VMWARE, INC. (Form: 10-Q, Received: 12/07/2020 17:14:30)

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iso4217:USD xbrli:shares xbrli:shares vmw:subpoena vmw:claim iso4217:USD vmw:acquisition vmw:patent xbrli:pure vmw:position vmw:segment vmw:extension

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 30, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33622

_______________________________________________________

VMWARE, INC.

(Exact name of registrant as specified in its charter)

_______________________________________________________



Delaware		94-3292913
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3401 Hillview Avenue
Palo Alto,	CA	94304
(Address of principal executive offices)		(Zip Code)

(650) 427-5000

(Registrant’s telephone number, including area code)

_____________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock	VMW	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 27, 2020, the number of shares of common stock, par value $0.01 per share, of the registrant outstanding was 419,777,970, of which 112,556,134 shares were Class A common stock and 307,221,836 were Class B common stock.

TABLE OF CONTENTS



		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Statements of Income	3

	Condensed Consolidated Statements of Comprehensive Income	4

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Statements of Stockholders’ Equity	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 6.	Exhibits	68

	SIGNATURE	69

VMware, Pivotal, SaltStack, Datrium, Lastline, Nyansa, vRealize, Carbon Black, Workspace ONE, Horizon, CloudHealth, NSX, VMware vSAN, VMware Foundation, vSphere, VeloCloud, Heptio, and Tanzu are registered trademarks or trademarks of VMware or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.

Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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
	October 30,			November 1,			October 30,			November 1,
	2020			2019⁽¹⁾			2020			2019⁽¹⁾
Revenue⁽²⁾⁽³⁾:
License	$	639		$	728		$	2,019		$	2,147
Subscription and SaaS	676			470			1,880			1,320
Services	1,549			1,458			4,574			4,271
Total revenue	2,864			2,656			8,473			7,738
Operating expenses⁽²⁾⁽⁴⁾:
Cost of license revenue	44			42			119			116
Cost of subscription and SaaS revenue	142			103			400			294
Cost of services revenue	330			311			969			916
Research and development	714			642			2,058			1,846
Sales and marketing	912			918			2,727			2,674
General and administrative	250			269			773			701
Realignment	44			—			47			—
Operating income	428			371			1,380			1,191
Investment income	1			12			7			40
Interest expense	(52		)	(40		)	(156		)	(108		)
Other income (expense), net	177			17			186			75
Income before income tax	554			360			1,417			1,198
Income tax provision (benefit)	120			(30		)	150			(4,842		)
Net income	434			390			1,267			6,040
Less: Net loss attributable to non-controlling interests	—			(17		)	—			(50		)
Net income attributable to VMware, Inc.	$	434		$	407		$	1,267		$	6,090
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B	$	1.03		$	0.98		$	3.02		$	14.60
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B	$	1.02		$	0.96		$	3.00		$	14.32
Weighted-average shares, basic for Classes A and B	420,857			416,387			419,758			417,002
Weighted-average shares, diluted for Classes A and B	423,400			423,035			423,093			425,366
__________
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal Software, Inc. (“Pivotal”) acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).
⁽²⁾ Effective the fourth quarter of fiscal 2020, revenue recognized from subscription and SaaS offerings, as well as the related cost of subscription and SaaS revenue, are being presented separately (refer to Note A).
⁽³⁾ Includes related party revenue as follows (refer to Note C):
License	$	289		$	353		$	976		$	992
Subscription and SaaS	136			88			373			239
Services	518			376			1,439			1,052
⁽⁴⁾ Includes stock-based compensation as follows:
Cost of license revenue	$	—		$	—		$	1		$	1
Cost of subscription and SaaS revenue	4			3			13			10
Cost of services revenue	25			20			74			58
Research and development	140			118			397			328
Sales and marketing	85			76			243			204
General and administrative	50			39			141			104

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of Contents

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(unaudited)



	Three Months Ended					Nine Months Ended
	October 30,		November 1,			October 30,			November 1,
	2020		2019⁽¹⁾			2020			2019⁽¹⁾
Net income	$	434	$	390		$	1,267		$	6,040
Other comprehensive income (loss):
Changes in fair value of effective foreign currency forward contracts:
Unrealized gains (losses), net of tax provision (benefit) of $— for all periods	2		(1		)	(1		)	3
Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $— for all periods	2		(3		)	—			(2		)
Net change in fair value of effective foreign currency forward contracts	4		(4		)	(1		)	1
Total other comprehensive income (loss)	4		(4		)	(1		)	1
Comprehensive income, net of taxes	438		386			1,266			6,041
Less: Net loss attributable to the non-controlling interests	—		(17		)	—			(50		)
Comprehensive income attributable to VMware, Inc.	$	438	$	403		$	1,266		$	6,091
__________
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of Contents

VMware, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)



	October 30,			January 31,
	2020			2020
ASSETS
Current assets:
Cash and cash equivalents	$	3,898		$	2,915
Accounts receivable, net of allowance for doubtful accounts of $6 and $7	1,789			1,883
Due from related parties, net	672			1,457
Other current assets	473			436
Total current assets	6,832			6,691
Property and equipment, net	1,311			1,280
Other assets	2,698			2,266
Deferred tax assets	5,865			5,556
Intangible assets, net	1,059			1,172
Goodwill	9,559			9,329
Total assets	$	27,324		$	26,294
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	190		$	208
Accrued expenses and other	2,232			2,151
Current portion of long-term debt and other borrowings	—			2,747
Unearned revenue	5,205			5,218
Total current liabilities	7,627			10,324
Note payable to Dell	270			270
Long-term debt	4,715			2,731
Unearned revenue	4,030			4,050
Income tax payable	790			817
Operating lease liabilities	904			746
Other liabilities	512			347
Total liabilities	18,848			19,285
Contingencies (refer to Note D)
Stockholders’ equity:
Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 113,300 and 110,484 shares	1			1
Class B convertible common stock, par value $0.01; authorized 1,000,000 shares; issued and outstanding 307,222 shares	3			3
Additional paid-in capital	2,201			2,000
Accumulated other comprehensive loss	(5		)	(4		)
Retained earnings	6,276			5,009
Total stockholders’ equity	8,476			7,009
Total liabilities and stockholders’ equity	$	27,324		$	26,294

