0001193125-18-338077 8-K 2 20181129 2.02 9.01 20181129 20181129 VMWARE, INC. 0001124610 7372 943292913 DE 0202 8-K 34 001-33622 181208743 3401 HILLVIEW AVENUE PALO ALTO CA 94304 (650) 427-5000 3401 HILLVIEW AVENUE PALO ALTO CA 94304 VMWARE INC 20000923 8-K 1 d660589d8k.htm 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): November 29, 2018 VMWARE, INC. (Exact name of registrant as specified in its charter) Delaware 001-33622 94-3292913 (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification Number) 3401 Hillview Avenue, Palo Alto, CA 94304 (Address of Principal Executive Offices) (Zip code) Registrant’s telephone number, including area code: (650) 427-5000 N/A (Former Name or Former Address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): ? Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) ? Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) ? Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) ? Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933(§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging growth company ? If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ? -------------------------------------------------------------------------------- Item 2.02 Results of Operations and Financial Condition. On November 29, 2018, VMware issued a press release announcing its financial results for the quarter ended November 2, 2018. The press release, which includes information regarding VMware’s use of non-GAAP financial measures, is attached hereto as Exhibit 99.1 and is incorporated by reference herein. The information in this Item 2.02 and the Exhibit attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing. Item 9.01 Financial Statements and Exhibits. (d) Exhibits 99.1 Press release of VMware, Inc. dated November 29, 2018 -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: November 29, 2018 VMware, Inc. By: /s/ Zane Rowe Zane Rowe Chief Financial Officer and Executive Vice President EX-99.1 2 d660589dex991.htm EX-99.1 Exhibit 99.1 VMware Reports Fiscal 2019 Third Quarter Results Total revenue growth of 14% year-over-year License revenue growth of 17% year-over-year, driven by broad product portfolio strength PALO ALTO, Calif., Nov. 29, 2018 — VMware, Inc. (NYSE: VMW), a leading innovator in enterprise software, today announced financial results for the third quarter of fiscal year 2019: • Revenue for the third quarter was $2.20 billion, an increase of 14% from the third quarter of fiscal 2018. • License revenue for the third quarter was $884 million, an increase of 17% from the third quarter of fiscal 2018. • GAAP net income for the third quarter was $334 million, including a loss of $161 million on an investment in Pivotal Software, or $0.81 per diluted share, down 16% per diluted share compared to $395 million, or $0.96 per diluted share, for the third quarter of fiscal 2018. Non-GAAP net income for the third quarter was $645 million, or $1.56 per diluted share, up 26% per diluted share compared to $509 million, or $1.23 per diluted share, for the third quarter of fiscal 2018. • GAAP operating income for the third quarter was $495 million, an increase of 21% from the third quarter of fiscal 2018. Non-GAAP operating income for the third quarter was $741 million, an increase of 17% from the third quarter of fiscal 2018. • Operating cash flows for the third quarter were $769 million. Free cash flows for the third quarter were $712 million. • Total revenue plus sequential change in total unearned revenue grew 11% year-over-year. • License revenue plus sequential change in unearned license revenue grew 15% year-over-year. “Q3 was another strong quarter, and we’re pleased with our results, which continue to be driven by broad-based strength across our diverse product portfolio and in all three geographies,” commented Pat Gelsinger, chief executive officer, VMware. “Our successful annual VMworld events featured many new product, partnership and acquisition announcements — demonstrating continued innovation and investment in our strategy for the future.” “We had solid Q3 performance on top of a strong Q3 last year,” said Zane Rowe, executive vice president and chief financial officer, VMware. “We are increasing our full year fiscal 2019 guidance as a result of our strength in Q3 and outlook for Q4.” VMware is raising full-year fiscal 2019 total revenue guidance to $8.882 billion (up from prior guidance of $8.820 billion), updating GAAP net income per diluted share to between $5.95 and $6.07, and updating non-GAAP net income per diluted share to $6.22 (up from prior guidance of $6.14 per diluted share). Quarterly Business Highlights & Strategic Announcements • VMware Cloud on AWS saw further momentum with data center expansion across multiple regions globally including the U.S., Europe and now