SOURCE: VMware, Inc.

VMware, Inc.

October 18, 2010 16:01 ET

VMware Reports Third Quarter 2010 Results

Revenue Growth of 46% to $714 Million; GAAP Operating Margin of 13.2%; Non-GAAP Operating Margin of 28.6%; Trailing Twelve Months Operating Cash Flows Growth of 8% to $1.1 Billion; Trailing Twelve Months Free Cash Flows Growth of 39% to $1.1 Billion

PALO ALTO, CA--(Marketwire - October 18, 2010) -   VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the third quarter 2010:

  • Revenues for the third quarter were $714 million, an increase of 46% from the third quarter of 2009.

  • GAAP operating income for the third quarter was $94 million, compared to $23 million for the third quarter of 2009. Non-GAAP operating income for the third quarter was $204 million, compared to $109 million the third quarter of 2009.

  • GAAP net income for the third quarter was $85 million, or $0.20 per diluted share, compared to $38 million, or $0.09 per diluted share, for the third quarter of 2009. Non-GAAP net income for the third quarter was $165 million, or $0.39 per diluted share, compared to $95 million, or $0.24 per diluted share, for the third quarter of 2009. 

  • Cash, cash equivalents and short-term investments as of September 30, 2010 were $2.9 billion, an increase of 32% compared to a year ago. Total deferred revenues were $1.5 billion, an increase of 52% from the same period a year ago.

  • For the trailing twelve months ended September 30, 2010, operating cash flows were $1.1 billion, an increase of 8% from the same period a year ago. Trailing twelve month free cash flows were $1.1 billion, an increase of 39% from the same period a year ago.

US revenues for the third quarter increased 47% to $362 million from the third quarter of 2009. International revenues for the third quarter grew 44% to $352 million from the third quarter of 2009.

License revenues were $343 million, an increase of 43% from the third quarter of 2009.
Services revenues, which include software maintenance and professional services, were $371 million, an increase of 49% from the third quarter of 2009. 

"VMware's third quarter results were driven by strong demand across products and regions, led by the U.S. Federal sector," said Mark Peek, chief financial officer. "For the fourth quarter, we expect total revenues to be within a range of $790 and $810 million, an increase of 30% to 33% from 2009."

"The quarter's strong performance reinforces that VMware is on the right path to help customers navigate the changing IT landscape," said Paul Maritz, president and chief executive officer. "With virtualization as a central technology in cloud computing, VMware will continue to invest to deliver a broadening set of IT as a Service solutions across infrastructure, application platforms and end-user computing." 

Recent Highlights & Strategic Announcements

  • On August 31, 2010, VMware outlined its vision for the next decade of information technology at VMworld 2010 in San Francisco and later at VMworld Europe in Copenhagen. The new model -- IT as a Service and hybrid cloud computing -- improves each critical layer of modern architecture for infrastructure, applications and end-user access. The events attracted more than 23,000 registered attendees, including customers, partners, press and analysts, and 346 sponsors and exhibitors.

  • On August 31, 2010, VMware announced a series of solutions to support its new model of IT as a Service, including VMware vCloud ™ Director, a new model for delivering and consuming IT services across hybrid clouds; VMware vShield™, a product family to tackle cloud security challenges; VMware vCloud Datacenter Services, secure, interoperable enterprise-class clouds delivered by leading service providers; and VMware vFabric™, a modern application development platform to deliver speed, portability and optimized use of cloud infrastructure.

  • During the third quarter, VMware announced that some of the world's leading service providers, including Bluelock, Colt, SingTel, Terremark and Verizon, will utilize vCloud Datacenter Services to deliver secure interoperable enterprise-class hybrid clouds as a way for enterprises to extend their datacenters to external clouds, while preserving security, compliance and quality of service.

  • On August 31, 2010, VMware announced that it had acquired Integrien, a leader in real time application and infrastructure performance analytics software, and TriCipher, a leader in secure access management and enterprise identity federation for cloud hosted Software as a Service applications.