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of Contents

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)



	Nine Months Ended
	October 30,			November 1,
	2020			2019⁽¹⁾
Operating activities:
Net income	$	1,267		$	6,040
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	757			626
Stock-based compensation	869			705
Deferred income taxes, net	(177		)	(5,138		)
Unrealized (gain) loss on equity securities, net	(197		)	(30		)
(Gain) loss on disposition of assets, revaluation and impairment, net	22			(4		)
Loss on extinguishment of debt	8			—
Other	—			4
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	102			164
Other current assets and other assets	(622		)	(444		)
Due to/from related parties, net	785			299
Accounts payable	(4		)	14
Accrued expenses and other liabilities	393			(82		)
Income taxes payable	(53		)	15
Unearned revenue	(65		)	618
Net cash provided by operating activities	3,085			2,787
Investing activities:
Additions to property and equipment	(247		)	(215		)
Purchases of strategic investments	(16		)	(18		)
Proceeds from disposition of assets	21			22
Business combinations, net of cash acquired, and purchases of intangible assets	(390		)	(2,437		)
Net cash paid on disposition of a business	—			(4		)
Net cash used in investing activities	(632		)	(2,652		)
Financing activities:
Proceeds from issuance of common stock	264			294
Net proceeds from issuance of long-term debt	1,979			—
Borrowings under term loan, net of issuance costs	—			1,993
Repayment of term loan	(1,500		)	(1,400		)
Repayment of current portion of long-term debt	(1,257		)	—
Repurchase of common stock	(566		)	(1,279		)
Shares repurchased for tax withholdings on vesting of restricted stock	(319		)	(393		)
Payment to acquire non-controlling interests	(91		)	—
Contribution from Dell	—			27
Principal payments on finance lease obligations	(3		)	(1		)
Net cash used in financing activities	(1,493		)	(759		)
Net increase (decrease) in cash, cash equivalents and restricted cash	960			(624		)
Cash, cash equivalents and restricted cash at beginning of the period	3,031			3,596
Cash, cash equivalents and restricted cash at end of the period	$	3,991		$	2,972
Supplemental disclosures of cash flow information:
Cash paid for interest	$	142		$	131
Cash paid for taxes, net	393			283
Non-cash items:
Changes in capital additions, accrued but not paid	$	(18	)	$	5
Changes in tax withholdings on vesting of restricted stock, accrued but not paid	(4		)	49
__________
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of Contents

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions)

(unaudited)



	Three Months Ended October 30, 2020
	Class A Common Stock				Class B Convertible Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
	Shares		Par Value		Shares	Par Value		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
Balance, July 31, 2020	113		$	1	307	$	3	$	2,070		$	5,842	$	(9	)	$	7,907
Proceeds from issuance of common stock	1		—		—	—		122			—		—			122
Repurchase and retirement of common stock	(2	)	—		—	—		(255		)	—		—			(255		)
Issuance of restricted stock	1		—		—	—		—			—		—			—
Shares withheld for tax withholdings on vesting of restricted stock	—		—		—	—		(39		)	—		—			(39		)
Stock-based compensation	—		—		—	—		303			—		—			303
Amount due from tax sharing arrangement	—		—		—	—		—			—		—			—
Total other comprehensive income (loss)	—		—		—	—		—			—		4			4
Net income	—		—		—	—		—			434		—			434
Balance, October 30, 2020	113		$	1	307	$	3	$	2,201		$	6,276	$	(5	)	$	8,476



	Nine Months Ended October 30, 2020
	Class A Common Stock				Class B Convertible Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
	Shares		Par Value		Shares	Par Value		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
Balance, January 31, 2020	110		$	1	307	$	3	$	2,000		$	5,009	$	(4	)	$	7,009
Proceeds from issuance of common stock	3		—		—	—		264			—		—			264
Repurchase and retirement of common stock	(4	)	—		—	—		(566		)	—		—			(566		)
Issuance of restricted stock	6		—		—	—		—			—		—			—
Shares withheld for tax withholdings on vesting of restricted stock	(2	)	—		—	—		(315		)	—		—			(315		)
Stock-based compensation	—		—		—	—		863			—		—			863
Amount due from tax sharing arrangement	—		—		—	—		(45		)	—		—			(45		)
Total other comprehensive income (loss)	—		—		—	—		—			—		(1		)	(1		)
Net income	—		—		—	—		—			1,267		—			1,267
Balance, October 30, 2020	113		$	1	307	$	3	$	2,201		$	6,276	$	(5	)	$	8,476



	Three Months Ended November 1, 2019⁽¹⁾
	Class A Common Stock				Class B Convertible Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests			Stockholders’ Equity
	Shares		Par Value		Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests			Stockholders’ Equity
Balance, August 2, 2019	109		$	1	300	$	3	$	2,437		$	4,330		$	3		$	1,097		$	7,871
Proceeds from issuance of common stock	1		—		—	—		94			—			—			—			94
Issuance of stock-based awards in acquisition	—		—		—	—		10			—			—			—			10
Repurchase and retirement of common stock	(2	)	—		—	—		(194		)	(48		)	—			—			(242		)
Issuance of restricted stock	2		—		—	—		—			—			—			—			—
Shares withheld for tax withholdings on vesting of restricted stock	—		—		—	—		(94		)	—			—			—			(94		)
Stock-based compensation	—		—		—	—		230			—			—			26			256
Investment from Dell, net	—		—		—	—		1			—			—			1			2
Total other comprehensive income (loss)	—		—		—	—		—			—			(4		)	—			(4		)
Transactions with Pivotal’s non-controlling stockholders	—		—		—	—		(4		)	—			—			49			45
Net income (loss)	—		—		—	—		—			407			—			(17		)	390
Balance, November 1, 2019	110		$	1	300	$	3	$	2,480		$	4,689		$	(1	)	$	1,156		$	8,328



