2.23 billion from 2011. International revenues grew 22% to $2.38 billion from 2011.

License revenues for 2012 were $2.09 billion, an increase of 13% from 2011. Service revenues, which include software maintenance and professional services, were $2.52 billion for 2012, an increase of 31% from 2011.

Annual 2013 total revenues are expected to be in the range of $5.230 billion to $5.350 billion, an increase of approximately 14 to 16 percent from 2012, and annual license revenues are expected to grow between 8 and 11 percent.

First quarter 2013 total revenues are expected to be in the range of $1.170 billion to $1.190 billion, an increase of approximately 11 to 13 percent from the first quarter 2012.

"2012 was a strong year for VMware, with solid Q4 results despite a tough economic environment," said Pat Gelsinger, chief executive officer, VMware. "We see a tremendous market opportunity in 2013 and beyond, as we focus on what our customers value most: VMware's role as a pioneer of virtualization technologies that radically simplify IT infrastructure from the data center to the virtual workspace."

Recent Highlights & Strategic Announcements

  • On October 9, VMware unveiled an updated cloud management portfolio, including significant enhancements to the management products in the VMware vCloud® Suite. VMware also introduced a new product to the suite, VMware vCloud Automation Center™ 5.1, to further simplify and automate governance services across multiple, heterogeneous clouds. The announcement strengthened the VMware vCloud® Suite 5.1- the first solution to deliver the software-defined datacenter.

  • On December 4, VMware announced the newly formed Pivotal Initiative, in which VMware and EMC are committing key existing technology, people and programs from both companies focused on Big Data and Cloud Application Platforms under one virtual organization. The Pivotal Initiative will enable a new generation of workloads that can exploit the advancements VMware is driving with the software-defined datacenter, the de facto infrastructure at the heart of cloud computing, and with end-user computing.

  • In December, VMware established the Network and Security Virtualization group internally to align operations, engineering and go to market efforts to drive demand for next generation networking solutions associated with the software-defined datacenter. The Company appointed Stephen Mullaney, formerly CEO of Nicira, as vice president and general manager of the new organization.

VMware plans to host a conference call today to review its fourth quarter and full year 2012 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 webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 60 days.

About VMware

VMware is the leader in virtualization and cloud infrastructure solutions that enable businesses to thrive in the Cloud Era. Customers rely on VMware to help them transform the way they build, deliver and consume Information Technology resources in a manner that is evolutionary and based on their specific needs. With 2012 revenues of $4.61 billion, VMware has more than 480,000 customers and 55,000 partners. The company is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com.

VMware, vCloud Automation Center and VMware vCloud are registered trademarks or trademarks of VMware, Inc. in the United States and other jurisdictions. Other marks mentioned herein are trademarks, which are proprietary to VMware, Inc. or another company.

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 titled "About Non-GAAP Financial Measures."

Forward-Looking Statements
This press release contains forward-looking statements including, among other things, statements regarding VMware's expected first quarter and annual 2013 revenues and annual 2013 license revenues; VMware's market opportunity; and the benefits of the Pivotal Initiative. These forward-looking statements are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. 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 promotions and beta programs; (v) our customers' ability to develop, and to transition to, new products and computing strategies such as cloud computing, desktop virtualization and the software defined data center; (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; (xiii) the successful integration of acquired companies and assets into VMware; and (xiv) 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 assumes no obligation to, and does not currently intend 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,
    2012   2011
             
