SOURCE: VMware, Inc.

VMware, Inc.

October 21, 2013 16:01 ET

VMware Reports Third Quarter 2013 Results

Year-Over-Year Revenue Growth of 14% to $1.29 Billion; Year-Over-Year Revenue Growth of 19% Excluding GoPivotal and Divestitures in 2013(1); GAAP Operating Margin of 22.4%; Non-GAAP Operating Margin of 33.9%; GAAP EPS of $0.60; Non-GAAP EPS of $0.84, an Increase of 20% Year Over Year

PALO ALTO, CA--(Marketwired - Oct 21, 2013) - VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the third quarter of 2013:

  • Revenues for the third quarter were $1.29 billion, an increase of 14% from the third quarter of 2012.  Excluding revenues attributable to GoPivotal and all divestitures that occurred in 2013, revenues for the third quarter increased 19% from the third quarter of 2012.1

  • Operating income for the third quarter was $287 million, an increase of 51% from the third quarter of 2012. Non-GAAP operating income for the third quarter was $436 million, an increase of 19% from the third quarter of 2012.

  • Net income for the third quarter was $261 million, or $0.60 per diluted share, up 67% per diluted share compared to $157 million, or $0.36 per diluted share, for the third quarter of 2012. Non-GAAP net income for the quarter was $363 million, or $0.84 per diluted share, up 20% per diluted share compared to $303 million, or $0.70 per diluted share, for the third quarter of 2012.

  • Operating cash flows for the third quarter were $637 million, an increase of 46% from the third quarter of 2012.  Free cash flows for the quarter were $543 million, an increase of 50% from the third quarter of 2012.

  • Cash, cash equivalents and short-term investments were $5.84 billion, and unearned revenues were $3.64 billion as of September 30, 2013.

"VMware continues to build momentum globally, because we are uniquely positioned to help our customers transform to the mobile-cloud era of computing," said Pat Gelsinger, chief executive officer, VMware.  "Customers are making long-term commitments to VMware to help them liberate resources from their current environments and power their businesses into the future."

"We are very pleased with our third quarter performance, meeting or exceeding all of our key goals for the quarter," said Jonathan Chadwick, chief financial officer, VMware. "2013 continues to play out according to the plan we shared at the beginning of the year. We are seeing strong customer demand for new solutions such as the software-defined data center, and I'm excited about our prospects for the remainder of 2013 and beyond."

As indicated in the financial results news release for the second quarter of 2013, VMware will provide forward-looking guidance in connection with this quarterly earnings announcement on its quarterly earnings conference call.

Recent Highlights & Strategic Announcements

  • At VMworld® 2013, VMware announced a wave of new products and services designed to extend the power of virtualization to the entire data center, including networking, storage and management, through its software-defined data center architecture (SDDC). VMworld 2013 and VMworld 2013 Europe set a new record with a combined total of over 31,000 registered attendees enjoying demos of newly-introduced technology, including VMware NSX™, VMware Virtual SAN™, VMware vCloud® Suite 5.5, VMware vSphere® with Operations Management™ 5.5 and new cloud management solutions.

  • VMware announced the U.S. availability of the new VMware vCloud® Hybrid Service™ and added two additional U.S. data center locations, enabling customers to seamlessly extend their data center to the public cloud. VMware also announced that the service will be available in the U.K. in the first quarter of 2014, demonstrating VMware's commitment to expand its hybrid cloud service into Europe and provide customers with the fastest, most reliable, and most compatible path to the cloud. New capabilities make it easy for customers to bring existing and new cloud-native applications to the public cloud and to extend their existing management tools.

  • VMware acquired Desktone, Inc., a privately held company that pioneered Desktop as a Service (DaaS) with an advanced multi-tenant desktop virtualization platform for delivering Windows desktops and applications as a cloud service to any user, anywhere, on any device.

  • VMware continues to attract diverse and talented new leaders to the company, including three new executive appointments during its third quarter: Sanjay Poonen, executive vice president and general manager of VMware's End-User Computing business; Tony Scott, senior vice president and chief information officer; and Sanjay Mirchandani, senior vice president and general manager, VMware Asia Pacific & Japan. http://www.vmware.com/company/leadership/

The company will host a conference call today at 2:00 p.m. PT/ 5:00 p.m. ET to review financial results and business outlook. A live web broadcast of the event will be available on the VMware investor relations website at http://ir.vmware.com. Slides will accompany the web broadcast. The replay of the webcast and slides will be available on the website for two months. In addition, seven quarters of historical data for revenues and unearned revenues, excluding revenues generated each period by the products and services contributed to GoPivotal on April 1, 2013 and the products and services associated with the divestures that occurred in 2013, will also be made available at http://ir.vmware.com in conjunction with the conference call. 