Asia-Pacific, including Sydney and Tokyo. • VMware expanded its integrated hybrid cloud offering, VMware Cloud Foundation 3.5, to deliver greater deployment flexibility and choice, including new Kubernetes support. Other enhancements to the VMware hybrid cloud portfolio included the new VMware vSphere Platinum Edition, along with updates to VMware vSAN and the VMware vRealize Cloud Management Platform. -------------------------------------------------------------------------------- • VMware acquired CloudHealth Technologies, a cloud operations platform across AWS, Microsoft Azure, Google Cloud and VMware environments enabling the delivery of a consistent and actionable view into cost and resource management, security and performance for applications across multiple clouds. • VMware signed a definitive agreement to acquire Heptio, a leader in the open Kubernetes ecosystem, to accelerate enterprise adoption of Kubernetes on-premises and across multi-cloud environments. • IBM and VMware announced a major partnership expansion, including a new IBM Services offering to help migrate and extend mission-critical VMware workloads to the IBM Cloud and new integrations to help enterprises to modernize applications with Kubernetes and containers. • VMware announced innovations across its intelligence-driven Workspace ONE platform to embrace technology heterogeneity in the workplace, while extending modern management and security across the platform. • VMware NSX SD-WAN by VeloCloud is targeting integration with Microsoft Azure Virtual WAN in the first half of 2019, enabling customers across all industries that have business resources in Azure to gain simple, automated and high-performance connectivity to the branch. This new solution will extend customers’ current ability to connect workloads running in Azure using VMware NSX SD-WAN and VMware NSX Data Center and will enable customers to deliver pervasive connectivity and intrinsic security from branch locations to Azure. • In the inaugural Gartner Magic Quadrant for WAN Edge Infrastructure (published on 18 October 2018), VMware was recognized as a Leader. The report, profiling 20 vendors, recognized VMware as a Leader in both ability to execute and completeness of vision, and VMware’s position was placed furthest for completeness of vision.1 • In September, the company was positioned as a Leader in “The Forrester Wave™: Hyperconverged Infrastructure, Q3 2018.” According to Forrester’s report, VMware achieved the highest possible score in the product strategy criterion, which is comprised of the sub-criteria of value proposition and planned product enhancements, and which appears in the strategy category.2 • In October, IDC ranked VMware No. 1 in market share in both worldwide cloud systems management and IT automation and configuration management software based on 2017 revenues.3,4 Additionally, VMware was named a Leader in the IDC MarketScape: Unified Endpoint Management Software 2018 Vendor Assessment.5 • VMware announced it achieved carbon neutrality in global operations two years ahead of its scheduled 2020 goal. Additionally, VMware and the City of Palo Alto plans to work together on a joint exploration of a community microgrid. Beginning as a proof-of-concept on the VMware headquarters campus, the microgrid will serve as a testbed to explore the potential of community microgrids for controlling distributed energy resources and integrating renewable energy in order to maintain resilience at the corporate and community level. • VMware, with Women Who Code, have launched Project Taara, an initiative in India that will give an opportunity to 15,000 women, who have taken a break in their careers to return to work. The program aims at upskilling women with free training and certification on advanced digital transformation solutions by VMware. -------------------------------------------------------------------------------- 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, six quarters of historical data for unearned revenue will also be made available at http://ir.vmware.com in conjunction with the conference call. # # # Adoption of New Revenue Standard ASC 606 During May 2014, the Financial Accounting Standards Board issued updates to accounting standards related to revenue recognition (“ASC 606”). VMware adopted ASC 606 on a full retrospective basis effective February 3, 2018. Accordingly, the financial results for the third quarter of fiscal 2019 presented in this release have been prepared under ASC 606. In order to provide meaningful comparisons to prior periods, VMware has included financial statements for the three and nine months ended November 3, 2017, adjusted for ASC 606, and the balance sheet as of the end of fiscal 2018, adjusted for ASC 606. All year-over-year comparisons in this release