EX-99.1 2 d474645dex991.htm PRESS RELEASE Press Release

Exhibit 99.1

 

LOGO

VMware Reports Record Fourth Quarter and Full Year 2012 Results

- Annual Revenue Growth of 22% to a record $4.61 Billion with Fourth Quarter Year-over-Year Growth of 22% to a record $1.29 Billion

- Annual Operating Margin 18.9%; Non-GAAP Operating Margin a record 32.4%. Fourth Quarter Operating Margin 19.5%; Non-GAAP Operating Margin a record 32.8%

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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


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

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

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

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

Recent Highlights & Strategic Announcements

 

   

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

 

   

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

 

   

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

VMware plans to host a conference call today to review its fourth quarter and full year 2012 results and to discuss its financial outlook. The call is scheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed via the Web at http://ir.vmware.com. The webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 60 days.

# # #

About VMware

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

# # #

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


Use of Non-GAAP Financial Measures

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

Forward-Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding VMware’s expected first quarter and annual 2013 revenues and annual 2013 license revenues; VMware’s market opportunity; and the benefits of the Pivotal Initiative. These forward-looking statements are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) adverse changes in general economic or market conditions; (ii) delays or reductions in consumer or information technology spending; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into the virtualization market, and new product and marketing initiatives by our competitors; (iv) factors that affect timing of license revenue recognition such as product announcements and promotions and beta programs; (v) our customers’ ability to develop, and to transition to, new products and computing strategies such as cloud computing, desktop virtualization and the software defined data center; (vi) the uncertainty of customer acceptance of emerging technology; (vii) changes in the willingness of customers to enter into longer term licensing and support arrangements; (viii) rapid technological and market changes in virtualization software and platforms for cloud and desktop computing; (ix) changes to product development timelines; (x) VMware’s relationship with EMC Corporation and EMC’s ability to control matters requiring stockholder approval, including the election of VMware’s board members; (xi) our ability to protect our proprietary technology; (xii) our ability to attract and retain highly qualified employees; (xiii) the successful integration of acquired companies and assets into VMware; and (xiv) fluctuating currency exchange rates. These forward-looking statements are based on current expectations and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. VMware assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

Contacts:

Paul Ziots

VMware Investor Relations

pziots@vmware.com

650-427-3267

Joan Stone

VMware Global Communications

joanstone@vmware.com

650-427-4436


VMware, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

     December 31,
2012
     December 31,
2011
 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 1,609,322       $ 1,955,756   

Short-term investments

     3,021,512         2,556,450   

Accounts receivable, net of allowance for doubtful accounts of $4,267 and $3,794

     1,150,906         882,857   

Due from EMC, net

     67,934         73,799   

Deferred tax asset

     179,430         128,471   

Other current assets

     90,935         80,439   
  

 

 

    

 

 

 

Total current assets

     6,120,039         5,677,772   

Property and equipment, net

     664,669         525,490   

Other assets, net

     128,701         154,236   

Deferred tax asset

     103,001         156,855   

Intangible assets, net

     731,852         407,375   

Goodwill

     2,848,130         1,759,080   
  

 

 

    

 

 

 

Total assets

   $ 10,596,392       $ 8,680,808   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS' EQUITY      

Current liabilities:

     

Accounts payable

   $ 89,562       $ 49,747   

Accrued expenses and other

     674,746         587,650   

Unearned revenues

     2,195,926         1,764,109   
  

 

 

    

 

 

 

Total current liabilities

     2,960,234         2,401,506   

Note payable to EMC

     450,000         450,000   

Unearned revenues

     1,264,639         944,309   

Other liabilities

     181,538         114,711   
  

 

 

    

 

 

 

Total liabilities

     4,856,411         3,910,526   

Commitments and contingencies

     

Stockholders' equity:

     

Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 128,688 and 123,610 shares

     1,287         1,236   

Class B convertible common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares

     3,000         3,000   

Additional paid-in capital

     3,431,710         3,212,264   

Accumulated other comprehensive income

     5,676         1,176   

Retained earnings

     2,298,308         1,552,606   
  

 

 

    

 

 

 

Total stockholders' equity

     5,739,981         4,770,282   
  

 

 

    

 

 

 

Total liabilities and stockholders' equity

   $ 10,596,392       $ 8,680,808   
  

 

 

    

 

 

 