1 Comparative growth percentages exclude revenues in each period attributable to the products and services contributed to GoPivotal, Inc. and the products and services associated with divestitures consummated by VMware in 2013.

About VMware

VMware is the leader in virtualization and cloud infrastructure solutions that enable businesses to thrive in the Cloud Era. Customers rely on VMware to help them transform the way they build, deliver and consume Information Technology resources in a manner that is evolutionary and based on their specific needs. With 2012 revenues of $4.61 billion, VMware has more than 500,000 customers and 55,000 partners.  The company is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com.

Additional Information

VMware's website is located at www.vmware.com, and its investor relations website is located at http://ir.vmware.com. VMware's goal is to maintain the investor relations website as a portal through which investors can easily find or navigate to pertinent information about VMware, all of which is made available free of charge. The additional information includes materials that VMware files with the SEC; announcements of investor conferences and events at which its executives talk about its products, services and competitive strategies; webcasts of its quarterly earnings calls, investor conferences and events (archives of which are also available for a limited time); additional information on its financial metrics, including reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures; press releases on quarterly earnings, product and service announcements, legal developments and international news; corporate governance information; and other news, blogs and announcements that VMware may post from time to time that investors may find useful or interesting.

VMware, VMworld, NSX, VMware Virtual SAN, vCloud, vCloud Hybrid Service, vSphere, and vSphere with Operations Management are registered trademarks or trademarks of VMware, Inc. in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective organizations.

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 expectations for the transformation to a new era of computing, VMware's continuing momentum, VMware's prospects for the remainder of 2013 and beyond, the future availability of announced products and services and their benefits to customers, long-term customer commitments to VMware, and the planned expansion of the VMware vCloud Hybrid Service. 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, government, and information technology spending, including any residual impact of the partial U.S. federal government shutdown in October 2013; (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 VMware's competitors; (iv) factors that affect timing of license revenue recognition such as product announcements and promotions and beta programs; (v) customers' ability to develop, and to transition to, new products and computing strategies such as cloud computing, desktop virtualization and the software-defined data center; (vi) the uncertainty of customer acceptance of emerging technology; (vii) changes in the willingness of customers to enter into longer term licensing and support arrangements; (viii) rapid technological and market changes in virtualization software and platforms for cloud, end user, and mobile computing; (ix) changes to product development time lines; (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) VMware's ability to protect its proprietary technology; (xii) VMware's 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 VMware's 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 INCOME  
(in millions, except per share amounts)  
(unaudited)  
                         
                         
    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2013     2012     2013     2012  
                                 
Revenues:                                
  License   $ 564     $ 491     $ 1,583     $ 1,490  
  Services     725       643       2,141       1,822  
Total revenues     1,289       1,134       3,724       3,312  
Operating expenses (1):                                
  Cost of license revenues     51       60       163       174  
  Cost of services revenues     132       119       375       356  
  Research and development     266       260       797       731  
  Sales and marketing     449       412       1,308       1,166  
  General and administrative     103       93       298       266  
  Realignment charges     1       -       64       -  
Operating income     287       190       719       619  
Investment income     7       8       21       20  
Interest expense with EMC     (1 )     (1 )     (3 )     (4 )
Other income (expense), net     15       (2 )     29       (2 )
Income before income taxes     308       195       766       633  
Income tax provision     47       38       87       93  
Net income   $ 261     $ 157     $ 679     $ 540  
                                 
Net income per weighted-average share, basic for Class A and Class B   $ 0.61     $ 0.37     $ 1.58     $ 1.26  
                                 
Net income per weighted-average share, diluted for Class A and Class B   $ 0.60     $ 0.36     $ 1.57     $ 1.24  
                                 
Weighted-average shares, basic for Class A and Class B     430       427       429       427  
Weighted-average shares, diluted for Class A and Class B     433       433       433       434  
______                                
(1) Includes stock-based compensation as follows:                                
  Cost of license revenues   $ 1     $ -     $ 2     $ 1  
  Cost of services revenues     7       8       21       21  
  Research and development     52       60       165       148  
  Sales and marketing     37       52       106       111  
  General and administrative     16       12       42       34  
  Realignment charges     -       -       6       -  
                                 
 
VMware, Inc.
         