compare third quarter of fiscal 2019 results to the third quarter of fiscal 2018 as adjusted for ASC 606. To further assist investors, the financial tables in this release also include a supplemental unearned revenue schedule for the second, third and fourth quarters of fiscal 2018 as adjusted for ASC 606. About VMware VMware software powers the world’s complex digital infrastructure. The company’s compute, cloud, mobility, networking and security offerings provide a dynamic and efficient digital foundation to over 500,000 customers globally, aided by an ecosystem of 75,000 partners. Headquartered in Palo Alto, California, this year VMware celebrates twenty years of breakthrough innovation benefiting business and society. For more information please visit https://www.vmware.com/company.html. 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, including updates regarding VMware’s conditional special dividend that was announced on July 2, 2018. VMware, VMworld, VMware Cloud, Cloud Foundation, vSphere, VMware vSAN, vRealize, NSX, Workspace ONE, CloudHealth and VeloCloud are registered trademarks or trademarks of VMware, Inc. or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective organizatizations. 1 Gartner, Magic Quadrant for WAN Edge Infrastructure, Joe Skorupa, et. al., October 18, 2018. Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose. -------------------------------------------------------------------------------- 2 Forrester, Naveen Chhabra, The Forrester Wave™: Hyperconverged Infrastructure, Q3 2018, September 25, 2018 3 IDC, Stephen Elliot, Tim Grieser, Worldwide Cloud System Management Software Market Shares, 2017: Strong Growth Continues, #US44282218, September 2018 4 IDC, Stephen Elliot, Tim Grieser, Worldwide IT Automation and Configuration Management Software Market Shares, 2017: Hybrid IT Drives Growth, #US44014318, June 2018 5 IDC, Phil Hochmuth IDC MarketScape: Worldwide Unified Endpoint Management Software 2018 Vendor Assessment, #US43294318, July 2018 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 expectations and estimates regarding FY19 total revenue and GAAP and non-GAAP earnings per diluted share; momentum across its portfolio and geographic regions; intention to acquire Heptio; and the expected benefits to customers of VMware products and services, such as the forthcoming integration of VMware NSX SD-WAN by VeloCloud with Microsoft Azure Virtual WAN. 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; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into the virtualization software and cloud, end user and mobile computing industries, and new product and marketing initiatives by VMware’s competitors; (iv) VMware’s customers’ ability to transition to new products and computing strategies such as cloud computing, desktop virtualization and the software defined data center; (v) VMware’s ability to enter into and maintain strategically effective partnerships and alliances; (vi) the uncertainty of customer acceptance of emerging technology; (vii) the ability of VMware and Heptio to satisfy closing conditions to the acquisition on a timely basis or at all; (viii) market conditions, regulatory requirements and other corporate considerations that could affect the timing and closing conditions to the acquisition of Heptio by VMware; (ix) the ability to successfully integrate into VMware acquired companies and assets and smoothly transition services related to divested assets from VMware; (x) rapid technological changes in the virtualization software and cloud, end user and mobile computing industries; (xi) changes to product and service development timelines; (xii) VMware’s relationship with Dell Technologies and Dell’s ability to control matters requiring stockholder approval, including the election of VMware’s board members and matters relating to Dell’s investment in VMware; (xiii) VMware’s ability to protect its proprietary technology; (xiv) VMware’s ability to attract and retain highly qualified employees; (xv) the ability of VMware to realize synergies from Dell; (xvi) disruptions resulting from key management changes; (xvii) risks associated with international sales such as fluctuating currency exchange rates and increased trade barriers; (xviii) changes in VMware’s financial condition; and (xix) risks associated with cyber-attacks, information security and privacy. These forward-looking statements are made as of the date of this press release, 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. -------------------------------------------------------------------------------- Contacts: Paul Ziots VMware Investor Relations pziots@vmware.com 650-427-3267 Michael Thacker VMware Global PR mthacker@vmware.com 650-427-4454 -------------------------------------------------------------------------------- VMware, Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2018 