SOURCE: VMware, Inc.

VMware, Inc.

October 17, 2011 16:01 ET

VMware Reports Third Quarter 2011 Results

Year-Over-Year Revenue Growth of 32% to $942 Million; Operating Margin of 19.2%; Non-GAAP Operating Margin of 30.3%; EPS Growth of 105% to $0.41; Non-GAAP EPS Growth of 36% to $0.53; Trailing Twelve Months Operating Cash Flows Growth of 78% to $1.9 Billion; Free Cash Flows Growth of 72% to $1.8 Billion

PALO ALTO, CA--(Marketwire - Oct 17, 2011) - VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the third quarter of 2011:

  • Revenues for the third quarter were $942 million, an increase of 32% from the third quarter of 2010, and an increase of 30% measured in constant currency.

  • Operating income for the third quarter was $181 million. Non-GAAP operating income for the third quarter was $285 million, an increase of 40% from the third quarter of 2010.

  • Net income for the third quarter was $178 million, or $0.41 per diluted share, compared to $85 million, or $0.20 per diluted share, for the third quarter of 2010. Non-GAAP net income for the quarter was $230 million, or $0.53 per diluted share, compared to $165 million, or $0.39 per diluted share, for the third quarter of 2010.

  • Operating cash flows for the third quarter were $524 million. Free cash flows for the quarter were $494 million, an increase of 108% from the third quarter of 2010.

  • Trailing twelve months operating cash flows were $1.9 billion, an increase of 78%. Trailing twelve months free cash flows were $1.8 billion, an increase of 72%.

  • Cash, cash equivalents and short-term investments were $4.0 billion and unearned revenue was $2.2 billion as of September 30, 2011.

U.S. revenues for the third quarter of 2011 grew 22% to $443 million from the third quarter of 2010. International revenues grew 42% to $498 million from the third quarter of 2010, and 37% in constant currency.

License revenues for the third quarter of 2011 were $444 million, an increase of 29% from the third quarter of 2010, and an increase of 25% measured in constant currency. Service revenues, which include software maintenance and professional services, were $498 million for the third quarter of 2011, an increase of 34% from the third quarter of 2010.

"VMware's third quarter results were driven by growth across all products. Demand was especially strong in the Asia Pacific markets and we also experienced the seasonal impact of sales to the US Federal Government," said Mark Peek, chief financial officer. "Fourth quarter 2011 revenues are expected to be in the range of $1.03 billion and $1.06 billion, a year-over-year increase of 23% to 27%."

"I'm pleased with another solid quarter for VMware illustrated by progress with new products, growth across our portfolio and a growing community. We are becoming a significant partner to businesses moving to the cloud," said Paul Maritz, chief executive officer.

Recent Highlights & Strategic Announcements

  • During the third quarter, VMware announced the industry's first cloud infrastructure suite and the general availability of VMware vSphere® 5, delivering nearly 200 new and enhanced capabilities to help customers transform IT by driving greater efficiency from existing investments and improving operational agility.

  • In August 2011 at VMworld® Las Vegas, VMware announced a portfolio of new and emerging products to provide customers a cohesive path to IT as a Service. VMware announced a simple way to help organizations break free from device-centric legacy desktop models and work in the post-PC era. VMware View™ 5 simplifies IT manageability and control, while providing a high fidelity desktop virtualization experience. Updates to VMware Horizon™ will provide an open, user-centric platform for delivery of different application types within a unified application catalog from a wide range of devices.

  • VMware announced a new enterprise database as a service platform accelerating development while automating administration of heterogeneous database technologies. VMware vFabric Data Director™ establishes a policy driven model for driving consistent security, data protection and resource consumption across an enterprise's database portfolio. VMware vFabric Postgres, the first database supported on Data Director, dynamically adapts to changing workloads to achieve greater memory efficiency and higher consolidation ratios.

