Annual Revenue Growth of 32% to $3.77 Billion With Fourth Quarter Year-Over-Year Growth of 27% to $1.06 Billion; Annual Operating Margin of 19.5%; Non-GAAP Operating Margin of 31.0%. Fourth Quarter Operating Margin of 20.2%; Non-GAAP Operating Margin of 31.9%; Trailing Twelve Months Operating Cash Flows Growth of 72% to $2.03 Billion; Free Cash Flows Growth of 62% to $1.95 Billion
PALO ALTO, CA--(Marketwire - Jan 23, 2012) - VMware, Inc. (NYSE: VMW), the global leaderin virtualization and cloud infrastructure, today announced financialresults for the fourth quarter and full year of 2011:
- Revenues for the fourth quarter were $1.06 billion, an increase of 27%from the fourth quarter of 2010, and an increase of 26% measured inconstant currency.
- Operating income for the fourth quarter was $214 million, an increaseof 64% from the fourth quarter of 2010. Non-GAAP operating income for thefourth quarter was $338 million, an increase of 37% from the fourth quarterof 2010.
- Net income for the fourth quarter was $200 million, or $0.46 perdiluted share, compared to $120 million, or $0.28 per diluted share, forthe fourth quarter of 2010. Non-GAAP net income for the quarter was $266million, or $0.62 per diluted share, compared to $198 million, or $0.46 perdiluted share, for the fourth quarter of 2010.
- Operating cash flows for the fourth quarter were $561 million, anincrease of 38% from the fourth quarter of 2010. Free cash flows for thequarter were $535 million, an increase of 32% from the fourth quarter of2010.
- Revenues for 2011 were $3.77 billion, an increase of 32% from 2010.
- Operating income for 2011 was $735 million, an increase of 72% from2010. Non-GAAP operating income for 2011 was $1.17 billion, an increase of43% from 2010.
- Net income for 2011 was $724 million, or $1.68 per diluted share,compared to $357 million, or $0.84 per diluted share, for 2010. Non-GAAPnet income for 2011 was $936 million, or $2.17 per diluted share, comparedto $639 million, or $1.51 per diluted share, for 2010.
- Operating cash flows for 2011 were $2.03 billion, an increase of 72%and free cash flows for the year were $1.95 billion, an increase of 62%from 2010.
- Cash, cash equivalents and short-term investments were $4.51 billionand unearned revenue was $2.71 billion as of December 31, 2011.
U.S. revenues for 2011 grew 26% to $1.82 billion from 2010. Internationalrevenues grew 38% to $1.94 billion from 2010.
License revenues for 2011 were $1.84 billion, an increase of 31% from 2010.Service revenues, which include software maintenance and professionalservices, were $1.93 billion for 2011, an increase of 32% from 2010.
"The quarter's strong performance further signals that virtualization isthe foundation for simplifying and automating IT," said Paul Maritz, chiefexecutive officer, VMware. "As customers continue to drive significant ITtransformation, our task remains in providing solutions that go beyond costreduction, yielding business and competitive value."
"We are pleased with our record fourth quarter results," said Mark Peek,chief financial officer, VMware. "Our investments over the years haveclearly paid off and we will continue to take advantage of long-termopportunities ahead. First quarter 2012 revenues are expected to be in therange of $1.015 and $1.040 billion, an increase of 20% to 23% from thefirst quarter 2011. Annual 2012 revenues are expected to be in the rangeof $4.475 and $4.6 billion, an increase of 19% to 22% from 2011, and annuallicense revenues are expected to grow between 11% and 16%."
Recent Highlights & Strategic Announcements
- In October 2011, VMware unveiled three product suites designed tosimplify and automate IT management. With significant enhancements toVMware® vCenter Operations™ and the introduction of new VMware®vFabric Application Management™ and VMware® IT Business Managementsuites, VMware will help customers amplify the value of their virtualenvironments and achieve the agility and economics of cloud computing.
- VMware announced VMware vCenter™ Protect Essentials Plus™, acomplete on-premise management system designed to meet the needs of thesmall and midsize businesses (SMBs) and enhancements to its VMware GoPro™ service, simplifying IT management for SMBs.
- VMware announced VMware® Horizon Mobile, a simple way for ITdepartments to securely provision, manage and de-provision a corporatemobile workspace to an employee's Android device over-the-air, whileenabling the employee to retain the privacy and control of their personalmobile environments. VMware Horizon Mobile is expected to be available inearly 2012.