  • On September 13, 2010, VMware announced general availability of VMware View™4.5, a complete, virtual desktop solution that enables enterprises to improve security, lower operating costs, and simplify desktop administration and management by establishing a modern, end-user computing architecture.

  • In the third quarter, VMware announced a series of alliances to accelerate cloud computing deployment and IT as a Service. VMware's agreement with HP will deliver a new virtualization solution and reference architectures. VMware and NetApp announced new solutions that will help midsize enterprises consolidate and virtualize their Windows® environments to deliver enterprise-class IT as a Service. 

VMware plans to host a conference call today to review its third quarter 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 30 days. 

About VMware

VMware delivers virtualization and cloud infrastructure solutions 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 190,000 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, VMware vSphere, VMware vCloud, VMware vShield, VMware vFabric and VMware View are registered trademarks or trademarks 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

This press release contains forward-looking statements including, among other things, statements regarding VMware's fourth quarter revenue projections, our plans to invest in IT as a Service solutions and the delivery of such solutions, our visions for IT as a Service and hybrid cloud computing and their effect on the delivery of IT resources and the utilization by customers of our new products and the solutions offered through our alliances. 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 beta programs; (v) our customers' ability to develop, and to transition to, new products and computing strategies such as cloud computing and IT-as-a-service; (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 STATEMENTS OF CASH FLOWS  
(in thousands)  
(unaudited)  
   
  For the Three Months Ended     For the Nine Months Ended  
  September 30,     September 30,  
  2010     2009     2010     2009  
                               
Cash flows from operating activities:                              
Net income $ 84,600     $ 38,219     $ 237,559     $ 140,689  
Adjustments to reconcile net income to net cash provided by operating activities:                              
  Depreciation and amortization   71,117       55,420       183,461       141,730  
  Stock-based compensation, excluding amounts capitalized   73,657       62,352       205,190       163,623  
  Excess tax benefits from stock-based compensation   (78,703 )     (8,365 )     (167,204 )     (12,838 )
  Gain on acquisition         (5,859 )           (5,859 )
  Other   261       2,606       6,120       3,240  
    Changes in assets and liabilities, net of acquisitions:                              
    Accounts receivable   51,553       5,091       159,241       85,782  
    Other assets   (59,179 )     (8,820 )     (83,430 )     (7,924 )
    Due to/from EMC, net   13,629       (5,645 )     15,931       (15,056 )
    Accounts payable   (1,971 )     (2,203 )     4,589       (30,585 )
    Accrued expenses   1,631       20,404       28,527       34,292  
    Income taxes receivable from EMC         20,028       2,508       107,927  
    Income taxes payable   11,697       (9,840 )     42,821       11,270  
    Deferred income taxes, net   (4,088 )     (11,596 )     (8,435 )     (26,195 )
    Deferred revenue   32,495       47,574       140,896       111,829  
Net cash provided by operating activities   196,699       199,366       767,774       701,925  
                               
Cash flows from investing activities:                              
Additions to property and equipment   (31,137 )     (14,245 )     (91,245 )     (79,913 )
Capitalized software development costs   (7,023 )     (8,844 )     (48,194 )     (53,524 )
Purchases of available-for-sale securities   (964,655 )           (1,624,706 )      
Sales and maturities of available-for-sale securities   155,112             155,112        
Purchase of strategic investments         (5,720 )           (31,465 )
Sale of strategic investments   2,648             2,648        
Business acquisitions, net of cash acquired   (125,820 )     (356,278 )     (292,970 )     (356,278 )
Transfer of net assets under common control               (175,000 )      
Decrease in restricted cash               206       549  
Net cash used in investing activities   (970,875 )     (385,087 )     (2,074,149 )     (520,631 )
                               