  • VMware announced the beta availability of VMware Micro Cloud Foundry™ as a free download. Cloud Foundry is the industry's first open Platform as a Service (PaaS) solution, designed to deliver access to modern, high productivity frameworks and a rich ecosystem of application services from VMware, third parties and the open source community.

VMware plans to host a conference call today to review its third quarter 2011 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 at VMware's Investor Relation's page 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 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 2010 revenues of $2.9 billion, VMware has more than 300,000 customers and 25,000 partners. The company is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com.

VMware, VMware vSphere, VMware View, VMworld, VMware vFabric Data Director and VMware Micro Cloud Foundry are registered trademarks or trademarks of VMware, Inc. in the United States and/or 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 fourth quarter revenues, the features and benefits of VMware vCloud Connector, VMware Horizon, and VMware Micro Cloud Foundry and the role of VMware products and services in customer adoption of cloud computing and the transition to the post-PC era. 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 and cloud computing markets, and new product and marketing initiatives by our competitors; (iv) factors that affect timing of license revenue recognition such as product announcements, beta programs and product promotions that can cause revenue recognition of certain orders to be deferred; (v) our customers' ability to develop, and to transition to, new products and computing strategies such as cloud computing and desktop virtualization; (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      For the Nine Months
                                  Ended                     Ended
                              September 30,             September 30,
                        ------------------------  ------------------------
                            2011         2010         2011         2010
                        -----------  -----------  -----------  -----------

Operating activities:
Net income              $   177,538  $    84,600  $   523,508  $   237,559
Adjustments to
 reconcile net income
 to net cash provided
 by operating
 activities:
  Depreciation and
   amortization              73,985       71,117      229,643      183,461
  Stock-based
   compensation,
   excluding amounts
   capitalized               88,379       73,657      254,394      205,190
  Excess tax benefits
   from stock-based
   compensation             (46,428)     (78,703)    (197,692)    (167,204)
  Gain on sale of
   Terremark investment           -            -      (56,000)           -
  Other                       6,968          261       10,794        6,120
    Changes in assets
     and liabilities,
     net of
     acquisitions:
    Accounts receivable      46,174       51,553       72,757      159,241
    Other assets            (57,402)     (59,179)     (91,455)     (83,430)
    Due to/from EMC,
     net                     17,505       13,629       42,940       15,931
    Accounts payable        (10,846)      (1,971)     (12,553)       4,589
    Accrued expenses        (19,539)       1,631       14,672       28,527
    Income taxes
     receivable from
     EMC                     69,796            -      246,240        2,508
    Income taxes
     payable                 14,321       11,697       51,922       42,821
    Deferred income
     taxes, net              10,231       (4,088)       9,273       (8,435)
    Unearned revenue        152,829       32,495      365,781      140,896
                        -----------  -----------  -----------  -----------
Net cash provided by
 operating activities       523,511      196,699    1,464,224      767,774
                        -----------  -----------  -----------  -----------

Investing activities:
Additions to property
 and equipment              (54,948)     (31,137)    (177,180)     (91,245)
Purchase of leasehold
 interest                    22,043            -     (151,083)           -
Capitalized software
 development costs          (21,139)      (7,023)     (73,998)     (48,194)
Purchases of
 available-for-sale
 securities                (955,686)    (964,655)  (2,083,491)  (1,624,706)
Sales of
 available-for-sale
 securities                 231,705      124,218      608,293      124,218
Maturities of
 available-for-sale
 securities                 231,738       30,894      724,707       30,894
Sale of strategic
 investments                      -        2,648       78,513        2,648
Business acquisitions,
 net of cash acquired       (99,522)    (125,820)    (303,610)    (292,970)
Transfer of net assets
 under common control        (1,930)           -      (22,393)    (175,000)
Other investing              (3,230)           -      (30,372)         206
                        -----------  -----------  -----------  -----------
Net cash used in
 investing activities      (650,969)    (970,875)  (1,430,614)  (2,074,149)
                        -----------  -----------  -----------  -----------