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 1,609,322   $ 1,955,756
  Short-term investments     3,021,512     2,556,450
  Accounts receivable, net of allowance for doubtful accounts of $4,267 and $3,794     1,150,906     882,857
  Due from EMC, net     67,934     73,799
  Deferred tax asset     179,430     128,471
  Other current assets     90,935     80,439
Total current assets     6,120,039     5,677,772
Property and equipment, net     664,669     525,490
Other assets, net     128,701     154,236
Deferred tax asset     103,001     156,855
Intangible assets, net     731,852     407,375
Goodwill     2,848,130     1,759,080
    Total assets   $ 10,596,392   $ 8,680,808
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
  Accounts payable   $ 89,562   $ 49,747
  Accrued expenses and other     674,746     587,650
  Unearned revenues     2,195,926     1,764,109
Total current liabilities     2,960,234     2,401,506
Note payable to EMC     450,000     450,000
Unearned revenues     1,264,639     944,309
Other liabilities     181,538     114,711
    Total liabilities     4,856,411     3,910,526
Commitments and contingencies            
Stockholders' equity:            
  Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 128,688 and 123,610 shares     1,287     1,236
  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     3,431,710     3,212,264
  Accumulated other comprehensive income     5,676     1,176
  Retained earnings     2,298,308     1,552,606
    Total stockholders' equity     5,739,981     4,770,282
      Total liabilities and stockholders' equity   $ 10,596,392   $ 8,680,808
                   
   
   
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,  
    2012     2011     2012     2011  
                                 
Revenues:                                
  License   $ 596,720     $ 513,767     $ 2,086,990     $ 1,841,169  
  Services     696,435       546,535       2,518,057       1,925,927  
Total revenues     1,293,155       1,060,302       4,605,047       3,767,096  
Operating expenses (1):                                
  Cost of license revenues     63,393       56,389       237,027       207,398  
  Cost of services revenues     128,431       110,485       484,296       414,589  
  Research and development     268,323       216,992       999,214       775,051  
  Sales and marketing     478,401       385,236       1,644,849       1,334,346  
  General and administrative     102,082       77,144       367,718       300,541  
Operating income     252,525       214,056       871,943       735,171  
Investment income     6,364       4,685       26,557       16,157  
Interest expense with EMC     (1,047 )     (1,060 )     (4,654 )     (3,906 )
Other income (expense), net     2,082       (8,815 )     (732 )     46,991  
Income before income taxes     259,924       208,866       893,114       794,413  
Income tax provision     54,155       8,438       147,412       70,477  
Net income   $ 205,769     $ 200,428     $ 745,702     $ 723,936  
                                 
Net income per weighted-average share, basic for Class A and Class B   $ 0.48     $ 0.47     $ 1.75     $ 1.72  
                                 
Net income per weighted-average share, diluted for Class A and Class B   $ 0.47     $ 0.46     $ 1.72     $ 1.68  
                                 
Weighted-average shares, basic for Class A and Class B     427,266       422,873       426,658       421,188  
Weighted-average shares, diluted for Class A and Class B     433,205       431,375       433,974       431,750  
______                                
(1) Includes stock-based compensation as follows:                                
  Cost of license revenues   $ 547     $ 335     $ 2,072     $ 1,606  
  Cost of services revenues     7,482       5,993       28,220       23,389  
  Research and development     62,779       39,643       210,377       174,264  
  Sales and marketing     39,100       25,138       149,879       95,688  
  General and administrative     13,894       9,650       48,107       40,206  
   
   
VMware, Inc.  
                         
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(in thousands)  
(unaudited)  
                         
    For the Three Months Ended     For the Year Ended  
    December 31,     December 31,  
    2012     2011     2012     2011  
                                 
Operating activities:                                
Net income   $ 205,769     $ 200,428     $ 745,702     $ 723,936  
Adjustments to reconcile net income to net cash provided by operating activities:                                
  Depreciation and amortization     93,276       86,228       354,868       315,871  
  Stock-based compensation, excluding amounts capitalized     123,802       80,759       425,995       335,153  
  Excess tax benefits from stock-based compensation     (27,225 )     (26,811 )     (138,139 )     (224,503 )
  Gain on sale of Terremark investment     --       --       --       (56,000 )
  Other     3,645       10,626       2,355       21,420  
  Changes in assets and liabilities, net of acquisitions:                                
    Accounts receivable     (469,947 )     (336,123 )     (267,639 )     (263,366 )
    Other assets     9,597       15,576       (112,266 )     (75,879 )
    Due to/from EMC, net     (21,759 )     (61,310 )     5,865       (18,370 )
    Accounts payable     (2,426 )     (3,960 )     23,692       (16,513 )
    Accrued expenses     84,978       100,353       21,997       115,025  
    Income taxes receivable from EMC     19,488       23,018       19,488       269,258  
    Income taxes payable     10,842       27,261       138,508       79,183  
    Deferred income taxes, net     (3,962 )     (28,936 )     (74,060 )     (19,663 )
    Unearned revenue     467,299       474,300       751,158       840,081  
Net cash provided by operating activities     493,377       561,409       1,897,524       2,025,633  
                                 