- In December 2011, VMware announced new VMware View™ Clients forKindle Fire, Mac and Linux, along with updates to its popular VMware ViewClients for Android and iPad. The new VMware View Clients for Mac andLinux enable IT organizations to empower more agile, productive andconnected workforce or school communities by providing an easy-to-access,high-fidelity desktop virtualization experience optimized for the device oftheir choice. The new VMware View™ Clients for Mac and Linux areexpected to be available in early 2012.
VMware plans to host a conference call today to review its fourth quarterand 2011 results and to discuss its financial outlook. The call isscheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed viathe Web at http://ir.vmware.com. The webcast will be available live, and areplay will be available following completion of the live broadcast forapproximately 60 days.
About VMware
VMware is the leader in virtualization and cloud infrastructure solutionsthat enable businesses to thrive in the Cloud Era. Customers rely on VMwareto help them transform the way they build, deliver and consume InformationTechnology resources in a manner that is evolutionary and based on theirspecific needs. With 2011 revenues of $3.77 billion, VMware has more than300,000 customers and 25,000 partners. The company is headquartered inSilicon Valley with offices throughout the world and can be found online atwww.vmware.com.
VMware, VMware vCenter Operations, VMware vFabric Application Management,VMware vCenter Protect Essentials Plus, VMware View and VMware Go Pro areregistered trademarks or trademarks of VMware, Inc. in the United Statesand/or other jurisdictions. Other marks mentioned herein are trademarks,which are proprietary to VMware, Inc. or another company.
Use of Non-GAAP Financial Measures
Reconciliations of non-GAAP financial measures to VMware's financialresults as determined in accordance with GAAP are included at the end ofthis press release following the accompanying financial data. For adescription of these non-GAAP financial measures, including the reasonsmanagement uses each measure, please see the section of the tables titled"About Non-GAAP Financial Measures."
Forward-Looking Statements
This press release contains forward-looking statements including, amongother things, statements regarding VMware's expected first quarter andannual 2012 revenues and annual 2012 license revenue growth, the expectedtransformation of IT and the role and value proposition of virtualizationand VMware solutions in the IT transformation, our ability to takeadvantage of long-term opportunities, the value to customers and theprospect of customer adoption of our new product suites, and the expectedfeatures and benefits and availability of VMware Horizon Mobile and VMwareView Clients for Mac and Linux. These forward-looking statements aresubject to the safe harbor provisions created by the Private SecuritiesLitigation Reform Act of 1995. Actual results could differ materially fromthose projected in the forward-looking statements as a result of certainrisk factors, including but not limited to: (i) adverse changes in generaleconomic or market conditions; (ii) delays or reductions in consumer orinformation technology spending; (iii) competitive factors, including butnot limited to pricing pressures, industry consolidation, entry of newcompetitors into the virtualization and cloud computing markets, and newproduct and marketing initiatives by our competitors; (iv) factors thataffect timing of license revenue recognition such as product announcements,beta programs and product promotions that can cause revenue recognition ofcertain orders to be deferred; (v) our customers' ability to develop, andto transition to, new products and computing strategies such as cloudcomputing and desktop virtualization; (vi) the uncertainty of customeracceptance of emerging technology; (vii) changes in the willingness ofcustomers to enter into longer term licensing and support arrangements;(viii) rapid technological and market changes in virtualization softwareand platforms for cloud and desktop computing; (ix) changes to productdevelopment timelines; (x) VMware's relationship with EMC Corporation andEMC's ability to control matters requiring stockholder approval, includingthe election of VMware's board members; (xi) our ability to protect ourproprietary technology; (xii) our ability to attract and retain highlyqualified employees; (xiii) the successful integration of acquiredcompanies and assets into VMware; and (xiv) fluctuating currency exchangerates. These forward looking statements are based on current expectationsand are subject to uncertainties and changes in condition, significance,value and effect as well as other risks detailed in documents filed withthe Securities and Exchange Commission, including our most recent reportson Form 10-K and Form 10-Q and current reports on Form 8-K that we may filefrom time to time, which could cause actual results to vary fromexpectations. VMware assumes no obligation to, and does not currentlyintend to, update any such forward-looking statements after the date ofthis release.