Financing activities:
Proceeds from issuance
 of common stock             84,572      139,939      285,286      355,846
Repurchase of common
 stock                     (210,527)    (141,440)    (490,916)    (285,940)
Excess tax benefits
 from stock-based
 compensation                46,428       78,703      197,692      167,204
Shares repurchased for
 tax withholdings on
 vesting of restricted
 stock                      (34,230)     (24,533)    (104,808)     (70,116)
                        -----------  -----------  -----------  -----------
Net cash provided by
 (used in) financing
 activities                (113,757)      52,669     (112,746)     166,994
                        -----------  -----------  -----------  -----------
Net decrease in cash
 and cash equivalents      (241,215)    (721,507)     (79,136)  (1,139,381)
Cash and cash
 equivalents at
 beginning of the
 period                   1,791,044    2,068,587    1,628,965    2,486,461
                        -----------  -----------  -----------  -----------
Cash and cash
 equivalents at end of
 the period             $ 1,549,829  $ 1,347,080  $ 1,549,829  $ 1,347,080
                        ===========  ===========  ===========  ===========






                               VMware, Inc.

                    CONSOLIDATED STATEMENTS OF INCOME
                 (in thousands, except per share amounts)
                                (unaudited)

                          For the Three Months      For the Nine Months
                                  Ended                     Ended
                              September 30,             September 30,
                        ------------------------  ------------------------
                            2011         2010         2011         2010
                        -----------  -----------  -----------  -----------

Revenues:
  License               $   443,597  $   343,239  $ 1,327,402  $   979,081
  Services                  498,266      371,006    1,379,392    1,042,601
                        -----------  -----------  -----------  -----------
                            941,863      714,245    2,706,794    2,021,682
Operating expenses(1):
  Cost of license
   revenues                  46,063       46,333      151,009      126,723
  Cost of services
   revenues                 106,678       80,229      304,104      226,641
  Research and
   development              199,655      175,429      558,059      475,297
  Sales and marketing       331,626      251,745      949,110      700,236
  General and
   administrative            77,120       66,497      223,397      195,406
                        -----------  -----------  -----------  -----------
Operating income            180,721       94,012      521,115      297,379
Investment income             4,351        2,349       11,472        4,029
Interest expense with
 EMC                           (915)      (1,245)      (2,846)      (3,103)
Other income (expense),
 net                           (998)       1,629       55,806       (6,977)
                        -----------  -----------  -----------  -----------
Income before income
 taxes                      183,159       96,745      585,547      291,328
Income tax provision          5,621       12,145       62,039       53,769
                        -----------  -----------  -----------  -----------
Net income              $   177,538  $    84,600  $   523,508  $   237,559
                        ===========  ===========  ===========  ===========

Net income per
 weighted-average
 share, basic for Class
 A and Class B          $      0.42  $      0.21  $      1.25  $      0.58

Net income per
 weighted-average
 share, diluted for
 Class A and Class B    $      0.41  $      0.20  $      1.21  $      0.56

Weighted-average
 shares, basic for
 Class A and Class B        422,030      411,755      420,247      408,082
Weighted-average
 shares, diluted for
 Class A and Class B        431,881      426,581      431,846      421,949

(1) Includes
 stock-based
 compensation as
 follows:
  Cost of license
   revenues             $       367  $       395  $     1,271  $     1,170
  Cost of services
   revenues                   6,068        4,387       17,396       12,601
  Research and
   development               46,663       43,124      134,621      117,292
  Sales and marketing        24,763       18,102       70,550       49,601
  General and
   administrative            10,518        7,649       30,556       24,526





                               VMware, Inc.