VMware, Inc.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

     For the Three Months Ended
December 31,
    For the Year Ended
December 31,
 
     2012     2011     2012     2011  

Revenues:

        

License

   $ 596,720      $ 513,767      $ 2,086,990      $ 1,841,169   

Services

     696,435        546,535        2,518,057        1,925,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,293,155        1,060,302        4,605,047        3,767,096   

Operating expenses (1):

        

Cost of license revenues

     63,393        56,389        237,027        207,398   

Cost of services revenues

     128,431        110,485        484,296        414,589   

Research and development

     268,323        216,992        999,214        775,051   

Sales and marketing

     478,401        385,236        1,644,849        1,334,346   

General and administrative

     102,082        77,144        367,718        300,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     252,525        214,056        871,943        735,171   

Investment income

     6,364        4,685        26,557        16,157   

Interest expense with EMC

     (1,047     (1,060     (4,654     (3,906

Other income (expense), net

     2,082        (8,815     (732     46,991   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     259,924        208,866        893,114        794,413   

Income tax provision

     54,155        8,438        147,412        70,477   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 205,769      $ 200,428      $ 745,702      $ 723,936   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per weighted-average share, basic for Class A and Class B

   $ 0.48      $ 0.47      $ 1.75      $ 1.72   

Net income per weighted-average share, diluted for Class A and Class B

   $ 0.47      $ 0.46      $ 1.72      $ 1.68   

Weighted-average shares, basic for Class A and Class B

     427,266        422,873        426,658        421,188   

Weighted-average shares, diluted for Class A and Class B

     433,205        431,375        433,974        431,750   

 

        

(1) Includes stock-based compensation as follows:

        

Cost of license revenues

   $ 547      $ 335      $ 2,072      $ 1,606   

Cost of services revenues

     7,482        5,993        28,220        23,389   

Research and development

     62,779        39,643        210,377        174,264   

Sales and marketing

     39,100        25,138        149,879        95,688   

General and administrative

     13,894        9,650        48,107        40,206   


VMware, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Three Months Ended
December 31,
    For the Year Ended
December 31,
 
     2012     2011     2012     2011  

Operating activities:

        

Net income

   $ 205,769      $ 200,428      $ 745,702      $ 723,936   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     93,276        86,228        354,868        315,871   

Stock-based compensation, excluding amounts capitalized

     123,802        80,759        425,995        335,153   

Excess tax benefits from stock-based compensation

     (27,225     (26,811     (138,139     (224,503

Gain on sale of Terremark investment

     —          —          —          (56,000

Other

     3,645        10,626        2,355        21,420   

Changes in assets and liabilities, net of acquisitions:

        

Accounts receivable

     (469,947     (336,123     (267,639     (263,366

Other assets

     9,597        15,576        (112,266     (75,879

Due to/from EMC, net

     (21,759     (61,310     5,865        (18,370

Accounts payable

     (2,426     (3,960     23,692        (16,513

Accrued expenses

     84,978        100,353        21,997        115,025   

Income taxes receivable from EMC

     19,488        23,018        19,488        269,258   

Income taxes payable

     10,842        27,261        138,508        79,183   

Deferred income taxes, net

     (3,962     (28,936     (74,060     (19,663

Unearned revenue

     467,299        474,300        751,158        840,081   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     493,377        561,409        1,897,524        2,025,633   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Additions to property and equipment

     (81,639     (52,911     (234,458     (230,091

Purchase of leasehold interest

     —          —          —          (151,083

Capitalized software development costs

     —          —          —          (73,998

Purchases of available-for-sale securities

     (469,042     (584,397     (3,188,684     (2,667,888

Sales of available-for-sale securities

     227,443        208,058        1,880,545        816,351   

Maturities of available-for-sale securities

     133,639        249,706        901,743        974,413   

Sale of strategic investments

     —          —          —          78,513   

Business acquisitions, net of cash acquired

     —          —          (1,344,214     (303,610

Transfer of net assets under common control

     —          —          —          (22,393

Other investing

     (37,195     (815     (49,552     (31,187
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (226,794     (180,359     (2,034,620     (1,610,973
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Proceeds from issuance of common stock

