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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 July 31, 2020
OR
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 August 28, 2020, the number of shares of common stock, par value $0.01 per share, of the registrant outstanding was 420,127,174, of which 112,905,338 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.
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
27
 
 
 
Item 3.
41
 
 
 
Item 4.
41
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
43
 
 
 
Item 1A.
43
 
 
 
Item 2.
64
 
 
 
Item 6.
66
 
 
 
 
67
VMware, Pivotal, Datrium, Lastline, vRealize, Carbon Black, VeloCloud, Nyansa, Workspace ONE, CloudHealth, NSX, VMware vSAN, VMware Foundation, vSphere, 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.


2

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
 
Six Months Ended
 
July 31,

August 2,
 
July 31,

August 2,
 
2020

2019(1)
 
2020

2019(1)
Revenue(2)(3):
 
 
 
 
 
 
 
License
$
719

 
$
773

 
$
1,379

 
$
1,419

Subscription and SaaS
631

 
439

 
1,204

 
850

Services
1,525

 
1,420

 
3,026

 
2,813

Total revenue
2,875

 
2,632

 
5,609

 
5,082

Operating expenses(2)(4):
 
 
 
 
 
 
 
Cost of license revenue
35

 
38

 
74

 
74

Cost of subscription and SaaS revenue
132

 
97

 
258

 
191

Cost of services revenue
321

 
306

 
639

 
605

Research and development
679

 
614

 
1,344

 
1,204

Sales and marketing
897

 
888

 
1,814

 
1,756

General and administrative
277

 
223

 
523

 
432

Realignment and loss on disposition

 

 
4

 

Operating income
534

 
466

 
953

 
820

Investment income
1

 
14

 
7

 
28

Interest expense
(55
)
 
(34
)
 
(104
)
 
(68
)
Other income (expense), net
15

 
41

 
8

 
58

Income before income tax
495

 
487

 
864

 
838

Income tax provision (benefit)
48

 
(4,798
)
 
31

 
(4,812
)
Net income
447

 
5,285

 
833

 
5,650

Less: Net loss attributable to non-controlling interests

 
(18
)
 

 
(33
)
Net income attributable to VMware, Inc.
$
447

 
$
5,303

 
$
833

 
$
5,683

Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B
$
1.06

 
$
12.72

 
$
1.99

 
$
13.62

Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B
$
1.06

 
$
12.47

 
$
1.97

 
$
13.34

Weighted-average shares, basic for Classes A and B
420,031

 
416,983

 
419,208

 
417,310

Weighted-average shares, diluted for Classes A and B
423,050

 
425,091

 
422,428

 
426,044

__________
 
 
 
 
 
 
 
(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
$
364

 
$
360

 
$
687

 
$
639

Subscription and SaaS
122

 
79

 
237

 
151

Services
478

 
350

 
921

 
676

(4)   Includes stock-based compensation as follows:
 
 
 
 
 
 
Cost of license revenue
$

 
$

 
$
1

 
$
1

Cost of subscription and SaaS revenue
5

 
3

 
9

 
6

Cost of services revenue
26

 
20

 
48

 
38

Research and development
132

 
109

 
257

 
211

Sales and marketing
88

 
68

 
159

 
129

General and administrative
42

 
34

 
91

 
64

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

3


VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 31,
 
August 2,
 
July 31,
 
August 2,
 
2020
 
2019(1)
 
2020
 
2019(1)
Net income
$
447

 
$
5,285

 
$
833

 
$
5,650

Other comprehensive income (loss):
 
 
 
 
 
 
 
Changes in fair value of effective foreign currency forward contracts:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax provision (benefit) of $1, $—, ($1) and $—
5

 
3

 
(5
)
 
6

Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $1, $—, $— and $—
3

 
(2
)
 

 
(1
)
Net change in fair value of effective foreign currency forward contracts
8

 
1

 
(5
)
 
5

Foreign currency translation adjustments
1

 

 

 

Total other comprehensive income (loss)
9

 
1

 
(5
)
 
5

Comprehensive income, net of taxes
456

 
5,286

 
828

 
5,655

Less: Net loss attributable to the non-controlling interests

 
(18
)
 

 
(33
)
Comprehensive income attributable to VMware, Inc.
$
456

 
$
5,304

 
$
828

 
$
5,688

__________
 
 
 
 
 
 
 
(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.