VMware, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Three Months Ended For the Year Ended December 31, December 31, ------------------------ ------------------------ 2011 2010 2011 2010 ----------- ----------- ----------- -----------Operating activities:Net income $ 200,428 $ 119,880 $ 723,936 $ 357,439Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 86,228 77,090 315,871 260,551 Stock-based compensation, excluding amounts capitalized 80,759 86,501 335,153 291,691 Excess tax benefits from stock-based compensation (26,811) (56,253) (224,503) (223,457) Gain on sale of Terremark investment -- -- (56,000) -- Other 10,626 6,963 21,420 13,083 Changes in assets and liabilities, net of acquisitions: Accounts receivable (336,123) (236,362) (263,366) (77,121) Other assets 15,576 3,999 (75,879) (79,431) Due to/from EMC, net (61,310) (44,439) (18,370) (28,508) Accounts payable (3,960) 4,292 (16,513) 8,881 Accrued expenses 100,353 92,353 115,025 120,880 Income taxes receivable from EMC 23,018 -- 269,258 2,508 Income taxes payable 27,261 46,618 79,183 89,439 Deferred income taxes, net (28,936) (48,513) (19,663) (56,948) Unearned revenue 474,300 354,486 840,081 495,382 ----------- ----------- ----------- -----------Net cash provided by operating activities 561,409 406,615 2,025,633 1,174,389 ----------- ----------- ----------- -----------Investing activities:Additions to property and equipment (52,911) (40,450) (230,091) (131,695)Purchase of leasehold interest -- -- (151,083) --Capitalized software development costs -- (15,955) (73,998) (64,149)Purchases of available- for-sale securities (584,397) (477,201) (2,667,888) (2,101,907)Sales of available-for- sale securities 208,058 265,033 816,351 389,251Maturities of available-for-sale securities 249,706 96,160 974,413 127,054Sale of strategic investments -- -- 78,513 2,648Business acquisitions, net of cash acquired -- -- (303,610) (292,970)Transfer of net assets under common control -- (10,580) (22,393) (185,580)Other investing (815) (4,800) (31,187) (4,594) ----------- ----------- ----------- -----------Net cash used in investing activities (180,359) (187,793) (1,610,973) (2,261,942) ----------- ----------- ----------- -----------Financing activities:Proceeds from issuance of common stock 52,332 75,460 337,618 431,306Repurchase of common stock (35,287) (52,587) (526,203) (338,527)Excess tax benefits from stock-based compensation 26,811 56,253 224,503 223,457Shares repurchased for tax withholdings on vesting of restricted stock (18,979) (16,063) (123,787) (86,179) ----------- ----------- ----------- -----------Net cash provided by (used in) financing activities 24,877 63,063 (87,869) 230,057 ----------- ----------- ----------- -----------Net increase (decrease) in cash and cash equivalents 405,927 281,885 326,791 (857,496)Cash and cash equivalents at beginning of the period 1,549,829 1,347,080 1,628,965 2,486,461 ----------- ----------- ----------- -----------Cash and cash equivalents at end of the period $ 1,955,756 $ 1,628,965 $ 1,955,756 $ 1,628,965 =========== =========== =========== =========== VMware, Inc. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) For the Three Months Ended For the Year Ended December 31, December 31, ---------------------- ---------------------- 2011 2010 2011 2010 ---------- ---------- ---------- ----------Revenues: License $ 513,767 $ 422,343 $1,841,169 $1,401,424 Services 546,535 413,318 1,925,927 1,455,919 ---------- ---------- ---------- ---------- 1,060,302 835,661 3,767,096 2,857,343Operating expenses (1): Cost of license revenues 56,389 50,735 207,398 177,458 Cost of services revenues 110,485 89,616 414,589 316,257 Research and development 216,992 177,671 775,051 652,968 Sales and marketing 385,236 313,045 1,334,346 1,013,281 General and administrative 77,144 73,980 300,541 269,386 ---------- ---------- ---------- ----------Operating income 214,056 130,614 735,171 427,993Investment income 4,685 2,604 16,157 6,633Interest expense with EMC (1,060) (966) (3,906) (4,069)Other income (expense), net (8,815) (7,205) 46,991 (14,182) ---------- ---------- ---------- ----------Income before income taxes 208,866 125,047 794,413 416,375Income tax provision 8,438 5,167 70,477 58,936 ---------- ---------- ---------- ----------Net income $ 200,428 $ 119,880 $ 723,936 $ 357,439 ========== ========== ========== ==========Net income per weighted- average share, basic for Class A and Class B $ 0.47 $ 0.29 $ 1.72 $ 0.87Net income per weighted- average share, diluted for Class A and Class B $ 0.46 $ 0.28 $ 1.68 $ 0.84Weighted-average shares, basic for Class A and Class B 422,873 414,919 421,188 409,805Weighted-average shares, diluted for Class A and Class B 431,375 427,883 431,750 423,446(1) Includes stock-based compensation as follows: Cost of license revenue $ 335 $ 483 $ 1,606 $ 1,653 Cost of services revenues 5,993 5,877 23,389 