Cash flows from financing activities:                              
Proceeds from issuance of common stock   139,939       84,917       355,846       166,523  
Repurchase of common stock   (141,440 )           (285,940 )      
Excess tax benefits from stock-based compensation   78,703       8,365       167,204       12,838  
Shares repurchased for tax withholdings on vesting of restricted stock   (24,533 )     (7,060 )     (70,116 )     (25,306 )
Net cash provided by financing activities   52,669       86,222       166,994       154,055  
Net increase (decrease) in cash and cash equivalents   (721,507 )     (99,499 )     (1,139,381 )     335,349  
Cash and cash equivalents at beginning of the period   2,068,587       2,275,660       2,486,461       1,840,812  
Cash and cash equivalents at end of the period $ 1,347,080     $ 2,176,161     $ 1,347,080     $ 2,176,161  
   
   
VMware, Inc.  
   
CONSOLIDATED STATEMENTS OF INCOME  
(in thousands, except per share amounts)  
(unaudited)  
   
  For the Three Months Ended     For the Nine Months Ended  
  September 30,     September 30,  
  2010     2009     2010     2009  
                               
Revenues:                              
  License $ 343,239     $ 240,271     $ 979,081     $ 725,236  
  Services   371,006       249,480       1,042,601       690,500  
    714,245       489,751       2,021,682       1,415,736  
Operating expenses (1):                              
  Cost of license revenues   46,333       37,529       126,723       85,741  
  Cost of services revenues   80,229       58,544       226,641       166,481  
  Research and development   175,429       133,509       475,297       360,290  
  Sales and marketing   251,745       185,222       700,236       506,787  
  General and administrative   66,497       51,711       195,406       148,299  
Operating income   94,012       23,236       297,379       148,138  
Investment income   2,349       1,621       4,029       7,179  
Interest expense with EMC, net   (1,245 )     (1,319 )     (3,103 )     (5,992 )
Other income (expense), net   1,629       8,336       (6,977 )     6,887  
Income before income taxes   96,745       31,874       291,328       156,212  
Income tax provision (benefit)   12,145       (6,345 )     53,769       15,523  
Net income $ 84,600     $ 38,219     $ 237,559     $ 140,689  
                               
Net income per weighted-average share, basic for Class A and Class B $ 0.21     $ 0.10     $ 0.58     $ 0.36  
                               
Net income per weighted-average share, diluted for Class A and Class B $ 0.20     $ 0.09     $ 0.56     $ 0.35  
                               
Weighted-average shares, basic for Class A and Class B   411,755       396,366       408,082       392,712  
Weighted-average shares, diluted for Class A and Class B   426,581       402,888       421,949       397,433  
______                              
(1) Includes stock-based compensation as follows:                              
Cost of license revenues $ 395     $ 330     $ 1,170     $ 973  
Cost of services revenues   4,387       4,003       12,601       10,941  
Research and development   43,124       34,250       117,292       84,587  
Sales and marketing   18,102       15,763       49,601       42,908  
General and administrative   7,649       8,006       24,526       24,214  
 
 
VMware, Inc.
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
       
  September 30,   December 31,
  2010   2009
           
ASSETS          
Current assets:          
  Cash and cash equivalents $ 1,347,080   $ 2,486,461
  Short-term investments   1,557,106     27,360
  Accounts receivable, net   378,454     534,196
  Due from EMC, net   11,042     26,402
  Deferred tax asset, current portion   84,332     63,360
  Other current assets   188,148     44,701
Total current assets   3,566,162     3,182,480
Property and equipment, net   418,639     402,356
Capitalized software development costs, net and other   153,905     169,293
Deferred tax asset, net of current portion   128,943     102,529
Intangible assets, net   223,102     94,557
Goodwill   1,575,102     1,115,769
      Total assets $ 6,065,853   $ 5,066,984
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
  Accounts payable $ 59,415   $ 50,566
  Accrued expenses and other   361,645     334,523
  Deferred revenue, current portion   1,025,636     908,953
Total current liabilities   1,446,696     1,294,042
Note payable to EMC   450,000     450,000
Deferred revenue, net of current portion   479,972     416,345
Deferred tax liability   40,262     60,300
Other liabilities   114,281     103,346
    Total liabilities   2,531,211     2,324,033
Commitments and contingencies          
Stockholders' equity:          
  Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 114,227 and 102,785 shares   1,142     1,028
  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   3,242,296     2,339,079
  Accumulated other comprehensive income   13,862     4,563
  Retained earnings   274,342     395,281
    Total stockholders' equity   3,534,642     2,742,951
      Total liabilities and stockholders' equity $ 6,065,853   $ 5,066,984
   