4


VMware, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
 
July 31,

January 31,
 
2020

2020
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,703

 
$
2,915

Accounts receivable, net of allowance for doubtful accounts of $6 and $7
1,970

 
1,883

Due from related parties, net
897

 
1,457

Other current assets
457

 
436

Total current assets
8,027

 
6,691

Property and equipment, net
1,302

 
1,280

Other assets
2,381

 
2,266

Deferred tax assets
5,809

 
5,556

Intangible assets, net
1,109

 
1,172

Goodwill
9,547

 
9,329

Total assets
$
28,175

 
$
26,294

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
216

 
$
208

Accrued expenses and other
2,195

 
2,151

Current portion of long-term debt and other borrowings
1,500

 
2,747

Unearned revenue
5,215

 
5,218

Total current liabilities
9,126

 
10,324

Note payable to Dell
270

 
270

Long-term debt
4,714

 
2,731

Unearned revenue
4,170

 
4,050

Income tax payable
783

 
817

Operating lease liabilities
781

 
746

Other liabilities
424

 
347

Total liabilities
20,268

 
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 113,248 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
2,070

 
2,000

Accumulated other comprehensive loss
(9
)
 
(4
)
Retained earnings
5,842

 
5,009

Total stockholders’ equity
7,907

 
7,009

Total liabilities and stockholders’ equity
$
28,175

 
$
26,294

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

5


VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended
 
July 31,
 
August 2,
 
2020
 
2019(1)
Operating activities:
 
 
 
Net income
$
833

 
$
5,650

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
496

 
407

Stock-based compensation
565

 
449

Deferred income taxes, net
(196
)
 
(4,955
)
Unrealized (gain) loss on equity securities, net
(6
)
 
(20
)
(Gain) loss on disposition of assets, revaluation and impairment, net
7

 
(4
)
Loss on extinguishment of debt
8

 

Other
(2
)
 
2

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(79
)
 
116

Other current assets and other assets
(345
)
 
(356
)
Due to/from related parties, net
560

 
298

Accounts payable
11

 
7

Accrued expenses and other liabilities
207

 
9

Income taxes payable
(51
)
 
(11
)
Unearned revenue
86

 
443

Net cash provided by operating activities
2,094

 
2,035

Investing activities:
 
 
 
Additions to property and equipment
(163
)
 
(163
)
Purchases of strategic investments
(11
)
 
(8
)
Proceeds from disposition of assets
21

 
22

Business combinations, net of cash acquired, and purchases of intangible assets
(335
)
 
(384
)
Net cash paid on disposition of a business

 
(5
)
Net cash used in investing activities
(488
)
 
(538
)
Financing activities:
 
 
 
Proceeds from issuance of common stock
142

 
152

Net proceeds from issuance of long-term debt
1,979

 

Repayment of current portion of long-term debt
(1,257
)
 

Repurchase of common stock
(311
)
 
(1,037
)
Shares repurchased for tax withholdings on vesting of restricted stock
(276
)
 
(351
)
Payment to acquire non-controlling interests
(91
)
 

Principal payments on finance lease obligations
(1
)
 
(1
)
Net cash provided by (used in) financing activities
185

 
(1,237
)
Net increase in cash, cash equivalents and restricted cash
1,791

 
260

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
$
4,822

 
$
3,856

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
91

 
$
64

Cash paid for taxes, net
282

 
188

Non-cash items:
 
 
 
Changes in capital additions, accrued but not paid
$
(7
)
 
$
(5
)
__________
 
 
 
(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.

6


VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
 
Three Months Ended July 31, 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
 
Balance, May 1, 2020
112

 
$
1

 
307

 
$
3

 
$
2,047

 
$
5,395

 
$
(18
)
 
$
7,428

Proceeds from issuance of common stock
1

 

 

 

 
31

 

 

 
31

Repurchase and retirement of common stock
(1
)
 

 

 

 
(130
)
 

 

 
(130
)
Issuance of restricted stock
2

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(1
)
 

 

 

 
(120
)
 

 

 
(120
)
Stock-based compensation

 

 

 

 
287

 

 

 
287

Amount due from tax sharing arrangement

 

 

 

 
(45
)
 

 

 
(45
)
Total other comprehensive income (loss)

 

 

 

 

 

 
9

 
9

Net income

 

 

 

 

 
447

 

 
447

Balance, July 31, 2020
113

 
$
1

 
307

 
$
3

 
$
2,070

 
$
5,842

 
$
(9
)
 
