0001193125-12-431528 8-K 3 20121023 2.02 5.02 9.01 20121023 20121023 VMWARE, INC. 0001124610 7372 943292913 DE 1231 8-K 34 001-33622 121156697 3401 HILLVIEW AVENUE PALO ALTO CA 94304 (650) 427-5000 3401 HILLVIEW AVENUE PALO ALTO CA 94304 VMWARE INC 20000923 8-K 1 d427330d8k.htm FORM 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): October 23, 2012 VMware, Inc. (Exact name of registrant as specified in its charter) Commission File Number: 001-33622 Delaware 94-3292913 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 3401 Hillview Avenue, Palo Alto, CA 94304 (Address of principal executive offices, including zip code) (650) 427-5000 (Registrant’s telephone number, including area code) (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: ¨ 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)) -------------------------------------------------------------------------------- Item 2.02 Results of Operations and Financial Condition. On October 23, 2012, VMware, Inc. (“VMware”) issued a press release announcing its financial results for the quarter ended September 30, 2012. 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 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. On October 23, 2012, VMware, Inc. (“VMware” or the “Company”) issued a press release announcing the appointment of Jonathan Chadwick as the Chief Financial Officer and Executive Vice President of the Company, effective November 5, 2012. Mr. Chadwick, age 46, has most recently been Chief Financial Officer of Skype, a provider of Internet-based voice communication, where he has been since March 2011 and a Corporate Vice President of Microsoft Corporation since its acquisition of Skype in October 2011. Mr. Chadwick joined Skype from McAfee, an antivirus software and computer security company, where he was the Executive Vice President and Chief Financial Officer from June 2010 until February 2011. From 1997 to 2010, Mr. Chadwick held various finance roles at Cisco Systems, a networking equipment company. Mr. Chadwick served as Senior Vice President, CFO – Global Customer Markets from July 2009 to June 2010, Senior Vice President, Corporate Controller and Principal Accounting Officer from June 2007 until July 2009, Vice President, Corporate Controller and Principal Accounting Officer from September 2006 to June 2007 and Vice President, Corporate Finance & Planning from February 2001 to September 2006. Mr. Chadwick currently serves on the board of F5 Networks, Inc., an application delivery networking company. Mr. Chadwick will be paid an annual base salary of $625,000 and be eligible to earn a performance-based cash bonus with an annual target of 100% of his base salary. Mr. Chadwick will also be paid a one-time bonus of up to $200,000, depending upon transition costs he incurs, which is earned at the completion of Mr. Chadwick’s first year of employment. If Mr. Chadwick voluntarily leaves his employment with VMware prior to the one-year anniversary of his date of hire, he must repay VMware the full amount of the bonus. Subject to approval by the Company’s Compensation and Corporate Governance Committee (the “Committee”), Mr. Chadwick will be awarded a restricted stock unit (“RSU”) grant with a target value of $8,000,000 that will vest over four years, with 37.5% of the RSUs vesting on the 18-month anniversary of the vesting base date and the remaining shares vesting 12.5% on each subsequent semi-annual anniversary of the vesting base date. The vesting base date will be the first day of the month during which the Committee approves Mr. Chadwick’s RSU grant and the number of RSUs in his grant will be determined by dividing the target value of the grant by the average of the closing sale price per share of VMware Class A Common Stock for the 45 trading days ending on November 30, 2012. Subject to approval by the Committee, Mr. Chadwick will also be granted a performance stock unit (“PSU”) award with a target value of $4,000,000. The number of PSUs granted will be determined utilizing the same method used to determine the number of RSUs. The PSU award will vest if VMware meets a designated revenue growth target over the three-year period commencing January 1, 2012. The PSUs will convert into VMware’s Class A common stock at a ratio ranging from 0.5 to 2.0 shares for each PSU, depending upon the degree of performance. Vesting