	Nine Months Ended November 1, 2019⁽¹⁾
	Class A Common Stock				Class B Convertible Common Stock			Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests			Stockholders’ Equity
	Shares		Par Value		Shares	Par Value		Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests			Stockholders’ Equity
Balance, February 1, 2019	111		$	1	300	$	3	$	2,959		$	(1,096	)	$	(2	)	$	1,026		$	2,891
Cumulative effect of adoption of new accounting pronouncements	—		—		—	—		—			2			—			—			2
Proceeds from issuance of common stock	1		—		—	—		200			—			—			—			200
Issuance of stock-based awards in acquisition	—		—		—	—		12			—			—			—			12
Repurchase and retirement of common stock	(7	)	—		—	—		(972		)	(307		)	—			—			(1,279		)
Issuance of restricted stock	7		—		—	—		—			—			—			—			—
Shares withheld for tax withholdings on vesting of restricted stock	(2	)	—		—	—		(442		)	—			—			—			(442		)
Stock-based compensation	—		—		—	—		632			—			—			73			705
Credit from tax sharing arrangement	—		—		—	—		85			—			—			—			85
Investment from Dell, net	—		—		—	—		17			—			—			12			29
Total other comprehensive income (loss)	—		—		—	—		—			—			1			—			1
Transactions with Pivotal’s non-controlling stockholders	—		—		—	—		(11		)	—			—			95			84
Net income (loss)	—		—		—	—		—			6,090			—			(50		)	6,040
Balance, November 1, 2019	110		$	1	300	$	3	$	2,480		$	4,689		$	(1	)	$	1,156		$	8,328
__________
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).

The accompanying notes are an integral part of the condensed consolidated financial statements.

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

A. Overview and Basis of Presentation

Company and Background

VMware, Inc. (“VMware” or the “Company”) originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. IT is working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses through a digital transformation. To take on these challenges, VMware is working with customers in the areas of hybrid and multi-cloud, modern applications, networking, security and digital workspaces. VMware’s software provides a flexible digital foundation to enable customers in their digital transformations.

Accounting Principles

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Retrospective Combination of Historical Financial Statements

In December 2019, VMware completed the acquisition of Pivotal, which was, at the time, a subsidiary of VMware’s parent company, Dell Technologies Inc. (“Dell”). The purchase of the controlling interest in Pivotal from Dell was accounted for as a transaction between entities under common control in accordance with Accounting Standards Codification 805-50, Business Combination - Related Issues, which requires retrospective combination of entities for all periods presented, as if the combination had been in effect since the inception of common control. The condensed consolidated financial statements of VMware and notes thereto are presented on a combined basis, as both VMware and Pivotal were under common control for all periods presented.

Of the total amount of consideration for the acquisition of the non-controlling interest in Pivotal, $155 million was recognized in accrued expenses and other on the condensed consolidated balance sheet as of January 31, 2020 for amounts potentially owed to dissenting stockholders. During the second quarter of fiscal 2021, VMware paid $91 million to dissenting stockholders of Pivotal, representing a portion of the amount accrued as of January 31, 2020.

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, for a fair statement of VMware’s condensed consolidated results of operations, financial position and cash flows for the periods presented. Results of operations are not necessarily indicative of the results that may be expected for the full fiscal year 2021. Certain information and footnote disclosures typically included in annual consolidated financial statements have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in VMware’s Annual Report on Form 10-K filed on March 26, 2020.

Effective September 7, 2016, Dell (formerly Denali Holding Inc.) acquired EMC Corporation (“EMC”), VMware’s parent company, including EMC’s majority control of VMware. As of October 30, 2020, Dell controlled 80.4% of VMware’s outstanding common stock and 97.4% of the combined voting power of VMware’s outstanding common stock, including 31 million shares of VMware’s Class A common stock and all of VMware’s Class B common stock.

As VMware is a majority-owned and controlled subsidiary of Dell, its results of operations and financial position are consolidated with Dell’s financial statements.

Management believes the assumptions underlying the condensed consolidated financial statements are reasonable. However, the amounts recorded for VMware’s related party transactions with Dell and its consolidated subsidiaries may not be considered arm’s length with an unrelated third party. Therefore, the condensed consolidated financial statements included herein may not necessarily reflect the results of operations, financial position and cash flows had VMware engaged in such transactions with an unrelated third party during all periods presented. Accordingly, VMware’s historical financial information is not necessarily indicative of what the Company’s results of operations, financial position and cash flows will be in the future, if and when VMware contracts at arm’s length with unrelated third parties for products and services the Company receives from and provides to Dell.

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of VMware and subsidiaries in which VMware has a controlling financial interest. The portion of results of operations attributable to the non-controlling interests for Pivotal prior to the acquisition was included in net loss attributable to non-controlling interests on the condensed consolidated statements of income for the periods presented. As part of the acquisition of Pivotal, VMware acquired the non-controlling interests in Pivotal from the holders of Pivotal Class A common stock, and has held 100% of the controlling financial interest in Pivotal since December 2019. The cumulative portion of the results of operations and changes in the net assets of Pivotal attributable to the non-controlling interests through the acquisition date were reclassified to additional paid-in capital on the condensed consolidated balance sheet as of January 31, 2020.

All intercompany transactions and account balances between VMware and its subsidiaries have been eliminated in consolidation. Transactions with Dell and its consolidated subsidiaries are generally settled in cash and are classified on the condensed consolidated statements of cash flows based upon the nature of the underlying transaction.

Use of Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, trade receivable valuation, marketing development funds, expected period of benefit for deferred commissions, useful lives assigned to fixed assets and intangible assets, valuation of goodwill and definite-lived intangibles, income taxes, stock-based compensation and contingencies. Actual results could differ from those estimates.

As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the condensed consolidated financial statements as new events occur and additional information becomes known. To the extent the Company’s actual results differ materially from those estimates and assumptions, VMware’s future financial statements could be affected.

Income Taxes

VMware’s quarterly effective income tax rate is based on the Company’s estimated annual income tax rate forecast and discrete tax items recognized in the period. During the first quarter of fiscal 2021, the Company completed an intra-group transfer of certain of Pivotal’s intellectual property rights (the “IP”) to the Company’s Irish subsidiary, resulting in a discrete tax benefit of $59 million recognized with a deferred tax asset. This deferred tax asset was recognized as a result of the book and tax basis difference on the IP transferred and was based on the IP’s current fair value.