   
VMware, Inc.  
   
RECONCILIATION OF GAAP TO NON-GAAP DATA  
For the Three Months Ended September 30, 2010  
(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     Tax Adjustment (2)     Non-GAAP, as adjusted  
                                                                   
Operating expenses :                                                                  
Cost of license revenues $ 46,333       (395 )     (26 )     (6,688 )         (26,140 )             $ 13,084  
Cost of services revenues $ 80,229       (4,387 )     (386 )     (1,471 )                       $ 73,985  
Research and development $ 175,429       (43,124 )     (3,100 )     (627 )         8,255     (1,232 )         $ 135,601  
Sales and marketing $ 251,745       (18,102 )     (2,076 )     (1,095 )                       $ 230,472  
General and administrative $ 66,497       (7,649 )     (771 )     (38 )   (1,035 )                   $ 57,004  
                                                                   
Operating income $ 94,012       73,657       6,359       9,919     1,035       17,885     1,232           $ 204,099  
Operating margin   13.2 %     10.3 %     0.9 %     1.4 %   0.1 %     2.5 %   0.2 %           28.6 %
                                                                   
Income before income taxes $ 96,745       73,657       6,359       9,919     1,035       17,885     1,232           $ 206,832  
                                                                   
Income tax provision $ 12,145                                                   29,221     $ 41,366  
Tax rate   12.6 %                                                         20.0 %
                                                                   
Net income $ 84,600       73,657       6,359       9,919     1,035       17,885     1,232       (29,221 )   $ 165,466  
                                                                   
Net income per weighted-average share, basic for Class A and Class B (3) $ 0.21     $ 0.18     $ 0.02     $ 0.02         $ 0.04         $ (0.07 )   $ 0.40  
                                                                   
Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.20     $ 0.18     $ 0.02     $ 0.02         $ 0.04         $ (0.07 )   $ 0.39  
                                                                   
                                                                   
(1) For the third quarter of 2010, VMware capitalized $8.3 million (including $1.2 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $26.1 million for the third quarter of 2010.  
   
(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 411,755 basic weighted-average shares for Class A and Class B.  
   
(4) Calculated based upon 426,581 diluted weighted-average shares for Class A and Class B.  
   
   
   
   
   
VMware, Inc.  
                                               
RECONCILIATION OF GAAP TO NON-GAAP DATA  
For the Three Months Ended September 30, 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 $ 37,529       (330 )   (6 )     (2,893 )           (27,030 )       $ 7,270  
Cost of services revenues $ 58,544       (4,003 )   (26 )                         $ 54,515  
Research and development $ 133,509       (34,250 )   (452 )     (40 )           10,597     (1,753 )   $ 107,611  
Sales and marketing $ 185,222       (15,763 )   (183 )     (388 )                   $ 168,888  
General and administrative $ 51,711       (8,006 )   (105 )     (126 )     (773 )             $ 42,701  
                                                           
Operating income $ 23,236       62,352     772       3,447       773       16,433     1,753     $ 108,766  
Operating margin   4.7 %     12.7 %   0.2 %     0.7 %     0.2 %     3.4 %   0.4 %     22.2 %
                                                           
Other income, net $ 8,336                       (5,859 )             $ 2,477  
                                                           
Income before income taxes $ 31,874       62,352     772       3,447       (5,086 )     16,433     1,753     $ 111,545  
                                                           