$
7,907


 
Six Months Ended July 31, 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
 
Balance, January 31, 2020
110

 
$
1

 
307

 
$
3

 
$
2,000

 
$
5,009

 
$
(4
)
 
$
7,009

Proceeds from issuance of common stock
2

 

 

 

 
142

 

 

 
142

Repurchase and retirement of common stock
(2
)
 

 

 

 
(311
)
 

 

 
(311
)
Issuance of restricted stock
5

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(2
)
 

 

 

 
(275
)
 

 

 
(275
)
Stock-based compensation

 

 

 

 
559

 

 

 
559

Amount due from tax sharing arrangement

 

 

 

 
(45
)
 

 

 
(45
)
Total other comprehensive income (loss)

 

 

 

 

 

 
(5
)
 
(5
)
Net income

 

 

 

 

 
833

 

 
833

Balance, July 31, 2020
113

 
$
1

 
307

 
$
3

 
$
2,070

 
$
5,842

 
$
(9
)
 
$
7,907



 
Three Months Ended August 2, 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
 
Balance, May 3, 2019
110

 
$
1

 
300

 
$
3

 
$
2,460

 
$
(714
)
 
$
2

 
$
1,082

 
$
2,834

Proceeds from issuance of common stock

 

 

 

 
3

 

 

 

 
3

Issuance of stock-based awards in acquisition

 

 

 

 
2

 

 

 

 
2

Repurchase and retirement of common stock
(2
)
 

 

 

 
(187
)
 
(259
)
 

 

 
(446
)
Issuance of restricted stock
2

 

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(1
)
 

 

 

 
(141
)
 

 

 

 
(141
)
Stock-based compensation

 

 

 

 
208

 

 

 
26

 
234

Credit from tax sharing arrangement

 

 

 

 
85

 

 

 

 
85

Investment from Dell, net

 

 

 

 
1

 

 

 
1

 
2

Total other comprehensive income (loss)

 

 

 

 

 

 
1

 

 
1

Transactions with Pivotal’s non-controlling stockholders

 

 

 

 
6

 

 

 
6

 
12

Net income (loss)

 

 

 

 

 
5,303

 

 
(18
)
 
5,285

Balance, August 2, 2019
109

 
$
1

 
300

 
$
3

 
$
2,437

 
$
4,330

 
$
3

 
$
1,097

 
$
7,871


 
Six Months Ended August 2, 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
 
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

 

 

 

 
106

 

 

 

 
106

Issuance of stock-based awards in acquisition

 

 

 

 
2

 

 

 

 
2

Repurchase and retirement of common stock
(6
)
 

 

 

 
(778
)
 
(259
)
 

 

 
(1,037
)
Issuance of restricted stock
5

 

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(2
)
 

 

 

 
(348
)
 

 

 

 
(348
)
Stock-based compensation

 

 

 

 
402

 

 

 
47

 
449

Credit from tax sharing arrangement

 

 

 

 
85

 

 

 

 
85

Investment from Dell, net

 

 

 

 
16

 

 

 
11

 
27

Total other comprehensive income (loss)

 

 

 

 

 

 
5

 

 
5

Transactions with Pivotal’s non-controlling stockholders

 

 

 

 
(7
)
 

 

 
46

 
39

Net income (loss)

 

 

 

 

 
5,683

 

 
(33
)
 
5,650

Balance, August 2, 2019
109

 
$
1

 
300

 
$
3

 
$
2,437

 
$
4,330

 
$
3

 
$
1,097

 
$
7,871

__________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.

7


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 July 31, 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.

8

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.
Intra-Group Transfer of Intellectual Property
During the first quarter of fiscal 2021, the Company completed an intra-group transfer of certain of its 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.
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. 
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.

9

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
 
August 2, 2019
 
As Previously Reported
 
Reclassification For New Revenue Line
 
Pivotal Adjustments(1)
 
As Adjusted
Revenue:
 
 
 
 
 
 

License
$
1,011

 
$
(238
)
 
$

 
$
773

Subscription and SaaS

 
306

 
133

 
439

Services
1,428

 
(68
)
 
60

 
1,420

Operating expenses:
 
 
 
 
 
 

Cost of license revenue
50

 
(12
)
 

 
38

Cost of subscription and SaaS revenue

 
73

 
24

 
97

Cost of services revenue
315

 
(61
)
 
52

 
306

 
Six Months Ended
 
August 2, 2019
 
As Previously Reported
 
Reclassification For New Revenue Line
 
Pivotal Adjustments(1)
 
As Adjusted
Revenue:
 
 
 
 
 
 
 
License
$
1,879

 
$
(460
)
 
$

 
$
1,419

Subscription and SaaS

 
591

 
259

 
850

Services
2,826

 
(131
)
 
118

 
2,813

Operating expenses:
 
 
 
 
 
 
 
Cost of license revenue
101

 
(27
)
 

 
74

Cost of subscription and SaaS revenue

 
142

 
49

 
191

Cost of services revenue
617

 
(115
)
 
103

 
605

(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 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.
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 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 $39 million and $26 million as of July 31, 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.