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
         
         
    September 30,   December 31,
    2013   2012
         
ASSETS        
Current assets:            
  Cash and cash equivalents   $ 2,263   $ 1,609
  Short-term investments     3,574     3,022
  Accounts receivable, net of allowance for doubtful accounts of $2 and $4     789     1,151
  Due from related parties, net     -     68
  Deferred tax asset     183     179
  Other current assets     116     91
Total current assets     6,925     6,120
Property and equipment, net     793     665
Other assets, net     113     128
Deferred tax asset     63     103
Intangible assets, net     602     732
Goodwill     2,958     2,848
    Total assets   $ 11,454   $ 10,596
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
  Accounts payable   $ 84   $ 90
  Accrued expenses and other     546     674
  Due to related parties, net     16     -
  Unearned revenues     2,225     2,196
Total current liabilities     2,871     2,960
Note payable to EMC     450     450
Unearned revenues     1,411     1,265
Other liabilities     195     181
    Total liabilities     4,927     4,856
Contingencies            
Stockholders' equity:            
  Class A common stock, par value $.01; authorized 2,500 shares; issued and outstanding 131 and 129 shares     1     1
  Class B convertible common stock, par value $.01; authorized 1,000 shares; issued and outstanding 300 shares     3     3
  Additional paid-in capital     3,545     3,432
  Accumulated other comprehensive income     1     6
  Retained earnings     2,977     2,298
    Total stockholders' equity     6,527     5,740
      Total liabilities and stockholders' equity   $ 11,454   $ 10,596
             
   
VMware, Inc.  
                         
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(in millions)  
(unaudited)  
                         
                         
    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2013     2012     2013     2012  
                         
Operating activities:                                
Net income   $ 261     $ 157     $ 679     $ 540  
Adjustments to reconcile net income to net cash provided by operating activities:                                
  Depreciation and amortization     82       86       261       262  
  Stock-based compensation     113       119       332       302  
  Excess tax benefits from stock-based compensation     (12 )     (25 )     (60 )     (111 )
  Non-cash realignment charges     -       -       15       -  
  Gain on disposition of certain lines of business and other, net     (12 )     -       (31 )     -  
  Other     4       (1 )     3       (1 )
  Changes in assets and liabilities, net of acquisitions:                                
    Accounts receivable     152       67       360       202  
    Other assets     4       (5 )     (72 )     (122 )
    Due to/from related parties, net     49       15       84       28  
    Accounts payable     (2 )     10       16       26  
    Accrued expenses     (90 )     (64 )     (112 )     (63 )
    Income taxes receivable from EMC     -       -       15       -  
    Income taxes payable     (2 )     60       (4 )     128  
    Deferred income taxes, net     32       (34 )     41       (70 )
    Unearned revenues     58       51       321       283  
Net cash provided by operating activities     637       436       1,848       1,404  
                                 
Investing activities:                                
Additions to property and equipment     (94 )     (75 )     (247 )     (153 )
Purchases of available-for-sale securities     (573 )     (765 )     (2,227 )     (2,720 )
Sales of available-for-sale securities     253       882       1,072       1,653  
Maturities of available-for-sale securities     227       234       597       768  
Proceeds from disposition of certain lines of business     6       -       37       -  
Business acquisitions, net of cash acquired     -       (1,242 )     (184 )     (1,344 )
Other investing     (8 )     (8 )     (11 )     (12 )
Net cash used in investing activities     (189 )     (974 )     (963 )     (1,808 )
                                 
Financing activities:                                
Proceeds from issuance of common stock     70       70       185       214  
Repurchase of common stock     (90 )     (129 )     (392 )     (307 )
Excess tax benefits from stock-based compensation     12       25       60       111  
Shares repurchased for tax withholdings on vesting of restricted stock     (17 )     (25 )     (84 )     (90 )
Net cash used in financing activities     (25 )     (59 )     (231 )     (72 )
Net increase (decrease) in cash and cash equivalents     423       (597 )     654       (476 )
Cash and cash equivalents at beginning of the period     1,840       2,077       1,609       1,956  
Cash and cash equivalents at end of the period   $ 2,263     $ 1,480     $ 2,263     $ 1,480  
                                 
 
 
VMware, Inc. 
 