                        CONSOLIDATED BALANCE SHEETS
                 (in thousands, except per share amounts)
                                (unaudited)


                                              September 30,   December 31,
                                                  2011            2010
                                              -------------   -------------

                          ASSETS
Current assets:
  Cash and cash equivalents                   $   1,549,829   $   1,628,965
  Short-term investments                          2,426,870       1,694,675
  Accounts receivable, net of allowance for
   doubtful accounts of $2,768 and $4,519           548,027         614,726
  Due from EMC, net                                  12,489          55,481
  Deferred tax asset                                127,740         100,689
  Other current assets                              147,901         203,119
                                              -------------   -------------
Total current assets                              4,812,856       4,297,655
Property and equipment, net                         516,661         419,065
Capitalized software development costs, net
 and other                                          177,420         151,945
Deferred tax asset                                  126,631         149,126
Intangible assets, net                              426,584         210,928
Goodwill                                          1,760,269       1,568,600
                                              -------------   -------------
      Total assets                            $   7,820,421   $   6,797,319
                                              =============   =============

       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                            $      57,812   $      58,913
  Accrued expenses and other                        508,149         459,813
  Unearned revenues                               1,468,126       1,270,426
                                              -------------   -------------
Total current liabilities                         2,034,087       1,789,152
Note payable to EMC                                 450,000         450,000
Unearned revenues                                   765,992         589,668
Deferred tax liability                                4,899          30,096
Other liabilities                                   111,546         129,960
                                              -------------   -------------
  Total liabilities                               3,366,524       2,988,876
Commitments and contingencies
Stockholders' equity:
 Class A common stock, par value $.01;
  authorized 2,500,000 shares; issued and
  outstanding 122,076 and 116,701 shares              1,221           1,167
 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                       3,096,738       2,955,971
 Accumulated other comprehensive income                 760          19,635
 Retained earnings                                1,352,178         828,670
                                              -------------   -------------
   Total stockholders' equity                     4,453,897       3,808,443
                                              -------------   -------------
     Total liabilities and stockholders'
      equity                                  $   7,820,421   $   6,797,319
                                              =============   =============


                              VMware, Inc.

                  RECONCILIATION OF GAAP TO NON-GAAP DATA
              For the Three Months Ended September 30, 2011
                 (in thousands, except per share amounts)
                                (unaudited)


                                            Employer
                                            Payroll
                                            Taxes on
                                            Employee            Acquisition
                                 Stock-      Stock                Related
                                 Based      Transac   Intangible Items and
                      GAAP   Compensation    tions   Amortization  Other
                    --------  ----------  ----------  ----------  --------

Operating expenses:
Cost of license
 revenues           $ 46,063        (367)        (26)    (12,743)       --
Cost of services
 revenues           $106,678      (6,068)       (329)     (1,242)       --
Research and
 development        $199,655     (46,663)     (2,394)       (797)       --
Sales and marketing $331,626     (24,763)     (1,403)     (2,832)       --
General and
 administrative     $ 77,120     (10,518)       (340)        (36)     (844)

Operating income    $180,721      88,379       4,492      17,650       844
Operating margin        19.2%        9.4%        0.5%        1.9%      0.1%

Income before
 income taxes       $183,159      88,379       4,492      17,650       844

Income tax
 provision          $  5,621
Tax rate                 3.1%

Net income          $177,538      88,379       4,492      17,650       844

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (3)              $   0.42  $     0.21  $     0.01  $     0.04  $     --

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (4)        $   0.41  $     0.20  $     0.01  $     0.04  $     --


[table continued below]


                                Stock-Based
                                Compensation
                    Capitalized Included in
                     Software   Capitalized     Tax     Non-GAAP
                    Development Software    Adjustment     as
                     Costs (1)  Development    (2)      adjusted
                    ----------  ----------  ----------  --------

Operating expenses:
Cost of license
 revenues              (14,427)         --          --  $ 18,500
Cost of services
 revenues                   --          --          --  $ 99,039
Research and
 development            24,528      (3,389)         --  $170,940
Sales and marketing         --          --          --  $302,628
General and
 administrative             --          --          --  $ 65,382

Operating income       (10,101)      3,389          --  $285,374
Operating margin          -1.1%        0.3%         --      30.3%

Income before
 income taxes          (10,101)      3,389          --  $287,812

Income tax
 provision                                      51,940  $ 57,561
Tax rate                                                    20.0%

Net income             (10,101)      3,389     (51,940) $230,251

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (3)              $    (0.02) $     0.01  $    (0.12) $   0.55

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (4)        $    (0.02) $     0.01  $    (0.12) $   0.53


(1)  For the third quarter of 2011, we capitalized $24.5 million (including
$3.4 million of stock-based compensation) of costs incurred for the
development of software products. Amortization expense from capitalized
amounts was $14.4 million for the third quarter of 2011.