in the PSU award will not occur, and no shares will be issued, for performance below minimum thresholds to be specified in the award. If Mr. Chadwick is terminated without “cause” or he terminates his employment for “good reason” (each as defined in Mr. Chadwick’s offer letter) within 18 months following his first day of employment, vesting will accelerate in one-half of the RSUs that are then unvested. If following a “change of control” (as defined in Mr. Chadwick’s offer letter), Mr. Chadwick is terminated without cause or he terminates his employment for good reason, vesting will accelerate with respect to 100% of the RSUs and PSUs. Acceleration of vesting in the RSUs following a change in control will occur if such termination occurs within twelve months following the change in control. -------------------------------------------------------------------------------- Item 9.01 Financial Statements and Exhibits. (d) Exhibits 99.1 Press release of VMware, Inc. dated October 23, 2012 -------------------------------------------------------------------------------- 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 October 23, 2012 VMware, Inc. By: /s/ Carl Eschenbach Carl Eschenbach Chief Operating Officer and Co-President EX-99.1 2 d427330dex991.htm PRESS RELEASE Exhibit 99.1 [[Image Removed: LOGO]] VMware Reports Third Quarter 2012 Results Company Appoints Jonathan Chadwick as Chief Financial Officer - Year-over-Year Revenue Growth of 20% to $1.13 Billion - Operating Margin of 16.8%; Non-GAAP Operating Margin of 32.2% PALO ALTO, Calif., October 23, 2012 — VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the third quarter of 2012. Also announced today, industry veteran Jonathan Chadwick will join VMware as chief financial officer (CFO) effective November 5, 2012. • Revenues for the third quarter were $1.13 billion, an increase of 20% from the third quarter of 2011, and 22% measured in constant currency. • Operating income for the third quarter was $190 million, an increase of 5% from the third quarter of 2011. Non-GAAP operating income for the third quarter was $365 million, an increase of 28% from the third quarter of 2011. • Net income for the third quarter was $157 million, or $0.36 per diluted share, compared to $178 million, or $0.41 per diluted share, for the third quarter of 2011. Non-GAAP net income for the quarter was $303 million, or $0.70 per diluted share, compared to $230 million, or $0.53 per diluted share, for the third quarter of 2011. • Trailing twelve months operating cash flows were $1.97 billion, an increase of 5% compared to the trailing twelve months ended the third quarter of 2011. Trailing twelve months free cash flows were $1.90 billion, an increase of 4% compared to the trailing twelve months ended the third quarter of 2011. • Cash, cash equivalents and short-term investments were $4.4 billion and unearned revenue was $3.0 billion as of September 30, 2012. U.S. revenues for the third quarter of 2012 grew 25% to $554 million from 2011. International revenues grew 16% to $580 million from 2011. License revenues for the third quarter of 2012 were $491 million, an increase of 11% from 2011. Service revenues, which include software maintenance and professional services, were $643 million for third quarter of 2012, an increase of 29% from 2011. “Third quarter results reinforce VMware’s leadership and momentum as cloud emerges as the de facto IT infrastructure standard,” said Pat Gelsinger, chief executive officer, VMware. “Our Software Defined Data Center platform gives customers a clear path to the cloud, and the recently announced VMware vCloud® Suite of virtualized compute, storage, networking and management capabilities demonstrates our unique ability to deliver proven solutions that speed this journey.” “We delivered a solid quarter despite tough macroeconomic conditions,” said Carl Eschenbach, chief operating officer and co-president, VMware. “The quarter went as expected and we achieved record quarterly results for total revenue and non-GAAP operating income. Fourth quarter revenues are expected to be in the range of $1.26 and $1.29 billion. Annual 2012 revenues are expected to be in the range of $4.572 and $4.602 billion, an increase of 21.4% to 22.2% from 2011. Annual license revenues are expected to grow between 12.8% and 