SUPPLEMENTAL REVENUES SCHEDULE 
(INCLUDES RECONCILIATION OF GAAP TO NON-GAAP DATA) 
(in millions) 
(unaudited) 
 
                                           
    For the Three Months Ended     For the Three Months Ended  
    September 30,     June 30,     March 31,     December 31,     September 30,     June 30,     March 31,  
    2013     2013     2013     2012     2012     2012     2012  
Revenues as reported (1):                                                        
  License   $ 564     $ 531     $ 488     $ 597     $ 491     $ 517     $ 482  
  Software maintenance     644       614       605       591       551       519       492  
  Professional services     81       98       98       105       92       87       81  
Total revenues   $ 1,289     $ 1,243     $ 1,191     $ 1,293     $ 1,134     $ 1,123     $ 1,055  
                                                         
Change (%) over prior year                                                        
  License     14.8 %     2.6 %     1.3 %     16.1 %     10.7 %     11.3 %     15.0 %
  Software maintenance     16.9 %     18.3 %     23.0 %     27.5 %     29.0 %     34.4 %     35.3 %
  Professional services     -11.4 %     13.4 %     20.8 %     27.0 %     28.6 %     23.7 %     33.0 %
Total revenues     13.7 %     10.7 %     12.9 %     22.0 %     20.4 %     21.9 %     25.1 %
                                                         
Revenues as reported, excluding GoPivotal (2)                                                        
  License   $ 564     $ 531     $ 485     $ 589     $ 486     $ 508     $ 478  
  Software maintenance     644       614       601       587       546       515       489  
  Professional services     81       98       84       77       72       68       69  
Total revenues   $ 1,289     $ 1,243     $ 1,170     $ 1,253     $ 1,104     $ 1,091     $ 1,036  
                                                         
Change (%) over prior year                                                        
  License     16.0 %     4.4 %     1.5 %     15.7 %     11.2 %     9.8 %     15.1 %
  Software maintenance     17.8 %     19.3 %     23.0 %     27.5 %     28.9 %     34.3 %     35.0 %
  Professional services     14.0 %     45.1 %     19.8 %     6.4 %     12.3 %     8.3 %     24.3 %
Total revenues     16.8 %     14.0 %     12.8 %     20.3 %     19.4 %     20.0 %     24.4 %
                                                         
Revenues as reported, excluding GoPivotal and all dispositions (3)                                                        
  License   $ 562     $ 526     $ 476     $ 581     $ 479     $ 500     $ 471  
  Software maintenance     642       611       590       574       535       504       478  
  Professional services     81       98       83       77       70       67       69  
Total revenues   $ 1,285     $ 1,235     $ 1,149     $ 1,232     $ 1,084     $ 1,071     $ 1,018  
                                                         
Change (%) over prior year                                                        
  License     17.3 %     5.3 %     1.1 %     16.0 %     11.8 %     9.2 %     14.5 %
  Software maintenance     20.0 %     21.3 %     23.4 %     27.2 %     28.5 %     33.1 %     33.7 %
  Professional services     15.4 %     45.6 %     19.9 %     6.3 %     11.3 %     8.1 %     24.3 %
Total revenues     18.5 %     15.4 %     12.9 %     20.3 %     19.4 %     19.2 %     23.5 %
                                                         
Reconciliation of "revenues as reported" to"revenues as reported, excluding GoPivotal and all dispositions":                                                        
                                                         
                                                         
Revenues as reported, excluding GoPivotal and all dispositions (3)   $ 1,285     $ 1,235     $ 1,149     $ 1,232     $ 1,084     $ 1,071     $ 1,018  
  GoPivotal     -       -       22       40       30       32       19  
  All dispositions     4       8       20       21       20       20       18  
Revenues as reported (1)   $ 1,289     $ 1,243     $ 1,191     $ 1,293     $ 1,134     $ 1,123     $ 1,055  
                                                         
 
(1) Represents revenues reported each quarter.
 
(2) Represents revenues reported each quarter less the revenues attributable to products and services contributed by VMware to GoPivotal, Inc. ("GoPivotal") on April 1, 2013. All quarters have been adjusted to exclude the related revenues.
 