2017(1) 2018 2017(1) Revenue: License $ 884 $ 758 $ 2,558 $ 2,182 Services 1,316 1,180 3,825 3,454 Total revenue 2,200 1,938 6,383 5,636 Operating expenses(2): Cost of license revenue 49 38 139 116 Cost of services revenue 266 240 777 721 Research and development 499 449 1,433 1,298 Sales and marketing 707 624 2,110 1,818 General and administrative 178 175 529 486 Realignment and loss on disposition 6 2 9 101 Operating income 495 410 1,386 1,096 Investment income 63 33 168 82 Interest expense (33 ) (28 ) (101 ) (41 ) Other income (expense), net (180 ) (2 ) 839 51 Income before income tax 345 413 2,292 1,188 Income tax provision 11 18 372 143 Net income $ 334 $ 395 $ 1,920 $ 1,045 Net income per weighted-average share, basic for Classes A and B $ 0.82 $ 0.97 $ 4.72 $ 2.56 Net income per weighted-average share, diluted for Classes A and B $ 0.81 $ 0.96 $ 4.64 $ 2.53 Weighted-average shares, basic for Classes A and B 408,708 406,733 406,929 407,856 Weighted-average shares, diluted for Classes A and B 414,477 413,013 413,378 413,957 (1) Adjusted to reflect the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. (2) Includes stock-based compensation as follows: Cost of license revenue $ — $ — $ 1 $ 1 Cost of services revenue 13 13 37 38 Research and development 98 96 272 266 Sales and marketing 53 52 147 150 General and administrative 28 21 74 58 -------------------------------------------------------------------------------- VMware, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in millions, except per share amounts, and shares in thousands) (unaudited) November 2, February 2, 2018 2018(1) ASSETS Current assets: Cash and cash equivalents $ 9,189 $ 5,971 Short-term investments 4,338 5,682 Accounts receivable, net of allowance for doubtful accounts of $5 and $2 1,101 1,394 Due from related parties, net 542 532 Other current assets 248 257 Total current assets 15,418 13,836 Property and equipment, net 1,128 1,074 Other assets 1,810 924 Deferred tax assets 59 227 Intangible assets, net 558 548 Goodwill 4,989 4,597 Total assets $ 23,962 $ 21,206 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 158 $ 15 Accrued expenses and other 1,328 1,357 Unearned revenue 3,584 3,438 Total current liabilities 5,070 4,810 Notes payable to Dell 270 270 Long-term debt 3,970 3,964 Unearned revenue 2,617 2,401 Income tax payable 878 954 Other liabilities 246 183 Total liabilities 13,051 12,582 Contingencies Stockholders’ equity: Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 109,843 and 103,776 1 1 Class B convertible common stock, par value $0.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares 3 3 Additional paid-in capital 1,268 844 Accumulated other comprehensive loss (51 ) (15 ) Retained earnings 9,690 7,791 Total stockholders’ equity 10,911 8,624 Total liabilities and stockholders’ equity $ 23,962 $ 21,206 (1) Adjusted to reflect the adoption of ASC 606. -------------------------------------------------------------------------------- VMware, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited) Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2018 2017(1) 2018 2017(1) Operating activities: Net income $ 334 $ 395 $ 1,920 $ 1,045 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 157 149 465 419 Stock-based compensation 192 182 531 513 Deferred income taxes, net (62 ) 59 163 119 Unrealized (gain) loss on equity securities, net 169 — (837 ) — Loss on disposition 5 2 6 94 (Gain) loss on disposition of assets, revaluation and impairment, net 8 3 1 (32 ) Gain on extinguishment of debt — (6 ) — (6 ) Loss on Dell stock purchase — — — 2 Other 4 — 4 2 Changes in assets and liabilities, net of acquisitions: Accounts receivable 125 280 297 284 Other current assets and other assets (92 ) (52 ) (264 ) (240 ) Due to/from related parties, net (54 ) (47 ) (10 ) (162 ) Accounts payable 30 (20 ) 125 39 Accrued expenses and other liabilities (153 ) (104 ) (117 ) 11 Income taxes payable (60 ) (70 ) 10 (63 ) Unearned revenue 166 199 357 342 Net cash provided by operating activities 769 970 2,651 2,367 Investing activities: Additions to property and equipment (57 ) (59 ) (178 ) (164 ) Purchases of available-for-sale securities (2 ) (1,186 ) (781 ) (3,339 ) Sales of available-for-sale securities 25 492 186 1,745 Maturities of available-for-sale securities 803 436 1,905 1,207 Purchases of strategic investments — (1 ) (3 ) (33 ) Proceeds from disposition of assets 2 — 35 6 Business combinations, net of cash acquired, and purchases of intangible assets (493 ) — (519 ) (236 ) Net cash paid on disposition of a business (6 ) (7 ) (11 ) (47 ) Net cash provided by (used in) investing activities 272 (325 ) 634 (861 ) Financing activities: Proceeds from issuance of common stock 82 28 181 104 Net