During the second quarter of fiscal 2020, a discrete tax benefit of $4.9 billion was recognized with a deferred tax asset due to an intra-group transfer of certain of the Company’s intellectual property rights to its Irish subsidiary. During the third quarter of fiscal 2020, certain statutes of limitations expired, which resulted in a reduction of unrecognized tax benefits of $53 million.

Subscription and SaaS Revenue

Effective with the fourth quarter of fiscal 2020, VMware is presenting new revenue and cost of revenue line items entitled “subscription and SaaS revenue” and “cost of subscription and SaaS revenue.” Previously, subscription and software-as-a-service (“SaaS”) revenue was referred to as “hybrid cloud subscription and SaaS revenue” and was allocated between license revenue and services revenue in the condensed consolidated statements of income. In light of the Company’s recent acquisitions, management decided to separately present revenue recognized from subscription and SaaS offerings as management believes it provides a more meaningful representation of the nature of its revenue. Revenue and related costs from prior periods were reclassified to conform to the current presentation.

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes the prior period reclassifications for revenue and the corresponding costs resulting from the presentation of the new revenue line item (amounts in millions):



	Three Months Ended
	November 1, 2019
	As Previously Reported		Reclassification For New Revenue Line			Pivotal Adjustments⁽¹⁾		As Adjusted
Revenue:
License	$	974	$	(246	)	$	—	$	728
Subscription and SaaS	—		330			140		470
Services	1,482		(84		)	60		1,458
Operating expenses:
Cost of license revenue	59		(17		)	—		42
Cost of subscription and SaaS revenue	—		77			26		103
Cost of services revenue	319		(60		)	52		311



	Nine Months Ended
	November 1, 2019
	As Previously Reported		Reclassification For New Revenue Line			Pivotal Adjustments⁽¹⁾		As Adjusted
Revenue:
License	$	2,853	$	(706	)	$	—	$	2,147
Subscription and SaaS	—		921			399		1,320
Services	4,308		(215		)	178		4,271
Operating expenses:
Cost of license revenue	160		(44		)	—		116
Cost of subscription and SaaS revenue	—		219			75		294
Cost of services revenue	936		(175		)	155		916

⁽¹⁾Includes adjustments related to the recast of prior periods resulting from the acquisition of Pivotal.

Recently Adopted Accounting Standards

Effective February 1, 2020, VMware adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires the measurement and recognition of current expected credit losses for financial assets. The standard did not have a material impact on the Company’s condensed consolidated financial statements.

New Accounting Pronouncement

In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, simplifying the accounting for convertible instruments and contracts in an entity’s own equity and amending the diluted earnings per share guidance for greater consistency within the standard. With the exception of the impact to the Company’s diluted net income per share, which is not expected to be material, the updated standard is not expected to have any other impact on the Company’s financial statements. The updated standard is effective for interim and annual periods beginning after December 15, 2021, but may be early adopted. VMware plans to adopt this updated standard during the first quarter of fiscal 2022 on a modified retrospective basis.

B. Revenue, Unearned Revenue and Remaining Performance Obligations

Revenue

Contract Assets

A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets include fixed fee professional services where transfer of services has occurred in advance of the Company’s

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

right to invoice. Contract assets are classified as accounts receivables upon invoicing. Contract assets are included in other current assets on the condensed consolidated balance sheets. Contract assets were $46 million and $26 million as of October 30, 2020 and January 31, 2020, respectively. Contract asset balances will fluctuate based upon the timing of the transfer of services, billings and customers’ acceptance of contractual milestones.

Contract Liabilities

Contract liabilities consist of unearned revenue, which is generally recorded when VMware has the right to invoice or payments have been received for undelivered products or services.

Customer Deposits

Customer deposits include prepayments from customers related to amounts received for contracts that include certain cancellation rights. Purchased credits eligible for redemption of VMware’s hosted services (“cloud credits”) are included in customer deposits until the cloud credit is consumed or is contractually committed to a specific hosted service. Cloud credits are redeemable by the customer for the gross value of the hosted offering. Upon contractual commitment for a hosted service, the net value of the cloud credits that are expected to be recognized as revenue when the obligation is fulfilled will be classified as unearned revenue.

As of October 30, 2020, customer deposits related to customer prepayments and cloud credits of $275 million were included in accrued expenses and other, and $152 million were included in other liabilities on the condensed consolidated balance sheets. As of January 31, 2020, customer deposits related to customer prepayments and cloud credits of $247 million were included in accrued expenses and other, and $143 million were included in other liabilities on the condensed consolidated balance sheets.

Deferred Commissions

Deferred commissions are classified as current or non-current based on the duration of the expected period of benefit. Deferred commissions, including the employer portion of payroll taxes, included in other current assets as of October 30, 2020 and January 31, 2020 were $27 million and $13 million, respectively. Deferred commissions included in other assets were $1.0 billion and $938 million as of October 30, 2020 and January 31, 2020, respectively.

Amortization expense for deferred commissions was included in sales and marketing on the condensed consolidated statements of income and was $113 million and $319 million during the three and nine months ended October 30, 2020, respectively, and $93 million and $270 million during the three and nine months ended November 1, 2019, respectively.

Unearned Revenue

Unearned revenue as of the periods presented consisted of the following (table in millions):



	October 30,		January 31,
	2020		2020
Unearned license revenue	$	11	$	19
Unearned subscription and SaaS revenue	1,596		1,534
Unearned software maintenance revenue	6,574		6,700
Unearned professional services revenue	1,054		1,015
Total unearned revenue	$	9,235	$	9,268

Unearned subscription and SaaS revenue is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.

Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized over time on a ratable basis over the contract duration. The weighted-average remaining contractual term as of October 30, 2020 was approximately two years. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.

Total billings and revenue recognized during the three months ended October 30, 2020 were $1.7 billion and $1.9 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses. Total billings and revenue recognized during the nine months ended October 30, 2020 were $5.4 billion and $5.5 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

as on-premises licenses. During the nine months ended October 30, 2020, VMware also acquired $33 million in unearned revenue in connection with business combinations.

Revenue recognized during the three and nine months ended November 1, 2019 was $1.6 billion and $4.7 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses.

Remaining Performance Obligations

Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.