13.8%.” -------------------------------------------------------------------------------- Jonathan Chadwick Appointed Chief Financial Officer Jonathan Chadwick, 46, brings deep industry and business leadership experience to VMware. Most recently, he served as corporate vice president of Microsoft and CFO of Skype, following roles as EVP and CFO of McAfee and in a variety of finance leadership positions in over a decade at Cisco Systems. Chadwick will be responsible for leading VMware’s global finance organization and will report to Gelsinger. Commenting on the new addition to VMware’s executive team, Gelsinger added, “As we refine and accelerate VMware’s market and innovation strategy, we are squarely focused on delivering increasing value to our customers and shareholders. Jonathan’s tremendous talent and experience in financial controls, business operations and strategic planning will be foundational to these efforts, and we warmly welcome him to the leadership team.” Recent Highlights & Strategic Announcements • In late August, VMware hosted VMworld® 2012 in San Francisco. The event attracted a record 21,000 customers, partners, press and analysts, and 250 sponsors and exhibitors signifying major interest from the IT industry in cloud computing and the next generation of IT. In early October, VMware hosted VMworld Europe in Barcelona, attracting more than 8,000 attendees to the Company’s regional user conference. • On August 27, VMware unveiled a comprehensive solution of cloud infrastructure and management products, expertise and ecosystem support to help customers drive greater efficiency and improve operational agility. At the heart of the announcement was the new VMware vCloud® Suite 5.1 – the first solution to deliver the Software Defined Data Center. The vCloud suite integrates VMware’s leading virtualization, cloud infrastructure and management portfolio into a single SKU, simplifying the adoption of cloud era technologies. • Also on August 27, VMware announced new Cloud Ops Intellectual Property (IP) and advisory, transformation and education services. Based on VMware’s experience helping hundreds of clients worldwide navigate through the complex decisions around building, running and optimizing public and private cloud environments, Cloud Ops has emerged as a new operating model where IT shifts from a reactive, tactical relationship with the business to the role of a strategic partner, helping broker critical, value-added services across an organization. VMware plans to host a conference call today to review its third quarter 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 2011 revenues of $3.77 billion, VMware has more than 400,000 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, VMworld 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 fourth quarter and annual revenue and license revenue projections, our expectations for leadership and momentum in cloud infrastructure, the roles of our Software Defined Data Center platform, vCloud Suite and Cloud Ops IP and services in the adoption of cloud computing and their benefits to customers, important IT market trends and expectations that VMware’s strategy will deliver increasing value to shareholders and customers. 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 and desktop virtualization; (vi) the uncertainty of customer acceptance of emerging technology; (vii) changes in the willingness of customers to enter into longer term licensing and support arrangements; (viii) rapid technological and market changes in virtualization software and platforms for cloud and desktop computing; (ix) changes to product development timelines; (x) VMware’s relationship with EMC Corporation and EMC’s ability to control matters requiring stockholder approval, including the election of VMware’s board members; (xi) our ability to protect our proprietary technology; (xii) our ability to attract and retain highly qualified employees; (xiii) the successful integration of acquired companies and assets into VMware; and (xiv) fluctuating currency exchange rates. These forward looking statements are based on current expectations and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. VMware assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release. 