Income tax provision (benefit) $ (6,345 )     13,923     279       1,133             6,937     469     $ 16,396  
Tax rate   -19.9 %                                                 14.7 %
                                                           
Net income $ 38,219       48,429     493       2,314       (5,086 )     9,496     1,284     $ 95,149  
                                                           
Net income per weighted-average share, basic for Class A and Class B (2) $ 0.10     $ 0.12         $ 0.01     $ (0.01 )   $ 0.02         $ 0.24  
                                                           
Net income per weighted-average share, diluted for Class A and Class B (3) $ 0.09     $ 0.12         $ 0.01     $ (0.01 )   $ 0.03         $ 0.24  
                                                           
                                                           
(1) For the third quarter of 2009, VMware capitalized $10.6 million (including $1.8 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $27.0 million for the third quarter of 2009.
 
(2) Calculated based upon 396,366 basic weighted-average shares for Class A and Class B.
 
(3) Calculated based upon 402,888 diluted weighted-average shares for Class A and Class B.
 
 
 
VMware, Inc.  
                                                       
RECONCILIATION OF GAAP TO NON-GAAP DATA  
For the Nine Months Ended September 30, 2010  
(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     Tax Adjustment (2)     Non-GAAP, as adjusted  
                                                                         
Operating expenses :                                                                        
Cost of license revenues   $ 126,723       (1,170 )     (63 )     (15,410 )           (71,057 )               $ 39,023  
Cost of services revenues   $ 226,641       (12,601 )     (563 )     (3,199 )                           $ 210,278  
Research and development   $ 475,297       (117,292 )     (5,802 )     (1,727 )           52,890       (8,103 )         $ 395,263  
Sales and marketing   $ 700,236       (49,601 )     (3,137 )     (2,133 )                           $ 645,365  
General and administrative   $ 195,406       (24,526 )     (1,347 )     (114 )     (3,174 )                     $ 166,245  
                                                                         
Operating income   $ 297,379       205,190       10,912       22,583       3,174       18,167       8,103           $ 565,508  
Operating margin     14.7 %     10.1 %     0.5 %     1.1 %     0.2 %     0.9 %     0.4 %           28.0 %
                                                                         
Income before income taxes   $ 291,328       205,190       10,912       22,583       3,174       18,167       8,103           $ 559,457  
                                                                         
Income tax provision   $ 53,769                                                       65,175     $ 118,944  
Tax rate     18.5 %                                                             21.3 %
                                                                         
Net income   $ 237,559       205,190       10,912       22,583       3,174       18,167       8,103       (65,175 )   $ 440,513  
                                                                         
Net income per weighted-average share, basic for Class A and Class B (3)   $ 0.58     $ 0.50     $ 0.03     $ 0.06     $ 0.01     $ 0.04     $ 0.02     $ (0.16 )   $ 1.08  
                                                                         
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 0.56     $ 0.49     $ 0.03     $ 0.05           $ 0.04     $ 0.02     $ (0.15 )   $ 1.04  
                                                                         
                                                                         
(1) For the first nine months of 2010, VMware capitalized $52.9 million (including $8.1 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $71.1 million for the first nine months of 2010.          
     
                                                                         
(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 408,082 basic weighted average shares for Class A and Class B.          
           
(4) Calculated based upon 421,949 diluted weighted average shares for Class A and Class B.          
                                                                         
                                                   
VMware, Inc.  
                                 