As of October 30, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.2 billion, of which approximately 55% is expected to be recognized as revenue over the next twelve months and the remainder thereafter. As of January 31, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.3 billion, of which approximately 54% was expected to be recognized as revenue during fiscal 2021, and the remainder thereafter.

C. Related Parties

The information provided below includes a summary of transactions with Dell and Dell’s consolidated subsidiaries (collectively, “Dell”).

Transactions with Dell

VMware and Dell engaged in the following ongoing related party transactions, which resulted in revenue and receipts, and unearned revenue for VMware:

•

Pursuant to original equipment manufacturer (“OEM”) and reseller arrangements, Dell integrates or bundles VMware’s products and services with Dell’s products and sells them to end users. Dell also acts as a distributor, purchasing VMware’s standalone products and services for resale to end-user customers through VMware-authorized resellers. Revenue under these arrangements is presented net of related marketing development funds and rebates paid to Dell. In addition, VMware provides professional services to end users based upon contractual agreements with Dell.


•	Dell purchases products and services from VMware for its internal use.


•	From time to time, VMware and Dell enter into agreements to collaborate on technology projects, and Dell pays VMware for services or reimburses VMware for costs incurred by VMware, in connection with such projects.

During each of the three and nine months ended October 30, 2020, revenue from Dell accounted for 33% of VMware’s consolidated revenue. During the three and nine months ended October 30, 2020, revenue recognized on transactions where Dell acted as an OEM accounted for 13% and 12%, respectively, of revenue from Dell, or 4% of VMware’s consolidated revenue.

During the three and nine months ended November 1, 2019, revenue from Dell accounted for 31% and 30% of VMware’s consolidated revenue, respectively. During the three and nine months ended November 1, 2019, revenue recognized on transactions where Dell acted as an OEM accounted for 11% and 12%, respectively, of revenue from Dell, or 3% of VMware’s consolidated revenue.

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Dell purchases VMware products and services directly from VMware, as well as through VMware’s channel partners. Information about VMware’s revenue and receipts, and unearned revenue from such arrangements, for the periods presented consisted of the following (table in millions):



	Revenue and Receipts								Unearned Revenue
	Three Months Ended				Nine Months Ended				As of
	October 30,		November 1,		October 30,		November 1,		October 30,		January 31,
	2020		2019		2020		2019		2020		2020
Reseller revenue	$	927	$	780	$	2,738	$	2,223	$	4,159	$	3,787
Internal-use revenue	16		37		50		60		28		57
Collaborative technology project receipts	4		2		9		7		n/a		n/a

Customer deposits resulting from transactions with Dell were $209 million and $194 million as of October 30, 2020 and January 31, 2020, respectively.

VMware and Dell engaged in the following ongoing related party transactions, which resulted in costs to VMware:


•	VMware purchases and leases products and purchases services from Dell.


•	From time to time, VMware and Dell enter into agreements to collaborate on technology projects, and VMware pays Dell for services provided to VMware by Dell related to such projects.

•

In certain geographic regions where VMware does not have an established legal entity, VMware contracts with Dell subsidiaries for support services and support from Dell personnel who are managed by VMware. The costs incurred by Dell on VMware’s behalf related to these employees are charged to VMware with a mark-up intended to approximate costs that would have been incurred had VMware contracted for such services with an unrelated third party. These costs are included as expenses on VMware’s condensed consolidated statements of income and primarily include salaries, benefits, travel and occupancy expenses. Dell also incurs certain administrative costs on VMware’s behalf in the United States (“U.S.”) that are recorded as expenses on VMware’s condensed consolidated statements of income.


•	In certain geographic regions, Dell files a consolidated indirect tax return, which includes value added taxes and other indirect taxes collected by VMware from its customers. VMware remits the indirect taxes to Dell, and Dell remits the tax payment to the foreign governments on VMware’s behalf.


•	From time to time, VMware invoices end users on behalf of Dell for certain services rendered by Dell. Cash related to these services is collected from the end user by VMware and remitted to Dell.


•	From time to time, VMware enters into agency arrangements with Dell that enable VMware to sell its subscriptions and services, leveraging the Dell enterprise relationships and end customer contracts.

Information about VMware’s payments for such arrangements during the periods presented consisted of the following (table in millions):



	Three Months Ended				Nine Months Ended
	October 30,		November 1,		October 30,		November 1,
	2020		2019		2020		2019
Purchases and leases of products and purchases of services⁽¹⁾	$	49	$	61	$	138	$	196
Dell subsidiary support and administrative costs	12		27		54		91

⁽¹⁾Amount includes indirect taxes that were remitted to Dell during the periods presented.

VMware also purchases Dell products through Dell’s channel partners. Purchases of Dell products through Dell’s channel partners were not significant during the periods presented.

From time to time, VMware and Dell also enter into joint marketing, sales, branding and product development arrangements, for which both parties may incur costs.

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Dell Financial Services (“DFS”)

DFS provided financing to certain of VMware’s end users at the end users’ discretion. Upon acceptance of the financing arrangement by both VMware’s end users and DFS, amounts classified as trade accounts receivable are reclassified to due from related parties, net on the condensed consolidated balance sheets. Revenue recognized on transactions financed through DFS was recorded net of financing fees. Financing fees on arrangements accepted by both parties were $12 million and $43 million during the three and nine months ended October 30, 2020, respectively, and $34 million during the nine months ended November 1, 2019. Financing fees during the three months ended November 1, 2019 were not significant.

Tax Sharing Agreement with Dell

Payments made to Dell pursuant to the tax sharing agreement were $54 million and $221 million during the three and nine months ended October 30, 2020, respectively, and $43 million and $132 million during the three and nine months ended November 1, 2019, respectively.