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 STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Operating activities: Net income $ 156,768 $ 177,538 $ 539,933 $ 523,508 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 86,434 73,985 261,592 229,643 Stock-based compensation, excluding amounts capitalized 119,487 88,379 302,193 254,394 Excess tax benefits from stock-based compensation (24,531 ) (46,428 ) (110,914 ) (197,692 ) Gain on sale of Terremark investment — — — (56,000 ) Other (735 ) 6,968 (1,290 ) 10,794 Changes in assets and liabilities, net of acquisitions: Accounts receivable 67,054 46,174 202,308 72,757 Other assets (4,713 ) (57,402 ) (121,863 ) (91,455 ) Due to/from EMC, net 15,479 17,505 27,624 42,940 Accounts payable 8,699 (10,846 ) 26,118 (12,553 ) Accrued expenses (63,917 ) (19,539 ) (62,981 ) 14,672 Income taxes receivable from EMC — 69,796 — 246,240 Income taxes payable 59,933 14,321 127,666 51,922 Deferred income taxes, net (33,727 ) 10,231 (70,098 ) 9,273 Unearned revenue 49,987 152,829 283,859 365,781 Net cash provided by operating activities 436,218 523,511 1,404,147 1,464,224 Investing activities: Additions to property and equipment (74,812 ) (54,948 ) (152,819 ) (177,180 ) Purchase of leasehold interest — 22,043 — (151,083 ) Capitalized software development costs — (21,139 ) — (73,998 ) Purchases of available-for-sale securities (764,574 ) (955,686 ) (2,719,642 ) (2,083,491 ) Sales of available-for-sale securities 882,348 231,705 1,653,102 608,293 Maturities of available-for-sale securities 234,028 231,738 768,104 724,707 Sale of strategic investments — — — 78,513 Business acquisitions, net of cash acquired (1,242,048 ) (99,522 ) (1,344,214 ) (303,610 ) Transfer of net assets under common control — (1,930 ) — (22,393 ) Other investing (8,183 ) (3,230 ) (12,357 ) (30,372 ) Net cash used in investing activities (973,241 ) (650,969 ) (1,807,826 ) (1,430,614 ) Financing activities: Proceeds from issuance of common stock 69,628 84,572 214,223 285,286 Repurchase of common stock (128,817 ) (210,527 ) (307,012 ) (490,916 ) Excess tax benefits from stock-based compensation 24,531 46,428 110,914 197,692 Shares repurchased for tax withholdings on vesting of restricted stock (25,019 ) (34,230 ) (90,002 ) (104,808 ) Net cash used in financing activities (59,677 ) (113,757 ) (71,877 ) (112,746 ) Net decrease in cash and cash equivalents (596,700 ) (241,215 ) (475,556 ) (79,136 ) Cash and cash equivalents at beginning of the period 2,076,900 1,791,044 1,955,756 1,628,965 Cash and cash equivalents at end of the period $ 1,480,200 $ 1,549,829 $ 1,480,200 $ 1,549,829 -------------------------------------------------------------------------------- VMware, Inc. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Revenues: License $ 491,121 $ 443,597 $ 1,490,270 $ 1,327,402 Services 642,563 498,266 1,821,622 1,379,392 Total revenues 1,133,684 941,863 3,311,892 2,706,794 Operating expenses (1): Cost of license revenues 60,338 46,063 173,634 151,009 Cost of services revenues 119,024 106,678 355,865 304,104 Research and development 259,907 199,655 730,891 558,059 Sales and marketing 411,535 331,626 1,166,448 949,110 General and administrative 92,537 77,120 265,636 223,397 Operating income 190,343 180,721 619,418 521,115 Investment income 7,505 4,351 20,193 11,472 Interest expense with EMC (1,162 ) (915 ) (3,607 ) (2,846 ) Other income (expense), net (1,539 ) (998 ) (2,814 ) 55,806 Income before income taxes 195,147 183,159 633,190 585,547 Income tax provision 38,379 5,621 93,257 62,039 Net income $ 156,768 $ 177,538 $ 539,933 $ 523,508 Net income per weighted-average share, basic for Class A and Class B $ 0.37 $ 0.42 $ 1.26 $ 1.25 Net income per weighted-average share, diluted for Class A and Class B $ 0.36 $ 0.41 $ 1.24 $ 1.21 Weighted-average shares, basic for Class A and Class B 427,142 422,030 426,902 420,247 Weighted-average shares, diluted for Class A and Class B 433,288 431,881 434,438 431,846 (1) Includes stock-based compensation as follows: Cost of license revenues $ 561 $ 367 $ 1,525 $ 1,271 Cost of services revenues 7,816 6,068 20,738 17,396 Research and development 60,194 46,663 147,598 134,621 Sales and marketing 51,662 24,763 110,779 70,550 General and administrative 11,914 10,518 34,213 30,556 -------------------------------------------------------------------------------- VMware, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited) September 30, December 31, 