10

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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 July 31, 2020, customer deposits related to customer prepayments and cloud credits of $277 million were included in accrued expenses and other, and $149 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 July 31, 2020 and January 31, 2020 were $24 million and $13 million, respectively. Deferred commissions included in other assets were $994 million and $938 million as of July 31, 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 $106 million and $206 million during the three and six months ended July 31, 2020, respectively, and $89 million and $178 million during the three and six months ended August 2, 2019, respectively.
Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
 
July 31,
 
January 31,
 
2020
 
2020
Unearned license revenue
$
11

 
$
19

Unearned subscription and SaaS revenue
1,619

 
1,534

Unearned software maintenance revenue
6,696

 
6,700

Unearned professional services revenue
1,059

 
1,015

Total unearned revenue
$
9,385

 
$
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 July 31, 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 July 31, 2020 were $2.0 billion and $1.8 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 six months ended July 31, 2020 were $3.7 billion and $3.6 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses. During the three and six months ended July 31, 2020, VMware also acquired $27 million and $30 million, respectively, in unearned revenue in connection with business combinations.
Revenue recognized during the three and six months ended August 2, 2019 was $1.6 billion and $3.1 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.

11

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

As of July 31, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.3 billion, of which approximately 54% 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 the three and six months ended July 31, 2020, revenue from Dell accounted for 34% and 33% of VMware’s consolidated revenue, respectively. During the three and six months ended July 31, 2020, revenue recognized on transactions where Dell acted as an OEM accounted for 12% of revenue from Dell, or 4% of VMware’s consolidated revenue.
During the three and six months ended August 2, 2019, revenue from Dell accounted for 30% and 29% of VMware’s consolidated revenue, respectively. During the three and six months ended August 2, 2019, revenue recognized on transactions where Dell acted as an OEM accounted for 12% of revenue from Dell, or 4% of VMware’s consolidated revenue.
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
 
Six Months Ended

As of

July 31,
 
August 2,
 
July 31,
 
August 2,

July 31,

January 31,

2020
 
2019
 
2020
 
2019

2020

2020
Reseller revenue
$
948


$
778

 
$
1,810

 
$
1,443


$
4,204


$
3,787

Internal-use revenue
16


11

 
35

 
23


33


57

Collaborative technology project receipts
3


2

 
6

 
4


 n/a


 n/a


Customer deposits resulting from transactions with Dell were $203 million and $194 million as of July 31, 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

12

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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
 
Six Months Ended
 
July 31,

August 2,
 
July 31,

August 2,
 
2020

2019
 
2020

2019
Purchases and leases of products and purchases of services(1)
$
45


$
56

 
$
89

 
$
136

Dell subsidiary support and administrative costs
15


27

 
42

 
64


(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.
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 $18 million and $31 million during the three and six months ended July 31, 2020, respectively, and $12 million and $25 million during the three and six months ended August 2, 2019, respectively.
Tax Sharing Agreement with Dell
Payments made to Dell pursuant to the tax sharing agreement were $142 million and $167 million during the three and six months ended July 31, 2020, respectively, and $52 million and $89 million during the three and six months ended August 2, 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 three and six months ended July 31, 2020 was $45 million. The amount recognized in additional paid-in capital during the three and six months ended August 2, 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.