Investing activities:                                
Additions to property and equipment     (81,639 )     (52,911 )     (234,458 )     (230,091 )
Purchase of leasehold interest     -       -       -       (151,083 )
Capitalized software development costs     -       -       -       (73,998 )
Purchases of available-for-sale securities     (469,042 )     (584,397 )     (3,188,684 )     (2,667,888 )
Sales of available-for-sale securities     227,443       208,058       1,880,545       816,351  
Maturities of available-for-sale securities     133,639       249,706       901,743       974,413  
Sale of strategic investments     -       -       -       78,513  
Business acquisitions, net of cash acquired     -       -       (1,344,214 )     (303,610 )
Transfer of net assets under common control     -       -       -       (22,393 )
Other investing     (37,195 )     (815 )     (49,552 )     (31,187 )
Net cash used in investing activities     (226,794 )     (180,359 )     (2,034,620 )     (1,610,973 )
                                 
Financing activities:                                
Proceeds from issuance of common stock     38,936       52,332       253,159       337,618  
Repurchase of common stock     (160,522 )     (35,287 )     (467,534 )     (526,203 )
Excess tax benefits from stock-based compensation     27,225       26,811       138,139       224,503  
Shares repurchased for tax withholdings on vesting of restricted stock     (43,100 )     (18,979 )     (133,102 )     (123,787 )
Net cash provided by (used in) financing activities     (137,461 )     24,877       (209,338 )     (87,869 )
Net increase (decrease) in cash and cash equivalents     129,122       405,927       (346,434 )     326,791  
Cash and cash equivalents at beginning of the period     1,480,200       1,549,829       1,955,756       1,628,965  
Cash and cash equivalents at end of the period   $ 1,609,322     $ 1,955,756     $ 1,609,322     $ 1,955,756  
 
 
VMware, Inc.
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Three Months Ended December 31, 2012
(in thousands, except per share amounts)
(unaudited)
 
                                                 
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 
                                                                 
Operating expenses:                                                                
Cost of license revenues   $ 63,393       (547 )     (17 )     (25,271 )     -       (13,151 )     -     $ 24,407  
Cost of services revenues   $ 128,431       (7,482 )     (194 )     (1,098 )     -       -       -     $ 119,657  
Research and development   $ 268,323       (62,779 )     (1,277 )     (1,254 )     -       -       -     $ 203,013  
Sales and marketing   $ 478,401       (39,100 )     (1,076 )     (3,096 )     -       -       -     $ 435,129  
General and administrative   $ 102,082       (13,894 )     (631 )     -       (494 )     -       -     $ 87,063  
                                                                 
Operating income   $ 252,525       123,802       3,195       30,719       494       13,151       -     $ 423,886  
Operating margin     19.5 %     9.6 %     0.3 %     2.4 %     -       1.0 %     -       32.8 %
                                                                 
Income before income taxes   $ 259,924       123,802       3,195       30,719       494       13,151       -     $ 431,285  
                                                                 
Income tax provision   $ 54,155                                               27,832     $ 81,987  
Tax rate     20.8 %                                                     19.0 %
                                                                 
Net income   $ 205,769       123,802       3,195       30,719       494       13,151       (27,832 )   $ 349,298  
                                                                 
Net income per weighted-average share, basic for Class A and Class B (3)   $ 0.48     $ 0.29     $ 0.01     $ 0.07     $ -     $ 0.03     $ (0.06 )   $ 0.82  
                                                                 
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 0.47     $ 0.29     $ 0.01     $ 0.07     $ -     $ 0.03     $ (0.06 )   $ 0.81  
                                                                 
 
(1) For the fourth quarter of 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $13.2 million. 
 