(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 422,030 basic weighted-average shares for Class A
and Class B.

(4) Calculated based upon 431,881 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, 2010
                 (in thousands, except per share amounts)
                                (unaudited)

                                            Employer
                                            Payroll
                                            Taxes on
                                            Employee            Acquisition
                                 Stock-      Stock                Related
                                 Based      Transac   Intangible Items and
                      GAAP   Compensation    tions   Amortization  Other
                    --------  ----------  ----------  ----------  --------
Operating expenses:
Cost of license
 revenues           $ 46,333        (395)        (26)     (6,688)       --
Cost of services
 revenues           $ 80,229      (4,387)       (386)     (1,471)       --
Research and
 development        $175,429     (43,124)     (3,100)       (627)       --
Sales and marketing $251,745     (18,102)     (2,076)     (1,095)       --
General and
 administrative     $ 66,497      (7,649)       (771)        (38)   (1,035)

Operating income    $ 94,012      73,657       6,359       9,919     1,035
Operating margin        13.2%       10.3%        0.9%        1.4%      0.1%

Income before
 income taxes       $ 96,745      73,657       6,359       9,919     1,035

Income tax
 provision          $ 12,145
Tax rate                12.6%

Net income          $ 84,600      73,657       6,359       9,919     1,035

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (3)              $   0.21  $     0.18  $     0.02  $     0.02  $     --

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (4)        $   0.20  $     0.18  $     0.02  $     0.02  $     --


[table continued below]


                                Stock-Based
                                Compensation
                    Capitalized Included in
                     Software   Capitalized     Tax     Non-GAAP
                    Development Software    Adjustment     as
                     Costs (1)  Development     (2)     adjusted
                    ----------  ----------  ----------  --------
Operating expenses:
Cost of license
 revenues              (26,140)         --          --  $ 13,084
Cost of services
 revenues                   --          --          --  $ 73,985
Research and
 development             8,255      (1,232)         --  $135,601
Sales and marketing         --          --          --  $230,472
General and
 administrative             --          --          --  $ 57,004

Operating income        17,885       1,232          --  $204,099
Operating margin           2.5%        0.2%         --      28.6%

Income before
 income taxes           17,885       1,232          --  $206,832

Income tax
 provision                                      29,221  $ 41,366
Tax rate                                                    20.0%

Net income              17,885       1,232     (29,221) $165,466

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (3)              $     0.04  $       --  $    (0.07) $   0.40

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (4)        $     0.04  $       --  $    (0.07) $   0.39


(1)  For the third quarter of 2010, we 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 Nine Months Ended September 30, 2011
                 (in thousands, except per share amounts)
                                (unaudited)


                                            Employer
                                            Payroll             Acquisition
                                            Taxes on              Related
                                 Stock-     Employee   Intangible  Items
                                 Based       Stock       Amortiz    and
                      GAAP   Compensation Transactions   ation     Other
                    --------  ----------  ----------  ----------  --------

Operating expenses:
Cost of license
 revenues           $151,009      (1,271)        (93)    (32,887)       --
Cost of services
 revenues           $304,104     (17,396)     (1,208)     (3,726)       --
Research and
 development        $558,059    (134,621)     (8,238)     (2,391)       --
Sales and marketing $949,110     (70,550)     (4,710)     (7,347)       --
General and
 administrative     $223,397     (30,556)     (1,197)       (108)   (2,226)