Payments from VMware to Dell under the tax sharing agreement relate to VMware’s portion of federal income taxes on Dell’s consolidated tax return as well as state tax payments for combined states. The timing of the tax payments due to and from related parties is governed by the tax sharing agreement. VMware’s portion of the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (the “Transition Tax”) is governed by a letter agreement between Dell, EMC and VMware executed during the first quarter of fiscal 2020 (the “Letter Agreement”). In December 2019, VMware amended the tax sharing agreement with Dell in connection with, and effective as of, the Pivotal acquisition. The tax sharing agreement with Dell, as amended and subject to certain exceptions, generally limits VMware’s maximum annual tax liability to Dell to the amount VMware would owe on a separate tax return basis. Subject to this cap for periods following the Pivotal acquisition, the amounts that VMware pays to Dell for its portion of federal income taxes on Dell’s consolidated tax return differ from the amounts VMware would owe on a separate tax return basis and the difference is recognized as a component of additional paid-in capital, generally in the period in which the consolidated tax return is filed. The difference between the amount of tax calculated on a separate tax return basis and the amount of tax calculated pursuant to the tax sharing agreement recorded in additional paid-in capital during the nine months ended October 30, 2020 was $45 million. The amount recognized in additional paid-in capital during the nine months ended November 1, 2019 was $85 million, primarily due to a reduction in Transition Tax liability based on the terms of the Letter Agreement and certain tax attribute determinations made by Dell. The amounts recognized in additional paid-in capital during the three months ended October 30, 2020 and November 1, 2019 were not significant.

As a result of the activity under the tax sharing agreement with Dell, amounts due to Dell were $499 million and $529 million as of October 30, 2020 and January 31, 2020, respectively, primarily related to VMware’s estimated tax obligation resulting from the Transition Tax. The Company expects to pay the remainder of its Transition Tax over a period of five years.

Pivotal Tax Sharing Agreement with Dell

Pivotal continues to file its separate tax return for U.S. federal income tax purposes, as it left the Dell consolidated tax group at the time of Pivotal’s initial public offering (“IPO”) in April 2018. This has reduced the amount of benefit or expense received by Pivotal since the IPO to the amount of benefit or expense Dell realizes from Pivotal’s inclusion on unitary state tax returns. Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for the tax benefits derived from the inclusion of its losses in certain Dell U.S. federal and state group returns. Payments received from Dell were recognized as a component of additional paid-in capital.

In April 2019, Pivotal and Dell amended their tax sharing agreement with regard to the treatment of certain U.S. Tax Cuts and Jobs Act implications not explicitly covered by the original terms of the tax sharing agreement. The amendment resulted in a one-time payment of $27 million by Dell to Pivotal in August 2019. During the nine months ended November 1, 2019, $24 million was recognized as a component of additional paid-in capital related to Pivotal’s tax sharing agreement with Dell and it was not material during the three months ended November 1, 2019.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Due To/From Related Parties, Net

Amounts due to and from related parties, net as of the periods presented consisted of the following (table in millions):



	October 30,		January 31,
	2020		2020
Due from related parties, current	$	771	$	1,618
Due to related parties, current⁽¹⁾	99		161
Due from related parties, net, current	$	672	$	1,457

⁽¹⁾ Includes an immaterial amount related to the Company’s current operating lease liabilities due to related parties.

The Company also recognized an immaterial amount related to non-current operating lease liabilities due to related parties. This amount has been included in operating lease liabilities on the condensed consolidated balance sheets as of October 30, 2020 and January 31, 2020.

Amounts in due from related parties, net, excluding DFS and tax obligations, include the current portion of amounts due to and due from related parties. Amounts included in due from related parties, net are generally settled in cash within 60 days of each quarter-end.

Notes Payable to Dell

As of October 30, 2020 and January 31, 2020, VMware had an outstanding promissory note payable to Dell in the principal amount of $270 million due December 1, 2022. The note may be prepaid without penalty or premium. Interest is payable quarterly in arrears at the annual rate of 1.75%. During each of the three and nine months ended October 30, 2020 and November 1, 2019, interest expense on the notes payable to Dell was not significant.

D. Commitments and Contingencies

Litigation

On June 4, 2020, purported Pivotal stockholder Kenia Lopez filed a lawsuit in the Delaware Chancery Court against Dell, VMware, Michael Dell, Robert Mee and Cynthia Gaylor. The claims include breach of fiduciary duty and aiding and abetting, all tied to VMware’s acquisition of Pivotal. On July 16, 2020, purported Pivotal stockholder Stephanie Howarth filed a similar lawsuit in the Delaware Chancery Court against the same defendants asserting the same types of claims. These matters have been consolidated, and VMware filed a motion to dismiss on September 23, 2020.

The Company is unable at this time to assess whether or to what extent it may be found liable and, if found liable, what the damages may be, and believes a loss is not probable and reasonably estimable. The Company intends to vigorously defend against these securities class actions.

On April 25, 2019, Cirba Inc. (“Cirba”) filed a lawsuit against VMware in the United States District Court for the District of Delaware (the “Delaware Court”), alleging two patent infringement claims and three trademark infringement-related claims. On May 6, 2019, Cirba filed a motion seeking a preliminary injunction tied to one of the two patents it alleges VMware infringes. Following a hearing on August 6, 2019, the Delaware Court denied Cirba’s preliminary injunction motion and set the case for trial in mid-January 2020. On August 20, 2019, VMware filed counterclaims against Cirba, asserting among other claims that Cirba is infringing four VMware patents. The Delaware Court severed those claims from the January 2020 trial on Cirba’s claims, and the trial on VMware’s patent claims is currently set for September 2021. The trial on Cirba’s claims in the Delaware Court was completed on January 23, 2020, and on January 24, 2020, the jury returned a verdict finding that VMware willfully infringed the two asserted patents and awarding approximately $237 million in damages. The jury further found that VMware was not liable on Cirba’s trademark infringement-related claims. A total of $237 million has been accrued for the Delaware action, which reflects the estimated losses that are considered both probable and reasonably estimable at this time. The parties filed post-trial motions in which VMware moved to set aside the verdict and reduce the damages award, and Cirba moved for a permanent injunction, enhanced damages, to set an ongoing royalty rate, and for an award of pre-judgment and post-judgment interest and supplemental damages. The parties held a hearing with the Delaware Court on those motions on May 15, 2020, and the Delaware Court has taken those motions under advisement. The Company intends to vigorously defend itself in this matter, including, if necessary, via an appeal. Final resolution of this matter could be materially different from the amount accrued. The amount accrued for this matter is included in accrued expenses and other on the condensed consolidated balance sheet as of October 30, 2020 and January 31, 2020, and the charge was included in general and administrative on the condensed consolidated statement of income for the year ended January 31, 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

On October 22, 2019, VMware filed a separate patent infringement lawsuit against Cirba in the United States District Court for the Eastern District of Virginia, asserting that Cirba infringes an additional four patents. The court in that action transferred the case to the District of Delaware. On March 23, 2020, Cirba filed a counterclaim asserting one additional patent against VMware. Overall, the Company is unable at this time to assess whether or to what extent it may be found liable on the new patent claim and, if found liable, what the damages may be, and believes a loss is not probable and reasonably estimable. The Company intends to vigorously defend against this matter.