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. 
 
(3) Calculated based upon 427,266 basic weighted-average shares for Class A and Class B.
 
(4) Calculated based upon 433,205 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, 2011
(in thousands, except per share amounts)
(unaudited)
 
                                                 
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 
                                                                 
Operating expenses:                                                                
Cost of license revenues   $ 56,389       (335 )     (27 )     (13,187 )     -       (22,042 )     -     $ 20,798  
Cost of services revenues   $ 110,485       (5,993 )     (160 )     (1,241 )     -       -       -     $ 103,091  
Research and development   $ 216,992       (39,643 )     (1,486 )     (796 )     -       -       -     $ 175,067  
Sales and marketing   $ 385,236       (25,138 )     (867 )     (2,866 )     -       -       -     $ 356,365  
General and administrative   $ 77,144       (9,650 )     (383 )     (37 )     (197 )     -       -     $ 66,877  
                                                                 
Operating income   $ 214,056       80,759       2,923       18,127       197       22,042       -     $ 338,104  
Operating margin     20.2 %     7.6 %     0.3 %     1.7 %     -       2.1 %     -       31.9 %
                                                                 
Income before income taxes   $ 208,866       80,759       2,923       18,127       197       22,042       -     $ 332,914  
                                                                 
Income tax provision   $ 8,438                                               58,145     $ 66,583  
Tax rate     4.0 %                                                     20.0 %
                                                                 
Net income   $ 200,428       80,759       2,923       18,127       197       22,042       (58,145 )   $ 266,331  
                                                                 
Net income per weighted-average share, basic for Class A and Class B (3)   $ 0.47     $ 0.19     $ 0.01     $ 0.04     $ -     $ 0.06     $ (0.14 )   $ 0.63  
                                                                 
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 0.46     $ 0.19     $ 0.01     $ 0.04     $ -     $ 0.05     $ (0.13 )   $ 0.62  
                                                                 
 
(1) For the fourth quarter of 2011, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $22.0 million. 
 
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be re-calculated during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, tax audit closures, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. 
 
(3) Calculated based upon 422,873 basic weighted-average shares for Class A and Class B.
 
(4) Calculated based upon 431,375 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, 2012
(in thousands, except per share amounts)
(unaudited)
 
                                                 
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
 Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 
                                                                 
Operating expenses:                                                                
Cost of license revenues   $ 237,027       (2,072 )     (60 )     (71,605 )     -       (70,608 )     -     $ 92,682  
Cost of services revenues   $ 484,296       (28,220 )     (1,040 )     (4,392 )     -       -       -     $ 450,644  
Research and development   $ 999,214       (210,377 )     (6,327 )     (3,718 )     -       -       -     $ 778,792  
Sales and marketing   $ 1,644,849       (149,879 )     (4,847 )     (12,243 )     -       -       -     $ 1,477,880  
General and administrative   $ 367,718       (48,107 )     (1,622 )     -       (3,896 )     -       -     $ 314,093  
                                                                 
Operating income   $ 871,943       438,655       13,896       91,958       3,896       70,608       -     $ 1,490,956  
Operating margin     18.9 %     9.5 %     0.3 %     2.0 %     0.2 %     1.5 %     -       32.4 %
                                                                 
Income before income taxes   $ 893,114       438,655       13,896       91,958       3,896       70,608       -     $ 1,512,127  
                                                                 
Income tax provision   $ 147,412                                               129,126     $ 276,538  
Tax rate     16.5 %                                                     18.3 %
                                                                 
Net income   $ 745,702       438,655       13,896       91,958       3,896       70,608       (129,126 )   $ 1,235,589  
                                                                 
Net income per weighted-average share, basic for Class A and Class B (3)   $ 1.75     $ 1.03     $ 0.03     $ 0.22     $ 0.01     $ 0.17     $ (0.31 )   $ 2.90  
                                                                 
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 1.72     $ 1.01     $ 0.03     $ 0.21     $ 0.01     $ 0.16     $ (0.29 )   $ 2.85  
                                                                 
 
(1) For the year ended December 31, 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $70.6 million. 
 