18,478 Research and development 39,643 47,143 174,264 164,435 Sales and marketing 25,138 23,545 95,688 73,146 General and administrative 9,650 9,453 40,206 33,979 VMware, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited) December 31, December 31, 2011 2010 ------------- ------------- ASSETSCurrent assets: Cash and cash equivalents $ 1,955,756 $ 1,628,965 Short-term investments 2,556,450 1,694,675 Accounts receivable, net of allowance for doubtful accounts of $3,794 and $4,519 882,857 614,726 Due from EMC, net 73,799 55,481 Deferred tax asset 128,471 100,689 Other current assets 80,439 203,119 ------------- -------------Total current assets 5,677,772 4,297,655Property and equipment, net 525,490 419,065Capitalized software development costs, net and other 154,236 151,945Deferred tax asset 156,855 149,126Intangible assets, net 407,375 210,928Goodwill 1,759,080 1,568,600 ------------- ------------- Total assets $ 8,680,808 $ 6,797,319 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable $ 49,747 $ 58,913 Accrued expenses and other 587,650 459,813 Unearned revenues 1,764,109 1,270,426 ------------- -------------Total current liabilities 2,401,506 1,789,152Note payable to EMC 450,000 450,000Unearned revenues 944,309 589,668Other liabilities 114,711 160,056 ------------- ------------- Total liabilities 3,910,526 2,988,876Commitments and contingenciesStockholders' equity: Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 123,610 and 116,701 shares 1,236 1,167 Class B convertible common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares 3,000 3,000 Additional paid-in capital 3,212,264 2,955,971 Accumulated other comprehensive income 1,176 19,635 Retained earnings 1,552,606 828,670 ------------- ------------- Total stockholders' equity 4,770,282 3,808,443 ------------- ------------- Total liabilities and stockholders' equity $ 8,680,808 $ 6,797,319 ============= ============= VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended December 31, 2011 (in thousands, except per share amounts) (unaudited) Employer Payroll Taxes on Stock- Employee Based Stock Compen- Trans- Intangible GAAP sation actions Amortization ---------- ---------- ---------- ----------Operating expenses:Cost of license revenues $ 56,389 (335) (27) (13,187)Cost of services revenues $ 110,485 (5,993) (160) (1,241)Research and development $ 216,992 (39,643) (1,486) (796)Sales and marketing $ 385,236 (25,138) (867) (2,866)General and administrative $ 77,144 (9,650) (383) (37)Operating income $ 214,056 80,759 2,923 18,127Operating margin 20.2% 7.6% 0.3% 1.7%Income before income taxes $ 208,866 80,759 2,923 18,127Income tax provision $ 8,438Tax rate 4.0%Net income $ 200,428 80,759 2,923 18,127Net income per weighted-average share, basic for Class A and Class B (3) $ 0.47 $ 0.19 $ 0.01 $ 0.04Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.46 $ 0.19 $ 0.01 $ 0.04table continued below Capitalized Acquisition Software Related Development Tax Non-GAAP, Items and Costs Adjustment as Other (1) (2) adjusted ---------- ---------- ---------- ----------Operating expenses:Cost of license revenues -- (22,042) -- $ 20,798Cost of services revenues -- -- -- $ 103,091Research and development -- -- -- $ 175,067Sales and marketing -- -- -- $ 356,365General and administrative (197) -- -- $ 66,877Operating income 197 22,042 -- $ 338,104Operating margin -- 2.1% -- 31.9%Income before income taxes 197 22,042 -- $ 332,914Income tax provision 58,145 $ 66,583Tax rate 20.0%Net income 197 22,042 (58,145) $ 266,331Net income per weighted-average share, basic for Class A and Class B (3) $ -- $ 0.06 $ (0.14) $ 0.63Net income per weighted-average share, diluted for Class A and Class B (4) $ -- $ 0.05 $ (0.13) $ 0.62(1) For the fourth quarter of 2011, no costs were capitalized for thedevelopment of software products. Amortization expense from previouslycapitalized amounts was $22.0 million for the fourth quarter of 2011.(2) Non-GAAP financial information for the quarter is adjusted for a taxrate equal to our annual estimated tax rate on non-GAAP income. This rateis based on our estimated annual GAAP income tax rate forecast, adjusted toaccount for items excluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate on non-GAAPincome is determined annually and may be adjusted during the year to takeinto account events or trends that we believe materially impact theestimated annual rate including, but not limited to, significant changesresulting from tax legislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to the differencesin the tax treatment of items excluded from non-GAAP earnings, as well asthe methodology applied to our estimated annual tax rates as describedabove, our estimated tax rate on non-GAAP income may differ from our GAAPtax rate and from our actual tax liabilities.(3) Calculated based upon 422,873 basic weighted-average shares for Class Aand Class B.