     38,936        52,332        253,159        337,618   

Repurchase of common stock

     (160,522     (35,287     (467,534     (526,203

Excess tax benefits from stock-based compensation

     27,225        26,811        138,139        224,503   

Shares repurchased for tax withholdings on vesting of restricted stock

     (43,100     (18,979     (133,102     (123,787
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (137,461     24,877        (209,338     (87,869
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     129,122        405,927        (346,434     326,791   

Cash and cash equivalents at beginning of the period

     1,480,200        1,549,829        1,955,756        1,628,965   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 1,609,322      $ 1,955,756      $ 1,609,322      $ 1,955,756   
  

 

 

   

 

 

   

 

 

   

 

 

 


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Three Months Ended December 31, 2012

(in thousands, except per share amounts)

(unaudited)

 

     GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 

Operating expenses:

                

Cost of license revenues

   $ 63,393        (547     (17     (25,271     —          (13,151     —        $ 24,407   

Cost of services revenues

   $ 128,431        (7,482     (194     (1,098     —          —          —        $ 119,657   

Research and development

   $ 268,323        (62,779     (1,277     (1,254     —          —          —        $ 203,013   

Sales and marketing

   $ 478,401        (39,100     (1,076     (3,096     —          —          —        $ 435,129   

General and administrative

   $ 102,082        (13,894     (631     —          (494     —          —        $ 87,063   

Operating income

   $ 252,525        123,802        3,195        30,719        494        13,151        —        $ 423,886   

Operating margin

     19.5     9.6     0.3     2.4     —          1.0     —          32.8

Income before income taxes

   $ 259,924        123,802        3,195        30,719        494        13,151        —        $ 431,285   

Income tax provision

   $ 54,155                  27,832      $ 81,987   

Tax rate

     20.8                 19.0

Net income

   $ 205,769        123,802        3,195        30,719        494        13,151        (27,832   $ 349,298   

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

   $ 0.48      $ 0.29      $ 0.01      $ 0.07      $ —        $ 0.03      $ (0.06   $ 0.82   

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

   $ 0.47      $ 0.29      $ 0.01      $ 0.07      $ —        $ 0.03      $ (0.06   $ 0.81   

 

(1) For the fourth quarter of 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $13.2 million.
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
(3) Calculated based upon 427,266 basic weighted-average shares for Class A and Class B.
(4) Calculated based upon 433,205 diluted weighted-average shares for Class A and Class B.


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Three Months Ended December 31, 2011

(in thousands, except per share amounts)

(unaudited)

 

     GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 

Operating expenses:

                

Cost of license revenues

   $ 56,389        (335     (27     (13,187     —          (22,042     —        $ 20,798   

Cost of services revenues

   $ 110,485        (5,993     (160     (1,241     —          —          —        $ 103,091   

Research and development

   $ 216,992        (39,643     (1,486     (796     —          —          —        $ 175,067   

Sales and marketing

   $ 385,236        (25,138     (867     (2,866     —          —          —        $ 356,365   

General and administrative

   $ 77,144        (9,650     (383     (37     (197     —          —        $ 66,877   

Operating income

   $ 214,056        80,759        2,923        18,127        197        22,042        —        $ 338,104   

Operating margin

     20.2     7.6     0.3     1.7     —          2.1     —          31.9

Income before income taxes

   $ 208,866        80,759        2,923        18,127        197        22,042        —        $ 332,914   

Income tax provision

   $ 8,438                  58,145      $ 66,583   

Tax rate

     4.0                 20.0

Net income

   $ 200,428        80,759        2,923        18,127        197        22,042        (58,145   $ 266,331   

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

   $ 0.47      $ 0.19      $ 0.01      $ 0.04      $ —        $ 0.06      $ (0.14   $ 0.63   

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

   $ 0.46      $ 0.19      $ 0.01      $ 0.04      $ —        $ 0.05      $ (0.13   $ 0.62   

 

(1) For the fourth quarter of 2011, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $22.0 million.
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be re-calculated during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, tax audit closures, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
(3) Calculated based upon 422,873 basic weighted-average shares for Class A and Class B.
(4) Calculated based upon 431,375 diluted weighted-average shares for Class A and Class B.