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. 
 
(3) Calculated based upon 426,658 basic weighted-average shares for Class A and Class B.
 
(4) Calculated based upon 433,974 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, 2011
(in thousands, except per share amounts)
(unaudited)
 
                                                   
    GAAP   Stock-Based
Compensation
  Employer
Payroll Taxes
on Employee
Stock Transactions
  Intangible
Amortization
  Acquisition
 Related
Items
    Capitalized
Software
Development
Costs (1)
    Stock-Based
Compensation
Included in
Capitalized
Software
Development
  Gain on sale of Terremark (2)     Tax
Adjustment
(3)
    Non-GAAP,
as adjusted
 
                                                                       
Operating expenses:                                                                      
Cost of license revenues   $ 207,398     (1,606 )   (120 )   (46,074 )   -       (84,741 )     -     -       -     $ 74,857  
Cost of services revenues   $ 414,589     (23,389 )   (1,368 )   (4,967 )   -       -       -     -       -     $ 384,865  
Research and development   $ 775,051     (174,264 )   (9,724 )   (3,187 )   -       86,426       (12,428 )   -       -     $ 661,874  
Sales and marketing   $ 1,334,346     (95,688 )   (5,577 )   (10,213 )   -       -       -     -       -     $ 1,222,868  
General and administrative   $ 300,541     (40,206 )   (1,580 )   (145 )   (2,423 )     -       -     -       -     $ 256,187  
                                                                       
Operating income   $ 735,171     335,153     18,369     64,586     2,423       (1,685 )     12,428     -       -     $ 1,166,445  
Operating margin     19.5 %   8.9 %   0.5 %   1.7 %   0.1 %     -       0.3 %   -       -       31.0 %
                                                                       
Other income (expense), net   $ 46,991                                             (56,000 )           $ (9,009 )
                                                                       
Income before income taxes   $ 794,413     335,153     18,369     64,586     2,423       (1,685 )     12,428     (56,000 )     -     $ 1,169,687  
                                                                       
Income tax provision   $ 70,477                                                     163,459     $ 233,936  
Tax rate     8.9 %                                                           20.0 %
                                                                       
Net income   $ 723,936     335,153     18,369     64,586     2,423       (1,685 )     12,428     (56,000 )     (163,459 )   $ 935,751  
                                                                       
Net income per weighted-average share, basic for Class A and Class B (4)   $ 1.72   $ 0.80   $ 0.04   $ 0.15   $ 0.01     $ (0.01 )   $ 0.03   $ (0.13 )   $ (0.39 )   $ 2.22  
                                                                       
Net income per weighted-average share, diluted for Class A and Class B (5)   $ 1.68   $ 0.78   $ 0.04   $ 0.15   $ 0.01     $ (0.01 )   $ 0.03   $ (0.13 )   $ (0.38 )   $ 2.17  
 
 
(1) For the year ended December 31, 2011, we capitalized $86.4 million (including $12.4 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $84.7 million. 
 
(2) VMware realized a gain of $56.0 million on the sale of its investment in Terremark Worldwide, Inc.
 
(3) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be re-calculated during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, tax audit closures, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. 
 
(4) Calculated based upon 421,188 basic weighted-average shares for Class A and Class B.
 