proceeds from issuance of long-term debt — 3,961 — 3,961 Repayment of notes payable to Dell — (1,225 ) — (1,225 ) Repurchase of common stock — (855 ) — (1,280 ) Shares repurchased for tax withholdings on vesting of restricted stock (36 ) (94 ) (228 ) (271 ) Payment for common control transaction with Dell (8 ) — (8 ) — Net cash provided by (used in) financing activities 38 1,815 (55 ) 1,289 Net increase in cash, cash equivalents and restricted cash 1,079 2,460 3,230 2,795 Cash, cash equivalents and restricted cash at beginning of the period 8,154 3,574 6,003 3,239 Cash, cash equivalents and restricted cash at end of the period $ 9,233 $ 6,034 $ 9,233 $ 6,034 Supplemental disclosures of cash flow information: Cash paid for interest $ 61 $ 3 $ 126 $ 19 Cash paid for taxes, net 133 25 206 87 Non-cash items: Changes in capital additions, accrued but not paid $ 7 $ 13 $ 16 $ 19 (1) Adjusted to reflect the adoption of ASC 606 and Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. Net cash provided by operating activities increased by $3 million for the nine months ended November 3, 2017 when compared to the previously reported amount due to the adoption of ASU 2016-18. There was no impact to net cash provided by operating activities for the three months ended November 3, 2017 due to the adoption of ASU 2016-18. -------------------------------------------------------------------------------- VMware, Inc. GROWTH IN REVENUE PLUS SEQUENTIAL CHANGE IN UNEARNED REVENUE (in millions) (unaudited) Growth in Total Revenue Plus Sequential Change in Unearned Revenue Three Months Ended November 2, November 3, 2018 2017(1) Total revenue, as reported $ 2,200 $ 1,938 Sequential change in unearned revenue(2) 171 198 Total revenue plus sequential change in unearned revenue $ 2,371 $ 2,136 Change (%) over prior year, as reported 11 % Growth in License Revenue Plus Sequential Change in Unearned License Revenue Three Months Ended November 2, November 3, 2018 2017(1) Total license revenue, as reported $ 884 $ 758 Sequential change in unearned license revenue(3) 22 28 Total license revenue plus sequential change in unearned license revenue $ 906 $ 786 Change (%) over prior year, as reported 15 % (1) Adjusted to reflect the adoption of ASC 606. (2) Sequential change in unearned revenue consists of the change in total unearned revenue from the preceding quarter. Total unearned revenue consists of current and non-current unearned revenue amounts presented in the condensed consolidated balance sheets. (3) Unearned license revenue primarily consists of the allocated portion of VMware’s SaaS offerings. -------------------------------------------------------------------------------- VMware, Inc. SUPPLEMENTAL UNEARNED REVENUE SCHEDULE (in millions) (unaudited) November 2, May 4, February 2, November 3, August 4, 2018 August 3, 2018 2018 2018(1) 2017(1) 2017(1) Unearned revenue as reported: License $ 212 $ 190 $ 157 $ 184 $ 143 $ 115 Software maintenance 5,345 5,223 5,024 5,082 4,541 4,429 Professional services 644 617 575 573 508 450 Total unearned revenue $ 6,201 $ 6,030 $ 5,756 $ 5,839 $ 5,192 $ 4,994 (1) Adjusted to reflect the adoption of ASC 606. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended November 2, 2018 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Acquisition, Payroll Taxes Disposition on Employee and Other Stock-Based Stock Intangible Related Tax Non-GAAP, GAAP Compensation Transactions Amortization Items Adjustment(1) as adjusted(2) Operating expenses: Cost of license revenue $ 49 — — (29 ) — — $ 19 Cost of services revenue $ 266 (13 ) — (1 ) — — $ 252 Research and development $ 499 (98 ) — — — — $ 400 Sales and marketing $ 707 (53 ) (2 ) (8 ) — — $ 647 General and administrative $ 178 (28 ) — — (8 ) — $ 141 Realignment and loss on disposition $ 6 — — — (6 ) — $ — Operating income $ 495 192 2 38 14 — $ 741 Operating margin(2) 22.5 % 8.7 % 0.1 % 1.7 % 0.7 % — 33.7 % Other income (expense), net(3) $ (180 ) — — — 177 — $ (3 ) Income before income tax $ 345 192 2 38 191 — $ 768 Income tax provision $ 11 112 $ 123 Tax rate(2) 3.2 % 16.0 % Net income $ 334 192 2 38 191 (112 ) $ 645 Net income per weighted-average share, diluted for Classes A and B(2) (4) $ 0.81 $ 0.46 $ — $ 0.09 $ 0.46 $ (0.27 ) $ 1.56 (1) 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 as well as significant tax adjustments, such as adjustments resulting from the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Tax Act”). 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 revenue 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. (2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (3) Non-GAAP adjustment to other income (expense), net includes gains or losses on equity investments, whether realized or unrealized. During the three months ended November 2, 2018, this adjustment primarily included a loss of $161 million, which related to VMware’s investment in Pivotal to adjust it to its fair value. (4) Calculated based upon 414,477 diluted weighted-average shares for Classes A and B. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended November 3, 2017 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Acquisition, Payroll Taxes Disposition on Employee and Other Stock-Based Stock Intangible Related Tax Non-GAAP, GAAP(1) Compensation Transactions Amortization Items Adjustment(1)(2) as adjusted(1)(3) Operating expenses: Cost of license revenue $ 38 — — (26 ) — — $ 11 Cost of services revenue $ 240 (13 ) (1 ) (1 ) — — $ 225 Research and development $ 449 (96 ) — — (1 ) — $ 352 Sales and marketing $ 624 (52 ) (1 ) (6 ) (1 ) — $ 567 General and administrative $ 175 (21 ) — — (4 ) — $ 149 Realignment and loss on disposition $ 2 — — — (2 ) — $ — Operating income $ 410 182 2 33 8 — $ 634 Operating margin(3) 21.1 % 9.4 % 0.1 % 1.7 % 0.4 % — 32.7 % Other income (expense), net $ (2 ) — — — 3 — $ 2 Income before income tax $ 413 182 2 33 11 — $ 641 Income tax provision $ 18 113 $ 132 Tax rate(3) 4.4 % 20.5 % Net income $ 395 182 2 33 11 (113 ) $ 509 Net income per weighted-average share, diluted for Classes A and B(3) (4) $ 0.96 $ 0.44 $ — $ 0.08 $ 0.03 $ (0.27 ) $ 1.23 (1) Adjusted to reflect the adoption of ASC 606. (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 as well as significant tax adjustments. 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 revenue 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) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (4) Calculated based upon 413,013 diluted weighted-average shares for Classes A and B. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Nine Months Ended November 2, 2018 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Acquisition, Payroll Taxes Disposition on Employee and Other Stock-Based Stock Intangible Related Tax Non-GAAP, GAAP Compensation Transactions Amortization Items Adjustment(1) as adjusted(2) Operating expenses: Cost of license revenue $ 139 (1 ) — (89 ) — — $ 50 Cost of services revenue $ 777 (37 ) (1 ) (2 ) — — $ 737 Research and development $ 1,433 (272 ) — — (2 ) — $ 1,159 Sales and marketing $ 2,110 (147 ) (3 ) (23 ) (2 ) — $ 1,935 General and administrative $ 529 (74 ) (1 ) — (26 ) — $ 428 Realignment and loss on disposition $ 9 — — — (9 ) — $ — Operating income $ 1,386 531 5 114 39 — $ 2,074 Operating margin(2) 21.7 % 8.3 % 0.1 % 1.8 % 0.6 % — 32.5 % Other income (expense), net(3) $ 839 — — — (839 ) — $ — Income before income tax $ 2,292 531 5 114 (800 ) — $ 2,141 Income tax provision $ 372 (29 ) $ 342 Tax rate(2) 16.2 % 16.0 % Net income $ 1,920 531 5 114 (800 ) 29 $ 1,799 Net income per weighted-average share, diluted for Classes A and B(2) (4) $ 4.64 $ 1.28 $ 0.01 $ 0.28 $ (1.93 ) $ 0.07 $ 4.35 (1) 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 as well as significant tax adjustments, such as adjustments resulting from the 2017 Tax Act. 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 revenue 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. (2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (3) Non-GAAP adjustment to other income (expense), net includes gains or losses on equity investments, whether realized or unrealized. During the nine months ended November 2, 2018, this adjustment primarily included a gain of $851 million, which related to VMware’s investment in Pivotal to adjust it to its fair value. (4) Calculated based upon 413,378 diluted weighted-average shares for Classes A and B. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Nine Months Ended November 3, 2017 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Acquisition, Payroll Taxes Disposition on Employee and Other Stock-Based Stock Intangible Related Loss on Share Tax Non-GAAP, GAAP(1) Compensation Transactions Amortization Items(1) Repurchase Adjustment(1)(2) as adjusted(1)(3) Operating expenses: Cost of license revenue $ 116 (1 ) — (79 ) — — — $ 35 Cost of services revenue $ 721 (38 ) (1 ) (2 ) — — — $ 679 Research and development $ 1,298 (266 ) (1 ) — (4 ) — — $ 1,028 Sales and marketing $ 1,818 (150 ) (3 ) (15 ) (3 ) — — $ 1,647 General and administrative $ 486 (58 ) (1 ) — (17 ) — — $ 409 Realignment and loss on disposition $ 101 — — — (101 ) — — $ — Operating income $ 1,096 513 6 96 125 — — $ 1,838 Operating margin(3) 19.4 % 9.1 % 0.1 % 1.7 % 2.2 % — — 32.6 % Other income (expense), net $ 51 — — — (33 ) 2 — $ 19 Income before income tax $ 1,188 513 6 96 92 2 — $ 1,898 Income tax provision $ 143 246 $ 389 Tax rate(3) 12.0 % 20.5 % Net income $ 1,045 513 6 96 92 2 (246 ) $ 1,509 Net income per weighted-average share, diluted for Classes A and B(3) (4) $ 2.53 $ 1.24 $ 0.01 $ 0.23 $ 0.22 $ — $ (0.60 ) $ 3.64 (1) Adjusted to reflect the adoption of ASC 606. (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 as well as significant tax adjustments. 