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Year Ended December 31, 2012

(in thousands, except per share amounts)

(unaudited)

 

     GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Tax
Adjustment
(2)
    Non-GAAP,
as adjusted
 

Operating expenses:

                

Cost of license revenues

   $ 237,027        (2,072     (60     (71,605     —          (70,608     —        $ 92,682   

Cost of services revenues

   $ 484,296        (28,220     (1,040     (4,392     —          —          —        $ 450,644   

Research and development

   $ 999,214        (210,377     (6,327     (3,718     —          —          —        $ 778,792   

Sales and marketing

   $ 1,644,849        (149,879     (4,847     (12,243     —          —          —        $ 1,477,880   

General and administrative

   $ 367,718        (48,107     (1,622     —          (3,896     —          —        $ 314,093   

Operating income

   $ 871,943        438,655        13,896        91,958        3,896        70,608        —        $ 1,490,956   

Operating margin

     18.9     9.5     0.3     2.0     0.2     1.5     —          32.4

Income before income taxes

   $ 893,114        438,655        13,896        91,958        3,896        70,608        —        $ 1,512,127   

Income tax provision

   $ 147,412                  129,126      $ 276,538   

Tax rate

     16.5                 18.3

Net income

   $ 745,702        438,655        13,896        91,958        3,896        70,608        (129,126   $ 1,235,589   

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

   $ 1.75      $ 1.03      $ 0.03      $ 0.22      $ 0.01      $ 0.17      $ (0.31   $ 2.90   

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

   $ 1.72      $ 1.01      $ 0.03      $ 0.21      $ 0.01      $ 0.16      $ (0.29   $ 2.85   

 

(1) For the year ended December 31, 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $70.6 million.
(2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
(3) Calculated based upon 426,658 basic weighted-average shares for Class A and Class B.
(4) Calculated based upon 433,974 diluted weighted-average shares for Class A and Class B.


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Year Ended December 31, 2011

(in thousands, except per share amounts)

(unaudited)

 

    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition
Related
Items
    Capitalized
Software
Development
Costs (1)
    Stock-Based
Compensation
Included in
Capitalized
Software
Development
    Gain on sale of
Terremark (2)
    Tax
Adjustment
(3)
    Non-GAAP,
as adjusted
 

Operating expenses:

                   

Cost of license revenues

  $ 207,398        (1,606     (120     (46,074     —          (84,741     —          —          —        $ 74,857   

Cost of services revenues

  $ 414,589        (23,389     (1,368     (4,967     —          —          —          —          —        $ 384,865   

Research and development

  $ 775,051        (174,264     (9,724     (3,187     —          86,426        (12,428     —          —        $ 661,874   

Sales and marketing

  $ 1,334,346        (95,688     (5,577     (10,213     —          —          —          —          —        $ 1,222,868   

General and administrative

  $ 300,541        (40,206     (1,580     (145     (2,423     —          —          —          —        $ 256,187   

Operating income

  $ 735,171        335,153        18,369        64,586        2,423        (1,685     12,428        —          —        $ 1,166,445   

Operating margin

    19.5     8.9     0.5     1.7     0.1     —          0.3     —          —          31.0

Other income (expense), net

  $ 46,991                    (56,000     $ (9,009

Income before income taxes

  $ 794,413        335,153        18,369        64,586        2,423        (1,685     12,428        (56,000     —        $ 1,169,687   

Income tax provision

  $ 70,477                      163,459      $ 233,936   

Tax rate

    8.9                     20.0

Net income

  $ 723,936        335,153        18,369        64,586        2,423        (1,685     12,428        (56,000     (163,459   $ 935,751   

Net income per weighted-average share, basic for Class A and Class B (4)

  $ 1.72      $ 0.80      $ 0.04      $ 0.15      $ 0.01      $ (0.01   $ 0.03      $ (0.13   $ (0.39   $ 2.22   

Net income per weighted-average share, diluted for Class A and Class B (5)

  $ 1.68      $ 0.78      $ 0.04      $ 0.15      $ 0.01      $ (0.01   $ 0.03      $ (0.13   $ (0.38   $ 2.17   

 

(1) For the year ended December 31, 2011, we capitalized $86.4 million (including $12.4 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $84.7 million.
(2) VMware realized a gain of $56.0 million on the sale of its investment in Terremark Worldwide, Inc.
(3) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be re-calculated during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, tax audit closures, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
(4) Calculated based upon 421,188 basic weighted-average shares for Class A and Class B.
(5) Calculated based upon 431,750 diluted weighted-average shares for Class A and Class B.


VMware, Inc.