(5) Calculated based upon 431,750 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,  
    2012     2011     2012     2011  
                                 
Revenues:                                
  License   $ 596,720     $ 513,767     $ 2,086,990     $ 1,841,169  
  Services:                                
    Software maintenance     590,971       463,489       2,152,986       1,640,397  
    Professional services     105,464       83,046       365,071       285,530  
  Total services     696,435       546,535       2,518,057       1,925,927  
Total revenues   $ 1,293,155     $ 1,060,302     $ 4,605,047     $ 3,767,096  
                                 
                                 
Percentage of revenues:                                
  License     46.1 %     48.5 %     45.3 %     48.9 %
  Services:                                
    Software maintenance     45.7 %     43.7 %     46.8 %     43.5 %
    Professional services     8.2 %     7.8 %     7.9 %     7.6 %
  Total services     53.9 %     51.5 %     54.7 %     51.1 %
Total revenues     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)  
(in thousands)  
(unaudited)  
   
    For the Three Months Ended  
    December 31,  
    2012     2011  
                 
GAAP cash flows from operating activities   $ 493,377     $ 561,409  
Capital expenditures     (81,639 )     (52,911 )
Free cash flows   $ 411,738     $ 508,498  
   
   
VMware, Inc.  
             
RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES  
TO FREE CASH FLOWS  
(A NON-GAAP FINANCIAL MEASURE)  
(in thousands)  
(unaudited)  
   
    For the Year Ended  
    December 31,  
    2012     2011  
                 
GAAP cash flows from operating activities   $ 1,897,524     $ 2,025,633  
Capital expenditures     (234,458 )     (230,091 )
Free cash flows   $ 1,663,066     $ 1,795,542  
                 

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, non-GAAP income per diluted share, non-GAAP operating margin 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, other than free cash flows, differ from GAAP in that they exclude stock-based compensation, employer payroll tax on employee stock transactions, amortization of intangible assets, acquisition related items, the net effect of the amortization and capitalization of software development costs, and the gain that VMware realized upon its sale of its investment in Terremark Worldwide, Inc. during the second quarter of fiscal 2011, each as discussed below. Free cash flows differ from GAAP cash flows from operating activities in its treatment of capital expenditures.

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 calculate bonus payments and to evaluate VMware's financial performance, the performance of its individual functional groups and the ability of operations to generate cash. 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 and gains 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 in 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 certain of the stock-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock options, which is an element of our ongoing stock-based compensation expense, 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.
  • 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. A portion of the purchase price of VMware's acquisitions is generally allocated to intangible assets, such as intellectual property, and is subject to amortization. However, VMware does not acquire businesses on a predictable cycle. Additionally, the amount of an acquisition's purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition. Therefore, VMware believes that the presentation of non-GAAP financial measures that adjust for the amortization of intangible assets 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. Additionally, VMware does not acquire businesses on a predictable cycle.
  • Capitalized software development costs. Capitalized software development costs encompasses capitalization of development costs and the subsequent amortization of the capitalized costs over the useful life of the product. Amortization and capitalization of software development costs can vary significantly depending upon the timing of products reaching technological feasibility and being made generally available. We did not capitalize software development costs related to product offerings during 2012. In future periods, we expect our amortization expense from capitalized software development costs to decline as software development costs are expected to be recorded as R&D expense as incurred given our go-to-market strategy, which has changed from single product solutions to product suite solutions. We also expect amortization of previously capitalized software development costs to steadily decline as previously capitalized software development costs become fully amortized.
  • Gain on sale of Terremark investment. In the second quarter of 2011, we sold our investment in Terremark Worldwide, Inc., which was acquired by Verizon in a cash transaction, and realized a gain of $56.0 million. Our investment in Terremark was made in connection with a business and technical collaboration and was not made to seek an investment gain or to fund our business operations. To the extent that sizeable gains or losses are realized on investments like this, they do not occur on a predictable cycle. Additionally, the timing of the event that triggered our divestment and whether or not we realized a gain or loss, was not under our control.
  • Tax adjustment. Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating our non-GAAP income. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

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 due to the fact that these expenditures are considered to be a necessary component of ongoing operations.

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 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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