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 revenue 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) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (4) Calculated based upon 413,957 diluted weighted-average shares for Classes A and B. -------------------------------------------------------------------------------- VMware, Inc. REVENUE BY TYPE (in millions) (unaudited) Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2018 2017(1) 2018 2017(1) Revenue: License $ 884 $ 758 $ 2,558 $ 2,182 Services: Software maintenance 1,138 1,016 3,324 2,989 Professional services 178 164 501 465 Total services 1,316 1,180 3,825 3,454 Total revenue $ 2,200 $ 1,938 $ 6,383 $ 5,636 Percentage of revenue: License 40.2 % 39.1 % 40.1 % 38.7 % Services: Software maintenance 51.7 % 52.4 % 52.0 % 53.0 % Professional services 8.1 % 8.5 % 7.9 % 8.3 % Total services 59.8 % 60.9 % 59.9 % 61.3 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % (1) Adjusted to reflect the adoption of ASC 606. -------------------------------------------------------------------------------- VMware, Inc. REVENUE BY GEOGRAPHY (in millions) (unaudited) Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2018 2017(1) 2018 2017(1) Revenue: United States $ 1,052 $ 970 $ 3,053 $ 2,825 International 1,148 968 3,330 2,811 Total revenue $ 2,200 $ 1,938 $ 6,383 $ 5,636 Percentage of revenue: United States 47.8 % 50.1 % 47.8 % 50.1 % International 52.2 % 49.9 % 52.2 % 49.9 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % (1) Adjusted to reflect the adoption of ASC 606. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES TO FREE CASH FLOWS (A NON-GAAP FINANCIAL MEASURE) (in millions) (unaudited) Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2018 2017(1) 2018 2017(1) GAAP cash flows from operating activities $ 769 $ 970 $ 2,651 $ 2,367 Capital expenditures (57 ) (59 ) (178 ) (164 ) Free cash flows $ 712 $ 911 $ 2,473 $ 2,203 (1) Adjusted to reflect the adoption of ASU 2016-18. GAAP cash flows from operating activities increased by $3 million for the nine months ended November 3, 2017 when compared to the previously reported amount due to the adoption of ASU 2016-18. There was no impact to GAAP cash flows from operating activities for the three months ended November 3, 2017 due to the adoption of ASU 2016-18. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA FISCAL 2019 NET INCOME PER DILUTED SHARE GUIDANCE (in millions) (unaudited) Full Year Fiscal 2019 (Projected) Current Guidance Prior Guidance GAAP Net income per diluted share $5.95 - $6.07(1) Projected $6.08 - $6.34(2) Projected Stock-based compensation 1.74 Estimated 1.71 Estimated Employer Payroll Tax on Employee Stock Transactions 0.02 Estimated 0.02 Estimated Intangible Amortization 0.38 Estimated 0.36 Estimated Acquisition, Disposition and Other Related Items(3) (1.92) Estimated (2.37) Estimated Tax adjustment(4) (0.01) Estimated 0.21 Estimated Non-GAAP Net income per diluted share $6.22 Projected $6.14 Projected (1) Values of items excluded from GAAP net income per diluted share are estimates. While the aggregate of estimates may not foot, in total we expect GAAP net income per share to be $0.15 to $0.27 less than non-GAAP net income per share. (2) Values of items excluded from GAAP net income per diluted share are estimates. While the aggregate of estimates may not foot, in total we expect GAAP net income per share to be $0.20 more to $0.06 less than non-GAAP net income per share. (3) Includes an unrealized loss of $161 million during the three months ended November 2, 2018 and an unrealized gain of $851 million during the nine months ended November 2, 2018, which related to VMware’s investment in Pivotal to adjust it to its fair value. (4) Reflects estimated impact of the U.S. Tax Cuts and Jobs Act. Final calculation may differ materially from estimates, due to, among other things, additional analysis on the application of the tax laws and further clarification and guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies and authorities. -------------------------------------------------------------------------------- About Non-GAAP Financial Measures To provide investors and others with additional information regarding VMware’s results, VMware has disclosed in this earnings release the following non-GAAP financial measures: non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP net 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, disposition and other-related items, gain or loss on share repurchase, certain litigation and other contingencies and discrete items that impacted our GAAP tax rate, each as discussed below. Our non-GAAP financial