Operating income    $521,115     254,394      15,446      46,459     2,226
Operating margin        19.3%        9.4%        0.6%        1.7%      0.1%

Other income
 (expense), net     $ 55,806

Income before
 income taxes       $585,547     254,394      15,446      46,459     2,226

Income tax
 provision          $ 62,039
Tax rate                10.6%

Net income          $523,508     254,394      15,446      46,459     2,226

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (4)              $   1.25  $     0.61  $     0.04  $     0.11  $     --

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (5)        $   1.21  $     0.59  $     0.04  $     0.11  $     --


[table continued below]


                                Stock-Based
                                Compensation
                    Capitalized Included in    Gain
                     Software   Capitalized on Sale of    Tax     Non-GAAP
                    Development Software    Terremark  Adjustment    as
                     Costs (1)  Development    (2)        (3)     adjusted
                    ----------  ---------- ---------- ----------  --------

Operating expenses:
Cost of license
 revenues              (62,699)         --         --         --  $ 54,059
Cost of services
 revenues                   --          --         --         --  $281,774
Research and
 development            86,426     (12,428)        --         --  $486,807
Sales and marketing         --          --         --         --  $866,503
General and
 administrative             --          --         --         --  $189,310

Operating income       (23,727)     12,428         --         --  $828,341
Operating margin          -0.9%        0.4%        --         --      30.6%

Other income
 (expense), net                               (56,000)                (194)

Income before
 income taxes          (23,727)     12,428    (56,000)        --  $836,773

Income tax
 provision                                               105,314  $167,353
Tax rate                                                              20.0%

Net income             (23,727)     12,428    (56,000)  (105,314) $669,420

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (4)              $    (0.06) $     0.02  $   (0.13) $   (0.25) $   1.59

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (5)        $    (0.05) $     0.02  $   (0.13) $   (0.24) $   1.55


(1)  For the first nine months of 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 $62.7 million for the first nine months of 2011.


(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 420,247 basic weighted-average shares for Class A
and Class B.

(5) Calculated based upon 431,846 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)

                                            Employer
                                            Payroll
                                            Taxes on
                                            Employee            Acquisition
                                 Stock-      Stock                Related
                                 Based      Transac   Intangible Items and
                      GAAP   Compensation    tions   Amortization  Other
                    --------  ----------  ----------  ----------  --------

Operating expenses:
Cost of license
 revenues           $126,723      (1,170)        (63)    (15,410)       --
Cost of services
 revenues           $226,641     (12,601)       (563)     (3,199)       --
Research and
 development        $475,297    (117,292)     (5,802)     (1,727)       --
Sales and marketing $700,236     (49,601)     (3,137)     (2,133)       --
General and
 administrative     $195,406     (24,526)     (1,347)       (114)   (3,174)

Operating income    $297,379     205,190      10,912      22,583     3,174
Operating margin        14.7%       10.1%        0.5%        1.1%      0.2%

Income before
 income taxes       $291,328     205,190      10,912      22,583     3,174

Income tax
 provision          $ 53,769
Tax rate                18.5%

Net income          $237,559     205,190      10,912      22,583     3,174

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (3)              $   0.58  $     0.50  $     0.03  $     0.06  $   0.01

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (4)        $   0.56  $     0.49  $     0.03  $     0.05  $     --


[table continued below]

                                Stock-Based
                                Compensation
                    Capitalized Included in
                     Software   Capitalized     Tax     Non-GAAP
                    Development Software    Adjustment     as
                     Costs (1)  Development     (2)     adjusted
                    ----------  ----------  ----------  --------

Operating expenses:
Cost of license
 revenues              (71,057)         --          --  $ 39,023
Cost of services
 revenues                   --          --          --  $210,278
Research and
 development            52,890      (8,103)         --  $395,263
Sales and marketing         --          --          --  $645,365
General and
 administrative             --          --          --  $166,245

Operating income        18,167       8,103          --  $565,508
Operating margin           0.9%        0.4%         --      28.0%

Income before
 income taxes           18,167       8,103          --  $559,457

Income tax
 provision                                      65,175  $118,944
Tax rate                                                    21.3%

Net income              18,167       8,103     (65,175) $440,513

Net income per
 weighted-average
 share, basic for
 Class A and Class
 B (3)              $     0.04  $     0.02  $    (0.16) $   1.08

Net income per
 weighted-average
 share, diluted for
 Class A and
 Class B (4)        $     0.04  $     0.02  $    (0.15) $   1.04


(1)  For the first nine months of 2010, we capitalized $52.9million
(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.