RECONCILIATION OF GAAP TO NON-GAAP DATA  
For the Nine Months Ended September 30, 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 $ 85,741     (973 ) (11 )   (8,407 )       (55,311 )     $ 21,039  
Cost of services revenues $ 166,481     (10,941 ) (47 )                 $ 155,493  
Research and development $ 360,290     (84,587 ) (1,058 )   (40 )       65,366     (11,842 ) $ 328,129  
Sales and marketing $ 506,787     (42,908 ) (364 )   (1,204 )             $ 462,311  
General and administrative $ 148,299     (24,214 ) (282 )   (374 )   (773 )         $ 122,656  
                                               
Operating income $ 148,138     163,623   1,762     10,025     773     (10,055 )   11,842   $ 326,108  
Operating margin   10.5 %   11.6 % 0.1 %   0.7 %       -0.7 %   0.8 %   23.0 %
                                               
Other income, net $ 6,887               (5,859 )         $ 1,028  
                                               
Income before income taxes $ 156,212     163,623   1,762     10,025     (5,086 )   (10,055 )   11,842   $ 328,323  
                                               
Income tax provision $ 15,523     33,706   534     3,456         (1,739 )   2,439   $ 53,919  
Tax rate   9.9 %                                     16.4 %
                                               
Net income $ 140,689     129,917   1,228     6,569     (5,086 )   (8,316 )   9,403   $ 274,404  
                                               
Net income per weighted-average share, basic for Class A and Class B (2) $ 0.36   $ 0.33     $ 0.02   $ (0.01 ) $ (0.02 ) $ 0.02   $ 0.70  
                                               
Net income per weighted-average share, diluted for Class A and Class B (3) $ 0.35   $ 0.33     $ 0.02   $ (0.01 ) $ (0.02 ) $ 0.02   $ 0.69  
                                               
                                               
(1) For the first nine months of 2009, VMware capitalized $65.4 million (including $11.8 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $55.3 million for the first nine months of 2009.        
     
                                               
(2) Calculated based upon 392,712 basic weighted-average shares for Class A and Class B.                                
                                               
(3) Calculated based upon 397,433 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 Nine Months Ended  
    September 30,       September 30,  
    2010       2009       2010       2009  
                                       
Revenues:                                      
  License   $ 343,239       $ 240,271       $ 979,081       $ 725,236  
  Services:                                      
    Software maintenance     314,131         212,818         871,804         577,553  
    Professional services     56,875         36,662         170,797         112,947  
  Total services     371,006         249,480         1,042,601         690,500  
    $ 714,245       $ 489,751       $ 2,021,682       $ 1,415,736  
                                       
                                       
Percentage of revenues:                                      
  License     48.1 %       49.1 %       48.4 %       51.2 %
  Services:                                      
    Software maintenance     44.0 %       43.4 %       43.1 %       40.8 %
    Professional services     7.9 %       7.5 %       8.5 %       8.0 %
  Total services     51.9 %       50.9 %       51.6 %       48.8 %
      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 September 30, 2010 and 2009  
(in thousands)  
(unaudited)  
   
    For the Three  
     Months Ended  
    September 30,  
    2010     2009  
                 
GAAP cash flows from operating activities   $ 196,699     $ 199,366  
Capitalized software development costs     (7,023 )     (8,844 )
Excess tax benefits from stock-based compensation     78,703       8,365  
Capital expenditures     (31,137 )     (14,245 )
Free cash flows   $ 237,242     $ 184,642  
                 
                 
VMware, Inc.  
             
RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES  
TO FREE CASH FLOWS  
(A NON-GAAP FINANCIAL MEASURE)  
For the Trailing Twelve Months Ended September 30, 2010 and 2009  
(in thousands)  
(unaudited)  
   
    For the Trailing  
    Twelve Months Ended  
    September 30,  
    2010     2009  
                 
GAAP cash flows from operating activities   $ 1,051,465     $ 974,737  
Capitalized software development costs     (63,281 )     (90,529 )
Excess tax benefits from stock-based compensation     180,580       13,343  
Capital expenditures     (114,707 )     (137,924 )
Free cash flows   $ 1,054,057     $ 759,627  

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 operating margin and trailing twelve-month and third quarter 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 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 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 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. 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.

  • 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 due to the fact that these expenditures are considered 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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