2012 2011 ASSETS Current assets: Cash and cash equivalents $ 1,480,200 $ 1,955,756 Short-term investments 2,914,419 2,556,450 Accounts receivable, net of allowance for doubtful accounts of $1,976 and $3,794 683,695 882,857 Due from EMC, net 46,175 73,799 Deferred tax asset 156,747 128,471 Other current assets 154,167 80,439 Total current assets 5,435,403 5,677,772 Property and equipment, net 579,998 525,490 Capitalized software development costs, net and other 94,702 154,236 Deferred tax asset 111,087 156,855 Intangible assets, net 765,590 407,375 Goodwill 2,893,333 1,759,080 Total assets $ 9,880,113 $ 8,680,808 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 72,462 $ 49,747 Accrued expenses and other 576,043 587,650 Unearned revenues 1,876,208 1,764,109 Total current liabilities 2,524,713 2,401,506 Note payable to EMC 450,000 450,000 Unearned revenues 1,117,058 944,309 Other liabilities 223,543 114,711 Total liabilities 4,315,314 3,910,526 Commitments and contingencies Stockholders’ equity: Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 128,336 and 123,610 shares 1,283 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 3,459,801 3,212,264 Accumulated other comprehensive income 8,176 1,176 Retained earnings 2,092,539 1,552,606 Total stockholders’ equity 5,564,799 4,770,282 Total liabilities and stockholders’ equity $ 9,880,113 $ 8,680,808 -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended September 30, 2012 (in thousands, except per share amounts) (unaudited) Employer Capitalized Payroll Taxes Acquisition Software Tax Stock-Based on Employee Intangible Related Development Adjustment Non-GAAP, GAAP Compensation Stock Transactions Amortization Items Costs (1) (2) as adjusted Operating expenses: Cost of license revenues $ 60,338 (561 ) (7 ) (19,306 ) — (14,859 ) — $ 25,605 Cost of services revenues $ 119,024 (7,816 ) 1 (1,098 ) — — — $ 110,111 Research and development $ 259,907 (60,194 ) (996 ) (962 ) — — — $ 197,755 Sales and marketing $ 411,535 (51,662 ) (332 ) (3,287 ) — — — $ 356,254 General and administrative $ 92,537 (11,914 ) (150 ) — (1,723 ) — — $ 78,750 Operating income $ 190,343 132,147 1,484 24,653 1,723 14,859 — $ 365,209 Operating margin 16.8 % 11.7 % 0.1 % 2.2 % 0.1 % 1.3 % — 32.2 % Income before income taxes $ 195,147 132,147 1,484 24,653 1,723 14,859 — $ 370,013 Income tax provision $ 38,379 28,223 $ 66,602 Tax rate 19.7 % 18.0 % Net income $ 156,768 132,147 1,484 24,653 1,723 14,859 (28,223 ) $ 303,411 Net income per weighted-average share, basic for Class A and Class B (3) $ 0.37 $ 0.31 $ — $ 0.06 $ — $ 0.03 $ (0.06 ) $ 0.71 Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.36 $ 0.30 $ — $ 0.06 $ — $ 0.04 $ (0.06 ) $ 0.70 (1) For the third quarter of 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $14.9 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 427,142 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 433,288 diluted weighted-average shares for Class A and Class B. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended September 30, 2011 (in thousands, except per share amounts) (unaudited) Stock-Based Compensation Employer Capitalized Included in Payroll Taxes Acquisition Software Capitalized Tax Stock-Based on Employee Intangible Related Development Software Adjustment Non-GAAP, GAAP Compensation Stock Transactions Amortization Items Costs (1) Development (2) as adjusted Operating expenses: Cost of license revenues $ 46,063 (367 ) (26 ) (12,743 ) — (14,427 ) — — $ 18,500 Cost of services revenues $ 106,678 (6,068 ) (329 ) (1,242 ) — — — — $ 99,039 Research and development $ 199,655 (46,663 ) (2,394 ) (797 ) — 24,528 (3,389 ) — $ 170,940 Sales and marketing $ 331,626 (24,763 ) (1,403 ) (2,832 ) — — — — $ 302,628 General and administrative $ 77,120 (10,518 ) (340 ) (36 ) (844 ) — — — $ 65,382 Operating income $ 180,721 88,379 4,492 17,650 844 (10,101 ) 3,389 — $ 285,374 Operating margin 19.2 % 9.4 % 0.5 % 1.9 % 0.1 % -1.1 % 0.3 % — 30.3 % Income before income taxes $ 183,159 88,379 4,492 17,650 844 (10,101 ) 3,389 — $ 287,812 Income tax provision $ 5,621 51,940 $ 57,561 Tax rate 3.1 % 20.0 % Net income $ 177,538 88,379 4,492 17,650 844 (10,101 ) 3,389 (51,940 ) $ 230,251 Net income per weighted-average share, basic for Class A and Class B (3) $ 0.42 $ 0.21 $ 0.01 $ 0.04 $ — $ (0.02 ) $ 0.01 $ (0.12 ) $ 0.55 Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.41 $ 0.20 $ 0.01 $ 0.04 $ — $ (0.02 ) $ 0.01 $ (0.12 ) $ 0.53 (1) For the third quarter of 2011, we capitalized $24.5 million (including $3.4 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $14.4 million. (2) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be re-calculated during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, tax audit closures, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. (3) Calculated based upon 422,030 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 431,881 diluted weighted-average shares for Class A and Class B. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Nine Months Ended September 30, 2012 (in thousands, except per share amounts) (unaudited) Employer Capitalized Payroll Taxes Acquisition Software Tax Stock-Based on Employee Intangible Related Development Adjustment Non-GAAP, GAAP Compensation Stock Transactions Amortization Items Costs (1) (2) as adjusted Operating expenses: Cost of license revenues $ 173,634 (1,525 ) (43 ) (46,334 ) — (57,457 ) — $ 68,275 Cost of services revenues $ 355,865 (20,738 ) (846 ) (3,294 ) — — — $ 330,987 Research and development $ 730,891 (147,598 ) (5,050 ) (2,464 ) — — — $ 575,779 Sales and marketing $ 1,166,448 (110,779 ) (3,771 ) (9,147 ) — — — $ 1,042,751 General and administrative $ 265,636 (34,213 ) (991 ) — (3,402 ) — — $ 227,030 Operating income $ 619,418 314,853 10,701 61,239 3,402 57,457 — $ 1,067,070 Operating margin 18.7 % 9.5 % 0.3 % 1.9 % 0.1 % 1.7 % — 32.2 % Income before income taxes $ 633,190 314,853 10,701 61,239 3,402 57,457 — $ 1,080,842 Income tax provision $ 93,257 101,295 $ 194,552 Tax rate 14.7 % 18.0 % Net income $ 539,933 314,853 10,701 61,239 3,402 57,457 (101,295 ) $ 886,290 Net income per weighted-average share, basic for Class A and Class B (3) $ 1.26 $ 0.74 $ 0.03 $ 0.14 $ 0.01 $ 0.14 $ (0.24 ) $ 2.08 Net income per weighted-average share, diluted for Class A and Class B (4) $ 1.24 $ 0.72 $ 0.02 $ 0.14 $ 0.01 $ 0.14 $ (0.23 ) $ 2.04 (1) For the first nine months of 2012, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $57.5 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 426,902 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 434,438 diluted weighted-average shares for Class A and Class B. -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Nine Months Ended September 30, 2011 (in thousands, except per share amounts) (unaudited) Stock-Based Compensation Employer Capitalized Included in Payroll Taxes Acquisition Software Capitalized Tax Stock-Based on Employee Intangible Related Development Software Gain on sale of Adjustment Non-GAAP, GAAP Compensation Stock Transactions Amortization Items Costs (1) Development Terremark (2) (3) as adjusted Operating expenses: Cost of license revenues $ 151,009 (1,271 ) (93 ) (32,887 ) — (62,699 ) — — — $ 54,059 Cost of services revenues $ 304,104 (17,396 ) (1,208 ) (3,726 ) — — — — — $ 281,774 Research and development $ 558,059 (134,621 ) (8,238 ) (2,391 ) — 86,426 (12,428 ) — — $ 486,807 Sales and marketing $ 949,110 (70,550 ) (4,710 ) (7,347 ) — — — — — $ 866,503 General and administrative $ 223,397 (30,556 ) (1,197 ) (108 ) (2,226 ) — — — — $ 189,310 Operating income $ 521,115 254,394 15,446 46,459 2,226 (23,727 ) 12,428 — — $ 828,341 Operating margin 19.3 % 9.4 % 0.6 % 1.7 % 0.1 % -0.9 % 0.4 % — — 30.6 % Other income (expense), net $ 55,806 (56,000 ) $ (194 ) Income before income taxes $ 585,547 254,394 15,446 46,459 2,226 (23,727 ) 12,428 (56,000 ) — $ 836,773 Income tax provision $ 62,039 105,314 $ 167,353 Tax rate 10.6 % 20.0 % Net income $ 523,508 254,394 15,446 46,459 2,226 (23,727 ) 12,428 (56,000 ) (105,314 ) $ 669,420 Net income per weighted-average share, basic for Class A and Class B (4) $ 1.25 $ 0.61 $ 0.04 $ 0.11 $ — $ (0.06 ) $ 0.02 $ (0.13 ) $ (0.25 ) $ 1.59 Net income per weighted-average share, diluted for Class A and Class B (5) $ 1.21 $ 0.59 $ 0.04 $ 0.11 $ — $ (0.05 ) $ 0.02 $ (0.13 ) $ (0.24 ) $ 1.55 (1) For the first nine months of 2011, we capitalized $86.4 million (including $12.4 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $62.7 million. (2) VMware realized a gain of $56.0 million on the sale of its investment in Terremark Worldwide, Inc. (3) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above. Our estimated tax rate on non-GAAP income is