On August 10, 2015, the Company received a subpoena from the California Attorney General’s office (“California AG”), following the Company’s settlement with the Department of Justice and the General Services Administration during June 2015, which stemmed from a qui tam complaint filed by Relator Dane Smith (“Relator”) under seal titled State of California et al. Ex rel. Smith v. VMware, Inc. et al., in the Superior Court of California, Sacramento County, alleging claims under the California False Claims Act. Following the filing of that lawsuit, the Company received two subpoenas from the California AG. The Company cooperated fully with the California AG in connection with its investigation regarding VMware’s state and local government sales practices covering the period between 2006 and 2013. On October 21, 2020, the parties entered into a settlement agreement pursuant to which the Company agreed to pay an immaterial amount to the State of California to resolve the matter. In the settlement agreement, the Company denied the allegations and denied that it violated any laws. The Company will separately resolve Relator's attorneys’ fees claim, which is not material.

In December 2019, the staff of the Enforcement Division of the SEC requested documents and information related to VMware’s backlog and associated accounting and disclosures. VMware is fully cooperating with the SEC’s investigation and is unable to predict the outcome of this matter at this time.

While VMware believes that it has valid defenses against each of the above legal matters, given the unpredictable nature of legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a material adverse effect on VMware’s condensed consolidated financial statements.

VMware accrues for a liability when a determination has been made that a loss is both probable and the amount of the loss can be reasonably estimated. If only a range can be estimated and no amount within the range is a better estimate than any other amount, an accrual is recorded for the minimum amount in the range. Significant judgment is required in both the determination that the occurrence of a loss is probable and is reasonably estimable. In making such judgments, VMware considers the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs are generally recognized as expense when incurred.

VMware is also subject to other legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business or in connection with business mergers and acquisitions, including claims with respect to commercial, contracting and sales practices, product liability, intellectual property, employment, corporate and securities law, class action, whistleblower and other matters. From time to time, VMware also receives inquiries from and has discussions with government entities and stockholders on various matters. As of October 30, 2020, other than the Cirba litigation, amounts accrued relating to these other matters arising as part of the ordinary course of business were considered not material. VMware does not believe that any liability from any reasonably possible disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on its condensed consolidated financial statements.

Contractual Commitments

From time to time, VMware enters into arrangements with minimum purchase commitments in the ordinary course of business. New material purchase commitments in fiscal 2021 have totaled $1.2 billion. Minimum payments under these new commitments are $250 million for fiscal 2022, $250 million for fiscal 2023 and $700 million prior to the end of fiscal 2024.

E. Business Combinations, Definite-Lived Intangible Assets, Net and Goodwill

Business Combinations

Acquisition of SaltStack, Inc.

During the third quarter of fiscal 2021, VMware completed the acquisition of SaltStack, Inc., a developer of intelligent, event-driven automation software, to broaden VMware’s Cloud Management capabilities from infrastructure to applications. The total purchase price, net of cash acquired, was $51 million. The purchase price primarily included $29 million of identifiable intangible assets and $24 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, have estimated useful lives of three years.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Acquisition of Datrium, Inc.

During the second quarter of fiscal 2021, VMware completed the acquisition of Datrium, Inc., a provider of cloud-native disaster recovery solutions, to broaden the VMware Site Recovery Disaster Recovery as a Service offerings. The total purchase price, net of cash acquired, was $137 million. The purchase price primarily included $25 million of identifiable intangible assets and $91 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, have estimated useful lives of three years to five years.

Acquisition of Lastline, Inc.

During the second quarter of fiscal 2021, VMware completed the acquisition of Lastline, Inc., a provider of network-based security breach detection products and services, to enhance capabilities for network detection and threat analysis on VMware NSX and SD-WAN offerings. The total purchase price, net of cash acquired, was $114 million. The purchase price primarily included $29 million of identifiable intangible assets and $86 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, have estimated useful lives of one year to four years.

Acquisition of Nyansa, Inc.

During the first quarter of fiscal 2021, VMware completed the acquisition of Nyansa, Inc., a developer of artificial intelligence-based network analytics, to accelerate the delivery of end-to-end monitoring and troubleshooting capacities within VMware SD-WAN by VeloCloud. The total purchase price, net of cash acquired, was $38 million. The purchase price primarily included $14 million of identifiable intangible assets and $24 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, have estimated useful lives of one year to four years.

Other Fiscal 2021 Acquisitions

During the nine months ended October 30, 2020, VMware completed three other acquisitions, which were not material individually to the condensed consolidated financial statements. VMware expects these acquisitions to enhance its product features and capabilities for its VMware Carbon Black Cloud and vRealize Operations offerings. The aggregate purchase price for these three acquisitions, net of cash acquired, was $44 million and primarily included $35 million of identifiable intangible assets and $16 million of goodwill, of which $24 million is expected to be deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, have estimated useful lives of one year to five years.

For each of the acquisitions completed during fiscal 2021, the excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which management believes represents synergies expected from combining the technologies of VMware with those of the acquired businesses. The estimated fair value assigned to the tangible assets, identifiable intangible assets, and assumed liabilities were based on management's estimates and assumptions. The initial allocation of the purchase price was based on preliminary valuations and assumptions and is subject to change within the measurement period. VMware expects to finalize the allocation of the purchase price within the measurement period.

The pro forma financial information assuming these fiscal 2021 acquisitions had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.

