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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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
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


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