determined annually and may be re-calculated during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, tax audit closures, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. (4) Calculated based upon 420,247 basic weighted-average shares for Class A and Class B. (5) Calculated based upon 431,846 diluted weighted-average shares for Class A and Class B. -------------------------------------------------------------------------------- VMware, Inc. REVENUE BY TYPE (in thousands) (unaudited) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Revenues: License $ 491,121 $ 443,597 $ 1,490,270 $ 1,327,402 Services: Software maintenance 550,626 426,772 1,562,015 1,176,907 Professional services 91,937 71,494 259,607 202,485 Total services 642,563 498,266 1,821,622 1,379,392 Total revenues $ 1,133,684 $ 941,863 $ 3,311,892 $ 2,706,794 Percentage of revenues: License 43.3 % 47.1 % 45.0 % 49.0 % Services: Software maintenance 48.6 % 45.3 % 47.2 % 43.5 % Professional services 8.1 % 7.6 % 7.8 % 7.5 % Total services 56.7 % 52.9 % 55.0 % 51.0 % Total revenues 100.0 % 100.0 % 100.0 % 100.0 % -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES TO FREE CASH FLOWS (A NON-GAAP FINANCIAL MEASURE) (in thousands) (unaudited) For the Three Months Ended September 30, 2012 2011 GAAP cash flows from operating activities $ 436,218 $ 523,511 Capitalized software development costs — (21,139 ) Excess tax benefits from stock-based compensation 24,531 46,428 Capital expenditures (74,812 ) (54,948 ) Free cash flows $ 385,937 $ 493,852 -------------------------------------------------------------------------------- VMware, Inc. RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES TO FREE CASH FLOWS (A NON-GAAP FINANCIAL MEASURE) (in thousands) (unaudited) For the Trailing Twelve Months Ended September 30, 2012 2011 GAAP cash flows from operating activities $ 1,965,556 $ 1,870,839 Capitalized software development costs — (89,953 ) Excess tax benefits from stock-based compensation 137,725 253,945 Capital expenditures (205,730 ) (217,630 ) Free cash flows $ 1,897,551 $ 1,817,201 -------------------------------------------------------------------------------- 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, free cash flows and trailing twelve-month free cash flows. VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These non-GAAP financial measures, 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 and the net effect of the amortization and capitalization of software development costs. Free cash flows differ from GAAP cash flows from operating activities in its treatment of capitalized software development costs, excess tax benefits from stock-based compensation and 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. • Excess tax benefits from stock-based compensation. We account for stock-based compensation under GAAP, which requires that we report the excess income tax benefit from stock-based compensation as a financing cash flow rather than as an operating cash flow. We have added this benefit back to our calculation of free cash flows in order to generally classify cash flows arising from income taxes as operating cash flows. • Employer payroll tax on employee stock transactions. The amount of employer payroll taxes on stock-based compensation is dependent on VMware’s stock price and other factors that are beyond our control and do not correlate to the operation of the business. • Amortization of intangible assets. A portion of the purchase price of VMware’s acquisitions is generally allocated to intangible assets, such as intellectual property, and is subject to amortization. However, VMware does not acquire businesses on a predictable cycle. Additionally, the amount of an acquisition’s purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition. Therefore, VMware believes that the presentation of non-GAAP financial measures that adjust for the amortization of intangible assets provides investors and others with a consistent basis for comparison across accounting periods. -------------------------------------------------------------------------------- • Acquisition related items. Acquisition related items include direct costs of acquisitions, such as transaction fees, which vary significantly and are unique to each acquisition. Additionally, VMware does not acquire businesses on a predictable