(3) Represents revenues reported each quarter less a) the revenues attributable to products and services contributed by VMware to GoPivotal on April 1, 2013 and b) the revenues attributable to all lines of businesses which were disposed of in 2013, including Zimbra which was disposed of in July 2013. All quarters have been adjusted to exclude the related revenues.
 
 
 
VMware, Inc.
 
SUPPLEMENTAL UNEARNED REVENUES SCHEDULE
(INCLUDES RECONCILIATION OF GAAP TO NON-GAAP DATA)
(in millions)
(unaudited)
 
                                           
    September 30,     June 30,     March 31,     December 31,     September 30,     June 30,     March 31,  
    2013     2013     2013     2012     2012     2012     2012  
Unearned revenues as reported (1)                                                        
  License   $ 415     $ 427     $ 446     $ 463     $ 366     $ 376     $ 373  
  Software maintenance     2,937       2,903       2,797       2,755       2,415       2,357       2,246  
  Professional services     284       266       247       243       212       209       189  
Total unearned revenues   $ 3,636     $ 3,596     $ 3,490     $ 3,461     $ 2,993     $ 2,942     $ 2,808  
                                                         
Change (%) over prior year                                                        
  License     13.3 %     13.7 %     19.6 %     18.9 %     35.8 %     56.5 %     48.4 %
  Software maintenance     21.6 %     23.2 %     24.5 %     29.1 %     33.8 %     39.8 %     41.3 %
  Professional services     34.3 %     26.8 %     30.6 %     30.8 %     32.5 %     37.9 %     37.3 %
Total unearned revenues     21.5 %     22.2 %     24.3 %     27.8 %     34.0 %     41.6 %     41.9 %
                                                         
Unearned revenues as reported, excluding GoPivotal and all dispositions (2)                                                        
                                                         
  License   $ 414     $ 427     $ 407     $ 414     $ 327     $ 336     $ 352  
  Software maintenance     2,933       2,903       2,736       2,671       2,346       2,289       2,189  
  Professional services     285       266       246       241       210       207       186  
Total unearned revenues   $ 3,632     $ 3,596     $ 3,389     $ 3,326     $ 2,883     $ 2,832     $ 2,727  
                                                         
Change (%) over prior year                                                        
  License     26.4 %     27.1 %     15.7 %     11.6 %     25.9 %     49.4 %     45.4 %
  Software maintenance     25.0 %     26.8 %     25.0 %     28.5 %     33.3 %     38.7 %     40.4 %
  Professional services     35.7 %     28.7 %     31.7 %     30.8 %     31.9 %     36.2 %     36.0 %
Total unearned revenues     26.0 %     27.0 %     24.3 %     26.3 %     32.3 %     39.7 %     40.7 %
                                                         
Reconciliation of "unearned revenues as reported" to "unearned revenues as reported, excluding GoPivotal and all dispositions":                                                        
                                                         
Unearned revenues as reported, excluding GoPivotal and all dispositions (2)   $ 3,632     $ 3,596     $ 3,389     $ 3,326     $ 2,883     $ 2,832     $ 2,727  
  GoPivotal and all dispositions     4       -       101       135       110       110       81  
Unearned revenues as reported (1)   $ 3,636     $ 3,596     $ 3,490     $ 3,461     $ 2,993     $ 2,942     $ 2,808  
                                                         
 
(1) Represents unearned revenues reported each quarter.
 
(2) Represents unearned revenues reported each quarter less a) the unearned revenues attributable to products and services contributed by VMware to GoPivotal on April 1, 2013 and b) the unearned revenues attributable to all lines of businesses which were disposed of in 2013, including Zimbra which was disposed of in July 2013. All quarters have been adjusted to exclude the related unearned revenues.
 
 
 
VMware, Inc.
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Three Months Ended September 30, 2013
(in millions, except per share amounts)
(unaudited)
 
                                                             
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Realignment
Charges
    Acquisition
and Other
Related
Items
    Capitalized
Software
Development
Costs (1)
    Gain on Disposition of Certain Lines of Business & Other, Net     Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 
                                                             