Definite-Lived Intangible Assets, Net

As of the periods presented, definite-lived intangible assets consisted of the following (amounts in tables in millions):



	October 30, 2020
	Weighted-Average Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	5.4	$	978	$	(461	)	$	517
Customer relationships and customer lists	11.4	733		(259		)	474
Trademarks and tradenames	7.6	132		(73		)	59
Other	2.0	21		(12		)	9
Total definite-lived intangible assets		$	1,864	$	(805	)	$	1,059

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)



	January 31, 2020
	Weighted-Average Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	5.7	$	1,030	$	(488	)	$	542
Customer relationships and customer lists	11.4	739		(200		)	539
Trademarks and tradenames	7.6	131		(58		)	73
Other	2.0	22		(4		)	18
Total definite-lived intangible assets		$	1,922	$	(750	)	$	1,172

Amortization expense on definite-lived intangible assets was $83 million and $244 million during the three and nine months ended October 30, 2020, respectively, and $74 million and $213 million during the three and nine months ended November 1, 2019, respectively.

Based on intangible assets recorded as of October 30, 2020 and assuming no subsequent additions, dispositions or impairment of underlying assets, the remaining estimated annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (table in millions):



Remainder of 2021	$	83
2022	296
2023	245
2024	193
2025	101
Thereafter	141
Total	$	1,059

Goodwill

The following table summarizes the changes in the carrying amount of goodwill during the nine months ended October 30, 2020 (table in millions):



Balance, January 31, 2020	$	9,329
Increase in goodwill due to business combinations and related adjustments	230
Balance, October 30, 2020	$	9,559

F. Realignment

During the third quarter of fiscal 2021, VMware approved a plan to streamline its operations and align resources with its business priorities. As a result of this action, approximately 330 positions were eliminated during the third quarter of fiscal 2021. VMware recognized $44 million and $47 million of severance-related realignment expenses during the three and nine months ended October 30, 2020, respectively, on the condensed consolidated statements of income. Actions associated with this plan are expected to be substantially complete by the end of fiscal 2021.

During the fourth quarter of fiscal 2020, VMware approved a plan to streamline its operations, with plans to better align business priorities and shift positions to lower cost locations. As a result of these actions, $74 million was recognized in accrued expenses and other on the condensed consolidated balance sheet as of January 31, 2020. Actions associated with this plan will be completed in fiscal 2021.

The following table summarizes the activity for the accrued realignment expenses for the nine months ended October 30, 2020 (table in millions):



	For the Nine Months Ended October 30, 2020
	Balance as of January 31, 2020		Realignment Expense		Utilization			Balance as of October 30, 2020
Severance-related costs	$	74	$	47	$	(96	)	$	25

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

G. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common stock outstanding and potentially dilutive securities outstanding during the period, as calculated using the treasury stock method. Potentially dilutive securities primarily include unvested restricted stock units (“RSUs”), including performance stock unit (“PSU”) awards, and stock options, including purchase options under VMware’s employee stock purchase plan, which included Pivotal’s employee stock purchase plan through the date of acquisition. Securities are excluded from the computation of diluted net income per share if their effect would be anti-dilutive. VMware uses the two-class method to calculate net income per share as both classes share the same rights in dividends; therefore, basic and diluted earnings per share are the same for both classes.

The following table sets forth the computations of basic and diluted net income per share during the periods presented (table in millions, except per share amounts and shares in thousands):



	Three Months Ended				Nine Months Ended
	October 30,		November 1,		October 30,		November 1,
	2020		2019		2020		2019
Net income attributable to VMware, Inc.	$	434	$	407	$	1,267	$	6,090

Weighted-average shares, basic for Classes A and B	420,857		416,387		419,758		417,002
Effect of other dilutive securities	2,543		6,648		3,335		8,364
Weighted-average shares, diluted for Classes A and B	423,400		423,035		423,093		425,366
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B	$	1.03	$	0.98	$	3.02	$	14.60
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B	$	1.02	$	0.96	$	3.00	$	14.32

The following table sets forth the weighted-average common share equivalents of Class A common stock that were excluded from the diluted net income per share calculations during the periods presented because their effect would have been anti-dilutive (shares in thousands):



	Three Months Ended		Nine Months Ended
	October 30,	November 1,	October 30,	November 1,
	2020	2019	2020	2019
Anti-dilutive securities:
Employee stock options	140	159	202	10
Restricted stock units	2,968	4,220	4,696	363
Total	3,108	4,379	4,898	373

H. Cash, Cash Equivalents, and Restricted Cash

Cash and Cash Equivalents

Cash and cash equivalents totaled $3.9 billion and $2.9 billion as of October 30, 2020 and January 31, 2020, respectively. Cash equivalents were $3.2 billion as of October 30, 2020 and consisted of money-market funds of $3.1 billion and time deposits of $55 million. Cash equivalents were $2.3 billion as of January 31, 2020 and consisted of money-market funds of $2.2 billion and time deposits of $102 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Restricted Cash

The following table provides a reconciliation of the Company’s cash and cash equivalents, and current and non-current portion of restricted cash reported on the condensed consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash as of October 30, 2020 and January 31, 2020 (table in millions):



	October 30,		January 31,
	2020		2020
Cash and cash equivalents	$	3,898	$	2,915
Restricted cash within other current assets	67		83
Restricted cash within other assets	26		33
Total cash, cash equivalents and restricted cash	$	3,991	$	3,031

Amounts included in restricted cash primarily relate to certain employee-related benefits, as well as amounts related to installment payments to certain employees as part of acquisitions, subject to the achievement of specified future employment conditions.

I. Debt

Unsecured Senior Notes

On April 7, 2020, VMware issued three series of unsecured senior notes pursuant to a public debt offering. The proceeds from the issuance were $2.0 billion, net of debt discount of $3 million and debt issuance costs of $17 million. VMware also has three series of unsecured senior notes issued on August 21, 2017 (collectively with the notes issued April 7, 2020, the “Senior Notes”).

The carrying value of the Senior Notes as of the periods presented was as follows (amounts in millions):



	October 30,		January 31,		Effective Interest Rate
	2020		2020		Effective Interest Rate
Senior Notes issued August 21, 2017:
2.30% Senior Note Due August 21, 2020	$	—	$	1,250	2.56%
2.95% Senior Note Due August 21, 2022	1,500		1,500		3.17%
3.90% Senior Note Due August 21, 2027	1,250		1,250		4.05%