REVENUE BY TYPE

(in thousands)

(unaudited)

 

     For the Three Months Ended
December 31,
    For the Year Ended
December 31,
 
     2012     2011     2012     2011  

Revenues:

        

License

   $ 596,720      $ 513,767      $ 2,086,990      $ 1,841,169   

Services:

        

Software maintenance

     590,971        463,489        2,152,986        1,640,397   

Professional services

     105,464        83,046        365,071        285,530   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total services

     696,435        546,535        2,518,057        1,925,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 1,293,155      $ 1,060,302      $ 4,605,047      $ 3,767,096   
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of revenues:

        

License

     46.1     48.5     45.3     48.9

Services:

        

Software maintenance

     45.7     43.7     46.8     43.5

Professional services

     8.2     7.8     7.9     7.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total services

     53.9     51.5     54.7     51.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 


VMware, Inc.

RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES

TO FREE CASH FLOWS

(A NON-GAAP FINANCIAL MEASURE)

(in thousands)

(unaudited)

 

     For the Three Months Ended
December 31,
 
     2012     2011  

GAAP cash flows from operating activities

   $ 493,377      $ 561,409   

Capital expenditures

     (81,639     (52,911
  

 

 

   

 

 

 

Free cash flows

   $ 411,738      $ 508,498   
  

 

 

   

 

 

 


VMware, Inc.

RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES

TO FREE CASH FLOWS

(A NON-GAAP FINANCIAL MEASURE)

(in thousands)

(unaudited)

 

     For the Year Ended
December 31,
 
     2012     2011  

GAAP cash flows from operating activities

   $ 1,897,524      $ 2,025,633   

Capital expenditures

     (234,458     (230,091
  

 

 

   

 

 

 

Free cash flows

   $ 1,663,066      $ 1,795,542   
  

 

 

   

 

 

 


About Non-GAAP Financial Measures

To provide investors and others with additional information regarding VMware’s results, we have disclosed in this press release the following non-GAAP financial measures: non-GAAP operating income, non-GAAP net income, non-GAAP income per diluted share, non-GAAP operating margin and free cash flows. VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These non-GAAP financial measures, other than free cash flows, differ from GAAP in that they exclude stock-based compensation, employer payroll tax on employee stock transactions, amortization of intangible assets, acquisition related items, the net effect of the amortization and capitalization of software development costs, and the gain that VMware realized upon its sale of its investment in Terremark Worldwide, Inc. during the second quarter of fiscal 2011, each as discussed below. Free cash flows differ from GAAP cash flows from operating activities in its treatment of capital expenditures.

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

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

 

   

Stock-based compensation. Although stock-based compensation is an important aspect of the compensation of VMware’s employees and executives, determining the fair value of certain of the stock-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock options, which is an element of our ongoing stock-based compensation expense, is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies.

 

   

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

 

   

Amortization of intangible assets. A portion of the purchase price of VMware’s acquisitions is generally allocated to intangible assets, such as intellectual property, and is subject to amortization. However, VMware does not acquire businesses on a predictable cycle. Additionally, the amount of an acquisition’s purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition. Therefore, VMware believes that the presentation of non-GAAP financial measures that adjust for the amortization of intangible assets provides investors and others with a consistent basis for comparison across accounting periods.

 

   

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

 

   

Capitalized software development costs. Capitalized software development costs encompasses capitalization of development costs and the subsequent amortization of the capitalized costs over the useful


 

life of the product. Amortization and capitalization of software development costs can vary significantly depending upon the timing of products reaching technological feasibility and being made generally available. We did not capitalize software development costs related to product offerings during 2012. In future periods, we expect our amortization expense from capitalized software development costs to decline as software development costs are expected to be recorded as R&D expense as incurred given our go-to-market strategy, which has changed from single product solutions to product suite solutions. We also expect amortization of previously capitalized software development costs to steadily decline as previously capitalized software development costs become fully amortized.

 

   

Gain on sale of Terremark investment. In the second quarter of 2011, we sold our investment in Terremark Worldwide, Inc., which was acquired by Verizon in a cash transaction, and realized a gain of $56.0 million. Our investment in Terremark was made in connection with a business and technical collaboration and was not made to seek an investment gain or to fund our business operations. To the extent that sizeable gains or losses are realized on investments like this, they do not occur on a predictable cycle. Additionally, the timing of the event that triggered our divestment and whether or not we realized a gain or loss, was not under our control.

 

   

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

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

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