Operating expenses:                                                                                
  Cost of license revenues   $ 51       (1 )     -       (22 )     -       -       (8 )     -       -     $ 20  
  Cost of services revenues   $ 132       (7 )     -       -       -       -       -       -       -     $ 125  
  Research and development   $ 266       (52 )     (1 )     (1 )     -       -       -       -       -     $ 212  
  Sales and marketing   $ 449       (37 )     (1 )     (1 )     -       -       -       -       -     $ 410  
  General and administrative   $ 103       (16 )     -       -       -       (1 )     -       -       -     $ 86  
  Realignment charges   $ 1       -       -       -       (1 )     -       -       -       -     $ -  
                                                                                 
Operating income   $ 287       113       2       24       1       1       8       -       -     $ 436  
Operating margin     22.4 %     8.7 %     0.2 %     1.9 %     -       0.1 %     0.6 %     -       -       33.9 %
                                                                                 
Other income (expense), net   $ 15       -       -       -       -       -       -       (12 )     -     $ 3  
                                                                                 
Income before income taxes   $ 308       113       2       24       1       1       8       (12 )     -     $ 445  
                                                                                 
Income tax provision   $ 47                                                               35     $ 82  
Tax rate     15.3 %                                                                     18.5 %
                                                                                 
Net income   $ 261       113       2       24       1       1       8       (12 )     (35 )   $ 363  
                                                                                 
Net income per weighted-average share, basic for Class A and Class B (3)   $ 0.61     $ 0.26     $ 0.01     $ 0.06     $ -     $ -     $ 0.02     $ (0.03 )   $ (0.08 )   $ 0.85  
                                                                                 
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 0.60     $ 0.26     $ 0.01     $ 0.06     $ -     $ -     $ 0.02     $ (0.03 )   $ (0.08 )   $ 0.84  
                                                                                 
 
(1)  For the third quarter of 2013, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $8.
 
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
 
(3) Calculated based upon 430 basic weighted-average shares for Class A and Class B.
 
(4) Calculated based upon 433 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, 2012
(in millions, except per share amounts)
(unaudited)
 
                                                 
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 
                                                 
Operating expenses:                                                                
  Cost of license revenues   $ 60       -       -       (19 )     -       (15 )     -     $ 26  
  Cost of services revenues   $ 119       (8 )     -       (1 )     -       -       -     $ 110  
  Research and development   $ 260       (60 )     (1 )     (1 )     -       -       -     $ 198  
  Sales and marketing   $ 412       (52 )     -       (4 )     -       -       -     $ 356  
  General and administrative   $ 93       (12 )     -       -       (2 )     -       -     $ 79  
                                                                 
Operating income   $ 190       132       1       25       2       15       -     $ 365  
Operating margin     16.8 %     11.7 %     0.1 %     2.2 %     0.1 %     1.3 %     -       32.2 %
                                                                 
Income before income taxes   $ 195       132       1       25       2       15       -     $ 370  
                                                                 
Income tax provision   $ 38                                               29     $ 67  
Tax rate     19.7 %                                                     18.0 %
                                                                 
Net income   $ 157       132       1       25       2       15       (29 )   $ 303  
                                                                 
Net income per weighted-average share, basic for Class A and Class B (3)   $ 0.37     $ 0.31     $ -     $ 0.06     $ -     $ 0.03     $ (0.06 )   $ 0.71  
                                                                 
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 0.36     $ 0.30     $ -     $ 0.06     $ -     $ 0.04     $ (0.06 )   $ 0.70  
                                                                 
 
(1)  For the third quarter of 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $15.
 
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
 
(3) Calculated based upon 427 basic weighted-average shares for Class A and Class B.
 
(4) Calculated based upon 433 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, 2013
(in millions, except per share amounts)
(unaudited)
 
                                                             
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Realignment
Charges
    Acquisition
and Other
Related
Items
    Capitalized
Software
Development
Costs (1)
    Gain on Disposition of Certain Lines of Business & Other, Net     Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 
                                                                                 
Operating expenses:                                                                                
  Cost of license revenues   $ 163       (2 )     -       (67 )     -       -       (34 )     -       -     $ 60  
  Cost of services revenues   $ 375       (21 )     (2 )     (2 )     -       -       -       -       -     $ 350  
  Research and development   $ 797       (165 )     (3 )     (2 )     -       -       -       -       -     $ 627  
  Sales and marketing   $ 1,308       (106 )     (3 )     (6 )     -       -       -       -       -     $ 1,193  
  General and administrative   $ 298       (42 )     (2 )     -       -       (3 )     -       -       -     $ 251  
  Realignment charges   $ 64       -       -       -       (64 )     -       -       -       -     $ -  
                                                                                 