(4) Calculated based upon 431,375 diluted weighted-average shares for ClassA and Class B. VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended December 31, 2010 (in thousands, except per share amounts) (unaudited) Employer Payroll Taxes on Stock- Employee Acquisition Based Stock Related Compen- Trans- Intangible Items and GAAP sation actions Amortization Other -------- --------- --------- --------- ----------Operating expenses:Cost of license revenues $ 50,735 (483) (21) (8,375) -Cost of services revenues $ 89,616 (5,877) (228) (1,471) -Research and development $177,671 (47,143) (3,299) (627) -Sales and marketing $313,045 (23,545) (1,496) (1,664) -General and administrative $ 73,980 (9,453) (342) (38) (325)Operating income $130,614 86,501 5,386 12,175 325Operating margin 15.6% 10.4% 0.6% 1.5% - Income before income taxes $125,047 86,501 5,386 12,175 325Income tax provision $ 5,167Tax rate 4.1%Net income $119,880 86,501 5,386 12,175 325Net income per weighted-average share, basic for Class A and Class B (3) $ 0.29 $ 0.21 $ 0.01 $ 0.03 $ -Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.28 $ 0.20 $ 0.01 $ 0.03 $ -table continued below Stock- Based Compensation Included Capitalized in Software Capitalized Tax Non-GAAP, Development Software Adjustment as Costs (1) Development (2) adjusted ---------- ---------- ---------- ----------Operating expenses:Cost of license revenues (28,465) - - $ 13,391Cost of services revenues - - - $ 82,040Research and development 18,776 (2,821) - $ 142,557Sales and marketing - - - $ 286,340General and administrative - - - $ 63,822Operating income 9,689 2,821 - $ 247,511Operating margin 1.2% 0.3% - 29.6%Income before income taxes 9,689 2,821 - $ 241,944Income tax provision 38,383 $ 43,550Tax rate 18.0%Net income 9,689 2,821 (38,383)$ 198,394Net income per weighted-average share, basic for Class A and Class B (3) $ 0.02 $ 0.01 $ (0.09)$ 0.48Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.02 $ 0.01 $ (0.09)$ 0.46(1) For the fourth quarter of 2010, we capitalized $18.8million (including $2.8 million of stock-based compensation)of costs incurred for the development of software products.Amortization expense from capitalized amounts was $28.5million for the fourth quarter of 2010.(2) Non-GAAP financial information for the quarter is adjustedfor a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAPincome tax rate forecast, adjusted to account for itemsexcluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate onnon-GAAP income is determined annually and may be adjustedduring the year to take into account events or trends that webelieve materially impact the estimated annual rate including,but not limited to, significant changes resulting from taxlegislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to thedifferences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to ourestimated annual tax rates as described above, our estimatedtax rate on non-GAAP income may differ from our GAAP tax rateand from our actual tax liabilities.(3) Calculated based upon 414,919 basic weighted-average sharesfor Class A and Class B.(4) Calculated based upon 427,883 diluted weighted-averageshares for Class A and Class B. VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Year Ended December 31, 2011 (in thousands, except per share amounts) (unaudited) Employer Payroll Taxes on Stock- Employee Acquisition Based Stock Intangible Related Compen- Trans- Amor- Items and GAAP sation actions tization Other ----------- -------- -------- -------- --------Operating expenses:Cost of license revenues $ 207,398 (1,606) (120) (46,074) --Cost of services revenues $ 414,589 (23,389) (1,368) (4,967) --Research and development $ 775,051 (174,264) (9,724) (3,187) --Sales and marketing $ 1,334,346 (95,688) (5,577) (10,213) --General and administrative $ 300,541 (40,206) (1,580) (145) (2,423)Operating income $ 735,171 335,153 18,369 64,586 2,423Operating margin 19.5% 8.9% 0.5% 1.7% 0.1%Other income (expense), net $ 46,991Income before income taxes $ 794,413 335,153 18,369 64,586 2,423Income tax provision $ 70,477Tax rate 8.9%Net income $ 723,936 335,153 18,369 64,586 2,423Net income per weighted-average share, basic for Class A and Class B (4) $ 1.72 $ 0.80 $ 0.04 $ 0.15 $ 0.01Net income per weighted-average share, diluted for Class A and Class B (5) $ 1.68 $ 0.78 $ 0.04 $ 0.15 $ 0.01table continued below Stock- Based Compensation Included in Capit- Capitalized alized Gain on Software Software Sale of Tax Non-GAAP, Development Develop- Terremark Adjust- as Costs (1) ment (2) ment (3) adjusted ----------- -------- -------- -------- ---------Operating expenses:Cost of license revenues (84,741) -- -- -- $ 74,857 Cost of services revenues -- -- -- -- $ 384,865Research and development 86,426 (12,428) -- -- $ 661,874Sales and marketing -- -- -- -- $1,222,868General and administrative -- -- -- -- $ 256,187Operating income (1,685) 12,428 -- -- $1,166,445Operating margin -- 0.3% -- -- 31.0%Other income (expense), net (56,000) (9,009)Income before income taxes (1,685) 12,428 (56,000) -- $1,169,687Income tax provision 163,459 $ 233,936Tax rate 20.0%Net income (1,685) 12,428 (56,000)(163,459)$ 935,751Net income per weighted-average share, basic for Class A and Class B (4) $ (0.01) $ 0.03 $ (0.13) $ (0.39)$ 2.22Net income per weighted-average share, diluted for Class A and Class B (5) $ (0.01) $ 0.03 $ (0.13) $ (0.38)$ 2.17(1) For the year ended December 31, 2011, we capitalized $86.4 million(including $12.4 million of stock-based compensation) of costs incurred forthe development of software products. Amortization expense from capitalizedamounts was $84.7 million for the year ended December 31, 2011.(2) VMware realized a gain of $56.0 million on the sale of its investmentin Terremark Worldwide, Inc.(3) Non-GAAP financial information for the quarter is adjusted for a taxrate equal to our annual estimated tax rate on non-GAAP income. This rateis based on our estimated annual GAAP income tax rate forecast, adjusted toaccount for items excluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate on non-GAAPincome is determined annually and may be adjusted during the year to takeinto account events or trends that we believe materially impact theestimated annual rate including, but not limited to, significant changesresulting from tax legislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to the differencesin the tax treatment of items excluded from non-GAAP earnings, as well asthe methodology applied to our estimated annual tax rates as describedabove, our estimated tax rate on non-GAAP income may differ from our GAAPtax rate and from our actual tax liabilities.(4) Calculated based upon 421,188 basic weighted-average shares for Class Aand Class B.(5) Calculated based upon 431,750 diluted weighted-average shares for ClassA and Class B. VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Year Ended December 31, 2010 (in thousands, except per share amounts) (unaudited) Employer Payroll Taxes on Stock- Employee Acquisition Based Stock Intangible Related Compen- Transact- Amor- Items and GAAP sation ions tization Other ----------- -------- -------- -------- --------Operating expenses:Cost of license revenues $ 177,458 (1,653) (84) (23,785) --Cost of services revenues $ 316,257 (18,478) (791) (4,670) -- Research and development $ 652,968 (164,435) (9,101) (2,354) --Sales and marketing $ 1,013,281 (73,146) (4,633) (3,797) --General and administrative $ 269,386 (33,979) (1,689) (152) (3,499)Operating income $ 427,993 291,691 16,298 34,758 3,499Operating margin 15.0% 10.2% 0.6% 1.2% 0.1%Income before income taxes $ 416,375 291,691 16,298 34,758 3,499Income tax provision $ 58,936Tax rate 14.2%Net income $ 357,439 291,691 16,298 34,758 3,499Net income per weighted-average share, basic for Class A and Class B (3) $ 0.87 $ 0.71 $ 0.04 $ 0.08 $ 0.01Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.84 $ 0.69 $ 0.04 $ 0.08 $ --table continues below Stock- Based Compensation Included in Capit- Capitalized alized Software Software Tax Non-GAAP, Development Develop- Adjust- as Costs (1) ment ment (2) adjusted ----------- -------- -------- --------Operating expenses:Cost of license revenues (99,522) -- -- $ 52,414Cost of services revenues -- -- -- $ 292,318Research and development 71,666 (10,924) -- $ 537,820Sales and marketing -- -- -- $ 931,705General and administrative -- -- -- $ 230,067Operating income 27,856 10,924 -- $ 813,019Operating margin 1.0% 0.4% -- 28.5%Income before income taxes 27,856 10,924 -- $ 801,401Income tax provision 103,558 $ 162,494Tax rate 20.3%Net income 27,856 10,924 (103,558) $ 638,907Net income per weighted-average share, basic for Class A and Class B (3) $ 0.07 $ 0.03 $ (0.25) $ 1.56Net income per weighted-average share, diluted for Class A and Class B (4) $ 0.07 $ 0.03 $ (0.24) $ 1.51(1) For the year ended December 31 2010, we capitalized $71.7 million(including $10.9 million of stock-based compensation) of costs incurred forthe development of software products. Amortization expense from capitalizedamounts was $99.5 million for the year ended December 31, 2010.(2) Non-GAAP financial information for the quarter is adjusted for a taxrate equal to our annual estimated tax rate on non-GAAP income. This rateis based on our estimated annual GAAP income tax rate forecast, adjusted toaccount for items excluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate on non-GAAPincome is determined annually and may be adjusted during the year to takeinto account events or trends that we believe materially impact theestimated annual rate including, but not limited to, significant changesresulting from tax legislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to the differencesin the tax treatment of items excluded from non-GAAP earnings, as well asthe methodology applied to our estimated annual tax rates as describedabove, our estimated tax rate on non-GAAP income may differ from our GAAPtax rate and from our actual tax liabilities.