13

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

As a result of the activity under the tax sharing agreement with Dell, amounts due to Dell were $521 million and $529 million as of July 31, 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 $27 million recognized as a component of additional paid-in capital during the six months ended August 2, 2019 and it was not material during the three months ended August 2, 2019.
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):
 
July 31,
 
January 31,
 
2020
 
2020
Due from related parties, current
$
1,027

 
$
1,618

Due to related parties, current(1)
130

 
161

Due from related parties, net, current
$
897


$
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 July 31, 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 July 31, 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 the three and six months ended July 31, 2020 and August 2, 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 are in the early stages of litigation. 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

14

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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, 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 July 31, 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.
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. In this matter, the California AG is investigating the accuracy of the Company’s sales practices with departments and agencies within the State of California. The Company has held meetings with the California AG’s representatives, and discussions are ongoing. 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 material loss is not probable and reasonably estimable. The Company intends to vigorously defend against this matter.
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 July 31, 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 as of July 31, 2020 are $250 million for fiscal 2022, $250 million for fiscal 2023 and $700 million prior to the end of fiscal 2024.

15

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

E. Business Combinations, Definite-Lived Intangible Assets, Net and Goodwill
Business Combinations
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 second quarter of fiscal 2021, VMware completed two 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 two acquisitions, net of cash acquired, was $40 million and primarily included $31 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.
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):
 
July 31, 2020
 
Weighted-Average Useful Lives
(in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Purchased technology
5.5
 
$
970

 
$
(432
)
 
$
538

Customer relationships and customer lists
11.4
 
730

 
(234
)
 
496

Trademarks and tradenames
7.6
 
132

 
(68
)
 
64

Other
2.0
 
21

 
(10
)
 
11

Total definite-lived intangible assets
 
 
$
1,853

 
$
(744
)
 
$
1,109


16

VMware, Inc.
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 $81 million and $161 million during the three and six months ended July 31, 2020, respectively, and $70 million and $140 million during the three and six months ended August 2, 2019, respectively.
Based on intangible assets recorded as of July 31, 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
$
163

2022
284

2023
234

2024
187

2025
101

Thereafter
140

Total
$
1,109


Goodwill
The following table summarizes the changes in the carrying amount of goodwill during the six months ended July 31, 2020 (table in millions):
Balance, January 31, 2020
$
9,329

Increase in goodwill related to business combinations
218

Balance, July 31, 2020
$
9,547


F. 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.

17

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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
 
Six Months Ended
 
July 31,

August 2,
 
July 31,

August 2,
 
2020

2019
 
2020

2019
Net income attributable to VMware, Inc.
$
447

 
$
5,303

 
$
833

 
$
5,683

 
 
 
 
 
 
 
 
Weighted-average shares, basic for Classes A and B
420,031

 
416,983

 
419,208

 
417,310

Effect of other dilutive securities
3,019

 
8,108

 
3,220

 
8,734

Weighted-average shares, diluted for Classes A and B
423,050

 
425,091

 
422,428

 
426,044

Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B
$
1.06

 
$
12.72

 
$
1.99

 
$
13.62

Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B
$
1.06

 
$
12.47

 
$
1.97

 
$
13.34


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
 
Six Months Ended
 
July 31,
 
August 2,
 
July 31,

August 2,
 
2020
 
2019
 
2020

2019
Anti-dilutive securities:
 
 
 
 
 
 
 
Employee stock options
170

 

 
233

 

Restricted stock units
5,727

 
458

 
4,664

 
251

Total
5,897

 
458

 
4,897

 
251


G. Cash, Cash Equivalents, and Restricted Cash
Cash and Cash Equivalents
Cash and cash equivalents totaled $4.7 billion and $2.9 billion as of July 31, 2020 and January 31, 2020, respectively. Cash equivalents were $3.9 billion as of July 31, 2020 and consisted of money-market funds of $3.9 billion and time deposits of $40 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.
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 July 31, 2020 and January 31, 2020 (table in millions):
 
July 31,
 
January 31,
 
2020
 
2020
Cash and cash equivalents
$
4,703

 
$
2,915

Restricted cash within other current assets
85

 
83

Restricted cash within other assets
34

 
33

Total cash, cash equivalents and restricted cash
$
4,822

 
$
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.

18

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

H. 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):
 
July 31,
 
January 31,
 
Effective Interest Rate
 
2020
 
2020
 
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%
Senior Notes issued April 7, 2020:
 
 
 
 
 
4.50% Senior Note Due May 15, 2025
750

 

 
4.70%
4.65% Senior Note Due May 15, 2027
500

 

 
4.80%
4.70% Senior Note Due May 15, 2030
750

 

 
4.86%
Total principal amount
4,750

 
4,000

 
 
Less: unamortized discount
(7
)
 
(5
)
 
 
Less: unamortized debt issuance costs
(29
)
 
(16
)
 
 
Net carrying amount
4,714

 
3,979

 
 
Current portion of long-term debt
&#