Operating income   $ 719       336       10       77       64       3       34       -       -     $ 1,243  
Operating margin     19.3 %     9.0 %     0.2 %     2.1 %     1.7 %     0.1 %     0.9 %     -       -       33.3 %
                                                                                 
Other income (expense), net   $ 29       -       -       -       -       -       -       (31 )     -     $ (2 )
                                                                                 
Income before income taxes   $ 766       336       10       77       64       3       34       (31 )     -     $ 1,259  
                                                                                 
Income tax provision   $ 87                                                               146     $ 233  
Tax rate     11.4 %                                                                     18.5 %
                                                                                 
Net income   $ 679       336       10       77       64       3       34       (31 )     (146 )   $ 1,026  
                                                                                 
Net income per weighted-average share, basic for Class A and Class B (3)   $ 1.58     $ 0.78     $ 0.02     $ 0.18     $ 0.15     $ 0.01     $ 0.08     $ (0.07 )   $ (0.34 )   $ 2.39  
                                                                                 
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 1.57     $ 0.78     $ 0.02     $ 0.18     $ 0.15     $ -     $ 0.08     $ (0.07 )   $ (0.34 )   $ 2.37  
                                                                                 
 
(1)  For the first nine months of 2013, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $34.
 
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
 
(3) Calculated based upon 429 basic weighted-average shares for Class A and Class B.
 
(4) Calculated based upon 433 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, 2012
(in millions, except per share amounts)
(unaudited)
 
                                                 
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 
                                                                 
Operating expenses:                                                                
  Cost of license revenues   $ 174       (1 )     -       (46 )     -       (58 )     -     $ 69  
  Cost of services revenues   $ 356       (21 )     (1 )     (3 )     -       -       -     $ 331  
  Research and development   $ 731       (148 )     (5 )     (3 )     -       -       -     $ 575  
  Sales and marketing   $ 1,166       (111 )     (4 )     (9 )     -       -       -     $ 1,042  
  General and administrative   $ 266       (34 )     (1 )     -       (3 )     -       -     $ 228  
                                                                 
Operating income   $ 619       315       11       61       3       58       -     $ 1,067  
Operating margin     18.7 %     9.5 %     0.3 %     1.9 %     0.1 %     1.7 %     -       32.2 %
                                                                 
Income before income taxes   $ 633       315       11       61       3       58       -     $ 1,081  
                                                                 
Income tax provision   $ 93                                               102     $ 195  
Tax rate     14.7 %                                                     18.0 %
                                                                 
Net income   $ 540       315       11       61       3       58       (102 )   $ 886  
                                                                 
Net income per weighted-average share, basic for Class A and Class B (3)   $ 1.26     $ 0.74     $ 0.03     $ 0.14     $ 0.01     $ 0.14     $ (0.24 )   $ 2.08  
                                                                 
Net income per weighted-average share, diluted for Class A and Class B (4)   $ 1.24     $ 0.72     $ 0.02     $ 0.14     $ 0.01     $ 0.14     $ (0.23 )   $ 2.04  
                                                                 
 
(1)  For the first nine months of 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $58.
 
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
 
(3) Calculated based upon 427 basic weighted-average shares for Class A and Class B.
 
 
(4) Calculated based upon 434 diluted weighted-average shares for Class A and Class B.
 
   
VMware, Inc.  
                         
REVENUES BY TYPE  
(in millions)  
(unaudited)  
                         
                         
    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2013     2012     2013     2012  
                                 
Revenues:                                
  License   $ 564     $ 491     $ 1,583     $ 1,490  
  Services:                                
    Software maintenance     644       551       1,864       1,562  
    Professional services     81       92       277       260  
  Total services     725       643       2,141       1,822  
Total revenues   $ 1,289     $ 1,134     $ 3,724     $ 3,312  
                                 
                                 
Percentage of revenues:                                
  License     43.7 %     43.3 %     42.5 %     45.0 %
  Services:                                
    Software maintenance     49.9 %     48.6 %     50.0 %     47.2 %
    Professional services     6.4 %     8.1 %     7.5 %     7.8 %
  Total services     56.3 %     56.7 %     57.5 %     55.0 %
Total revenues     100.0 %     100.0 %     100.0 %     100.0 %
                                 
   
VMware, Inc.  
                         