(3) Calculated based upon 409,805 basic weighted-average shares for Class Aand Class B.(4) Calculated based upon 423,446 diluted weighted-average shares for ClassA and Class B. VMware, Inc. REVENUE BY TYPE (in thousands) (unaudited) For the Three Months Ended For the Year Ended December 31, December 31, ------------------------ ------------------------ 2011 2010 2011 2010 ----------- ----------- ----------- -----------Revenues: License $ 513,767 $ 422,343 $ 1,841,169 $ 1,401,424 Services: Software maintenance 463,489 345,260 1,640,397 1,217,064 Professional services 83,046 68,058 285,530 238,855 ----------- ----------- ----------- ----------- Total services 546,535 413,318 1,925,927 1,455,919 ----------- ----------- ----------- ----------- $ 1,060,302 $ 835,661 $ 3,767,096 $ 2,857,343 =========== =========== =========== ===========Percentage of revenues: License 48.5% 50.5% 48.9% 49.0% Services: Software maintenance 43.7% 41.3% 43.5% 42.6% Professional services 7.8% 8.2% 7.6% 8.4% ----------- ----------- ----------- ----------- Total services 51.5% 49.5% 51.1% 51.0% ----------- ----------- ----------- ----------- 100.0% 100.0% 100.0% 100.0% =========== =========== =========== =========== VMware, Inc. RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES TO FREE CASH FLOWS (A NON-GAAP FINANCIAL MEASURE) For the Three Months Ended December 31, 2011 and 2010 (in thousands) (unaudited) For the Three Months Ended December 31, ------------------------ 2011 2010 ----------- -----------GAAP cash flows from operating activities $ 561,409 $ 406,615Capitalized software development costs - (15,955)Excess tax benefits from stock-based compensation 26,811 56,253Capital expenditures (52,911) (40,450) ----------- -----------Free cash flows $ 535,309 $ 406,463 =========== =========== VMware, Inc. RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES TO FREE CASH FLOWS (A NON-GAAP FINANCIAL MEASURE) For the Year Ended December 31, 2011 and 2010 (in thousands) (unaudited) For the Year Ended December 31, ------------------------ 2011 2010 ----------- -----------GAAP cash flows from operating activities $ 2,025,633 $ 1,174,389Capitalized software development costs (73,998) (64,149)Excess tax benefits from stock-based compensation 224,503 223,457Capital expenditures (230,091) (131,695) ----------- -----------Free cash flows $ 1,946,047 $ 1,202,002 =========== ===========
About Non-GAAP Financial Measures
To provide investors and others with additional information regardingVMware's results, we have disclosed in this press release the followingnon-GAAP financial measures: non-GAAP operating income, non-GAAP netincome, non-GAAP operating margin, free cash flows and trailingtwelve-month free cash flows. VMware has provided a reconciliation of eachnon-GAAP financial measure used in this earnings release to the mostdirectly comparable GAAP financial measure. These non-GAAP financialmeasures differ from GAAP in that they exclude stock-based compensation,employer payroll tax on employee stock transactions, amortization ofintangible assets, acquisition related items, the net effect of theamortization and capitalization of software development costs and the gainthat VMware realized upon its sale of its investment in TerremarkWorldwide, Inc. during the second quarter of fiscal 2011, each as discussedbelow.
VMware's management uses these non-GAAP financial measures to understandand compare operating results across accounting periods, for internalbudgeting and forecasting purposes, for short- and long-term operatingplans, to calculate bonus payments and to evaluate VMware's financialperformance, the performance of its individual functional groups and theability of operations to generate cash. Management believes these non-GAAPfinancial measures reflect VMware's ongoing business in a manner thatallows for meaningful period-to-period comparisons and analysis of trendsin VMware's business, as they exclude expenses and gains that are notreflective of ongoing operating results. Management also believes thatthese non-GAAP financial measures provide useful information to investorsand others in understanding and evaluating VMware's operating results andfuture prospects in the same manner as management and in comparingfinancial results across accounting periods and to those of peer companies.Additionally, management believes information regarding free cash flowsprovides investors and others with an important perspective on the cashavailable to make strategic acquisitions and investments, to repurchaseshares, to fund ongoing operations and to fund other capital expenditures.