                              REVENUE BY TYPE
                              (in thousands)
                                (unaudited)


                     For the Three Months Ended  For the Nine Months Ended
                           September 30,               September 30,
                     --------------------------  -------------------------
                         2011           2010         2011          2010
                     -----------    -----------  ------------  -----------

Revenues:
  License            $   443,597    $   343,239  $  1,327,402  $   979,081
  Services:
    Software
     maintenance         426,772        314,131     1,176,907      871,804
    Professional
     services             71,494         56,875       202,485      170,797
                     -----------    -----------  ------------  -----------
  Total services         498,266        371,006     1,379,392    1,042,601
                     -----------    -----------  ------------  -----------
                     $   941,863    $   714,245  $  2,706,794  $ 2,021,682
                     ===========    ===========  ============  ===========


Percentage of
 revenues:
  License                   47.1%          48.1%         49.0%        48.4%
  Services:
    Software
     maintenance            45.3%          44.0%         43.5%        43.1%
    Professional
     services                7.6%           7.9%          7.5%         8.5%
                     -----------    -----------  ------------  -----------
  Total services            52.9%          51.9%         51.0%        51.6%
                     -----------    -----------  ------------  -----------
                           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, 2011 and 2010
                              (in thousands)
                                (unaudited)


                                                For the Three Months Ended
                                                      September 30,
                                                --------------------------
                                                    2011          2010
                                                ------------  ------------

GAAP cash flows from operating activities       $    523,511  $    196,699
Capitalized software development costs               (21,139)       (7,023)
Excess tax benefits from stock-based
 compensation                                         46,428        78,703
Capital expenditures                                 (54,948)      (31,137)
                                                ------------  ------------
Free cash flows                                 $    493,852  $    237,242
                                                ============  ============






                               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, 2011 and 2010
                              (in thousands)
                                (unaudited)


                                            For the Trailing Twelve Months
                                                  Ended September 30,
                                            ------------------------------
                                                 2011            2010
                                            --------------  --------------

GAAP cash flows from operating activities   $    1,870,839  $    1,051,465
Capitalized software development costs             (89,953)        (63,281)
Excess tax benefits from stock-based
 compensation                                      253,945         180,580
Capital expenditures                              (217,630)       (114,707)
                                            --------------  --------------
Free cash flows                             $    1,817,201  $    1,054,057
                                            ==============  ==============



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, free cash flows and trailing twelve-month 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, 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.

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 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.

  • 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. 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.

  • 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 such investments, 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 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.

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.

Revenue Growth in Constant Currency

We have invoiced and collected in the Euro, the British Pound, the Japanese Yen, and the Australian Dollar in their respective regions since May 2009. As a result, our total revenues are affected by changes in the U.S. Dollar against these currencies. In order to provide a comparable framework for assessing how our business performed excluding the effect of foreign currency fluctuations, management analyzes year-over-year revenue growth on a constant currency basis. Since all of our entities operate with the U.S. Dollar as their functional currency, revenues for orders booked in currencies other than U.S. Dollars are converted into unearned revenue at the exchange rate in effect for the month in which each order is booked. We calculate constant currency on license revenues recognized during the current period that were originally booked in currencies other than U.S. Dollars by comparing the exchange rates at which the revenue was recognized against the exchange rate that was used in the comparable period. We do not calculate constant currency on services revenues, which include software maintenance revenues and professional services revenues.

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