cycle. • Capitalized software development costs. Capitalized software development costs encompasses capitalization of development costs and the subsequent amortization of the capitalized costs over the useful life of the product. Amortization and capitalization of software development costs can vary significantly depending upon the timing of products reaching technological feasibility and being made generally available. In addition, we exclude the capitalization of software from our free cash flows to better convey management’s view of operating cash flows. To the extent that we capitalize costs under generally accepted accounting guidance, we increase our GAAP operating cash flows due to the treatment of capitalized costs as cash used in investing activities. Historically, the amount of software development costs that we capitalized during a given fiscal period was often significant. However, following the release of VMware vSphere 5 and the comprehensive suite of cloud infrastructure technologies in the third quarter of 2011, management determined that VMware’s go-to-market strategy had changed from single solutions to product suite solutions. As a result of this change in strategy, and the related increased importance of interoperability between our products, the length of time between achieving technological feasibility and general release to customers has significantly decreased. Given that we expect the majority of our product offerings to be suites or to have key components that interoperate with our other product offerings, the costs incurred subsequent to achievement of technological feasibility are expected to be immaterial in future periods and we do not expect to record significant capitalized software development costs under our current strategy. We did not capitalize software development costs related to product offerings during the first nine months of 2012. We also expect amortization of previously capitalized software development costs to steadily decline as previously capitalized software development costs become fully amortized. • 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. As discussed above, we also exclude the excess income tax benefit from stock-based compensation and subtract capitalization of software development costs to derive our measure of free cash flows. The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense that affect VMware’s operations. Specifically, in the case of stock-based compensation, if VMware did not pay out a portion of its compensation in the form of stock-based compensation and related employer payroll taxes, the cash salary expense included in costs of revenues and operating expenses would be higher, which would affect VMware’s cash position. VMware compensates for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP and should not be considered measures of VMware’s liquidity. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Management encourages investors and others to review VMware’s financial information in its entirety and not rely on a single financial measure. -------------------------------------------------------------------------------- Revenue Growth in Constant Currency We invoice and collect in the Euro, the British Pound, the Japanese Yen, and the Australian Dollar in their respective regions. As a result, our total revenues are affected by changes in the U.S. Dollar against these currencies. In order to provide a comparable framework for assessing how our business performed excluding the effect of foreign currency fluctuations, management analyzes year-over-year revenue growth on a constant currency basis. Since all of our entities operate with the U.S. Dollar as their functional currency, unearned revenues for orders booked in currencies other than U.S. Dollars are converted into U.S. Dollars at the exchange rate in effect for the month in which each order is booked. We calculate constant currency on license revenues recognized during the current period that were originally booked in currencies other than U.S. Dollars by comparing the exchange rates used to recognize revenue in the current period against the exchange rates used to recognize revenue in the comparable period. We do not calculate constant currency on services revenues, which include software maintenance revenues and professional services revenues.