measures also reflect the application of our non-GAAP tax rate. Free cash flows differ from GAAP cash flows from operating activities with respect to the 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 charges 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 VMware’s employees and executives, the expense for the fair value of the stock-based instruments VMware utilizes may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of VMware’s core business. • 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 VMware’s 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, losses on asset disposals and costs to exit facilities. VMware’s management believes it is useful to exclude these items, when significant, as they are not reflective of VMware’s core business and operating results. -------------------------------------------------------------------------------- • Acquisition, disposition and other-related items. As VMware does not acquire or dispose of businesses on a predictable cycle and the terms of each transaction can vary significantly and are unique to each transaction, VMware believes it is useful to exclude acquisition, disposition and other-related items when looking for a consistent basis for comparison across accounting periods. These items include: • Direct costs of acquisitions and dispositions, such as transaction and advisory fees. • Accruals for the portion of merger consideration payable in installments that may be paid in cash or VMware stock, at the option of VMware. • Gains or losses on equity investments, whether realized or unrealized, including an unrealized loss of $161 million during the three months ended November 2, 2018 and an unrealized gain of $851 million during the nine months ended November 2, 2018, which related to VMware’s investment in Pivotal to adjust it to its fair value. • Charges recognized for non-recoverable strategic investments or gains recognized on the disposition of strategic investments are included as other-related items. • Gains or losses on sale or disposal of distinct lines of business or product offerings, or transactions with features similar to discontinued operations, including recoveries or charges recognized to adjust the fair value of assets that qualify as “held for sale.” • Certain costs incurred related to Dell’s acquisition of VMware’s parent company, EMC Corporation. • Gain or loss on share repurchase. In December 2016, VMware entered into a stock purchase agreement with Dell and Dell’s wholly-owned subsidiary, EMC Equity Assets LLC, pursuant to which VMware agreed to purchase $500 million of VMware Class A common stock. Through December 31, 2016, VMware had purchased 4.8 million shares for $375 million, as well as recognized a derivative asset related to its obligation to repurchase $125 million of additional shares. The derivative asset was measured at fair value on a recurring basis and resulted in the recognition of gains and losses, which were recorded to other income (expense), net on the condensed consolidated statements of income. On February 15, 2017, the stock purchase agreement with Dell was completed. VMware’s management believes it is useful to exclude the mark-to-market adjustment on the derivative asset, as it is not reflective of VMware’s core business and operating results. • Certain litigation and other contingencies. VMware, from time to time, may incur charges or benefits that are outside of the ordinary course of VMware’s business related to litigation and other contingencies. VMware believes it is useful to exclude such charges or benefits because it does not consider such amounts to be part of the ongoing operation of VMware’s business and because of the singular nature of the claims underlying such matters. • Tax adjustment. Non-GAAP financial information for the quarter is adjusted for a tax rate equal to VMware’s annual estimated tax rate on non-GAAP income. This rate is based on VMware’s estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating VMware’s non-GAAP income as well as discrete items, such as the estimated net tax expense recognized in the fourth quarter of fiscal 2018 in connection with the enactment of the Tax Cuts and Jobs Act on December 22, 2017. VMware’s 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 VMware management believes materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue 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 VMware’s estimated annual tax rates as described above, the estimated tax rate on non-GAAP income may differ from the GAAP tax rate and from VMware’s actual tax liabilities. Additionally, VMware’s management believes that the non-GAAP financial measure of free cash flows is meaningful to investors because management reviews 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.