REVENUES BY GEOGRAPHY  
(in millions)  
(unaudited)  
                         
                         
    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2013     2012     2013     2012  
                                 
Revenues:                                
  United States   $ 614     $ 554     $ 1,773     $ 1,589  
  International     675       580       1,951       1,723  
Total revenues   $ 1,289     $ 1,134     $ 3,724     $ 3,312  
                                 
                                 
Percentage of revenues:                                
  United States     47.6 %     48.8 %     47.6 %     48.0 %
  International     52.4 %     51.2 %     52.4 %     52.0 %
Total revenues     100.0 %     100.0 %     100.0 %     100.0 %
                                 
   
VMware, Inc.  
             
RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES  
TO FREE CASH FLOWS  
(A NON-GAAP FINANCIAL MEASURE)  
(in millions)  
(unaudited)  
   
             
    For the Three Months Ended  
    September 30,  
    2013     2012  
                 
GAAP cash flows from operating activities   $ 637     $ 436  
Capital expenditures     (94 )     (75 )
Free cash flows   $ 543     $ 361  
                 

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 operating margin, non-GAAP net income, non-GAAP income per diluted share, and free cash flows. VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These non-GAAP financial measures, other than free cash flows, differ from GAAP in that they exclude stock-based compensation, employer payroll tax on employee stock transactions, amortization of acquired intangible assets, realignment charges, acquisition and other-related items and the net effect of the amortization and capitalization of software development costs and gain on disposition of certain lines of business and other net, each as discussed below. Free cash flows differ from GAAP cash flows from operating activities in its treatment of capital expenditures.

We have also presented in this press release additional six quarters of historical data for revenue and unearned revenue, excluding revenue generated each period by the products and services contributed to GoPivotal, Inc. on April 1, 2013 and the products and services associated with the divestures consummated by us in 2013, We believe these measures are useful to investors because they allow investors to make meaningful comparisons of our revenues and unearned revenues across periods.

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. Stock-based compensation is generally fixed at the time the stock-based instrument is granted and amortized over a period of several years. Although stock-based compensation is an important aspect of the compensation of our employees and executives, the expense for the fair value of the stock-based instruments we utilize may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock options is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Additionally, in order to establish the fair value of performance-based stock awards, which are also an element of our ongoing stock-based compensation, we are required to apply judgment to estimate the probability of the extent to which performance objectives will be achieved. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies.

  • Employer payroll tax on employee stock transactions. The amount of employer payroll taxes on stock-based compensation is dependent on VMware's stock price and other factors that are beyond our control and do not correlate to the operation of the business.

  • Amortization of acquired 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.

  • Realignment charges: Realignment charges include workforce reductions, asset impairments and losses on asset disposals. We believe it is useful to exclude these items, when significant, as they are not reflective of our ongoing business and operating results.

  • Acquisition and other-related items. Acquisition and other-related items include direct costs of acquisitions and dispositions, such as transaction and advisory fees, which vary significantly and are unique to each transaction. Additionally, VMware does not acquire or dispose of businesses on a predictable cycle.

  • Capitalized software development costs. Capitalized software development costs encompass capitalization of development costs and the subsequent amortization of the capitalized costs over the useful life of the product. Amortization and capitalization of software development costs can vary significantly depending upon the timing of products reaching technological feasibility and being made generally available. We did not capitalize software development costs related to product offerings in either the first nine months  of 2013 or fiscal year 2012 given our current go-to-market strategy. In future periods, we expect our amortization expense to steadily decline as previously capitalized software development costs become fully amortized.

  • Gain on disposition of certain lines of business and other, net. In the third quarter of 2013 we recognized a gain of $12 million as a result of exiting a certain line of business.  In the first nine months   of 2013, we recognized a gain as a result of exiting certain lines of business under our business realignment plan, which was partially offset by a charge recognized for a non-recoverable strategic investment. These transactions resulted in a net gain of $31 million. To the extent that significant gains or losses are realized on such dispositions and strategic investments, they do not occur on a predictable cycle, and such gains and losses are not reflective of our ongoing business and operating results.

  • Tax adjustment. Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating our non-GAAP income. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. 

Additionally, we believe that the non-GAAP financial measure free cash flows is meaningful to investors because we review cash flows generated from operations after taking into consideration capital expenditures due to the fact that these expenditures are considered to be a necessary component of ongoing operations.

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

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