Management believes these non-GAAP financial measures are useful toinvestors and others in assessing VMware's operating performance due to thefollowing factors:
- Stock-based compensation. Although stock-based compensation is animportant aspect of the compensation of VMware's employees and executives,determining the fair value of certain of the stock-based instruments weutilize involves a high degree of judgment and estimation and the expenserecorded may bear little resemblance to the actual value realized upon thevesting, future exercise or termination of the related stock-based awards.Furthermore, unlike cash compensation, the value of stock options, which isan element of our ongoing stock-based compensation expense, is determinedusing a complex formula that incorporates factors, such as marketvolatility, that are beyond our control. Management believes it is usefulto exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison ofour results to those of peer companies. In addition, we account forstock-based compensation under GAAP, which requires that we report theexcess income tax benefit from stock-based compensation as a financing cash flow rather than as an operating cash flow. We have added this benefit backto our calculation of free cash flows in order to generally classify cashflows arising from income taxes as operating cash flows.
- Employer payroll tax on employee stock transactions. The amount ofemployer payroll taxes on stock-based compensation is dependent on VMware'sstock price and other factors that are beyond our control and do notcorrelate to the operation of the business.
- Amortization of intangible assets. A portion of the purchase price ofVMware's acquisitions is generally allocated to intangible assets, such asintellectual property, and is subject to amortization. However, VMware doesnot acquire businesses on a predictable cycle. Additionally, the amount ofan acquisition's purchase price allocated to intangible assets and the termof its related amortization can vary significantly and are unique to eachacquisition. Therefore, VMware believes that the presentation of non-GAAPfinancial measures that adjust for the amortization of intangible assets,provides investors and others with a consistent basis for comparison acrossaccounting periods.
- Acquisition related items. Acquisition related items include directcosts of acquisitions, such as transaction fees, which vary significantlyand are unique to each acquisition. Additionally, VMware does not acquirebusinesses on a predictable cycle.
- Capitalized software development costs. Capitalized softwaredevelopment costs encompasses capitalization of development costs and thesubsequent amortization of the capitalized costs over the useful life ofthe product. Amortization and capitalization of software development costscan vary significantly depending upon the timing of products reachingtechnological feasibility and being made generally available. In addition,we exclude the capitalization of software from our free cash flows tobetter convey management's view of operating cash flows. To the extent thatwe capitalize costs under generally accepted accounting guidance, weincrease our GAAP operating cash flows due to f the reduced expenserecognized within net income and paid out in cash during the period.
- Gain on sale of Terremark investment. In the second quarter of 2011,we sold our investment in Terremark Worldwide, Inc., which was acquired byVerizon in a cash transaction, and realized a gain of $56.0 million. Ourinvestment in Terremark was made in connection with a business andtechnical collaboration and was not made to seek an investment gain or tofund our business operations. To the extent that sizeable gains or lossesare realized on such investments, they do not occur on a predictable cycle.Additionally, the timing of the event that triggered our divestment andwhether or not we realized a gain or loss, was not under our control.
- Tax Adjustment. Non-GAAP financial information for the quarter isadjusted for a tax rate equal to our annual estimated tax rate on non-GAAPincome. This rate is based on our estimated annual GAAP income tax rateforecast, adjusted to account for items excluded from GAAP income incalculating our non-GAAP income. Our estimated tax rate on non-GAAP incomeis determined annually and may be adjusted during the year to take intoaccount events or trends that we believe materially impact the estimatedannual rate including, but not limited to, significant changes resultingfrom tax legislation, material changes in the geographic mix of revenuesand expenses and other significant events. Due to the differences in thetax treatment of items excluded from non-GAAP earnings, as well as themethodology applied to our estimated annual tax rates as described above,our estimated tax rate on non-GAAP income may differ from our GAAP tax rateand from our actual tax liabilities.
Additionally, we believe that the non-GAAP financial measure, free cashflows, is meaningful to investors because we review cash flows generatedfrom operations after taking into consideration capital expenditures due tothe fact that these expenditures are considered to be a necessary componentof ongoing operations. As discussed above, we also exclude capitalizationof software development costs and the excess income tax benefit fromstock-based compensation from our measure of free cash flows.
The use of non-GAAP financial measures has certain limitations because theydo not reflect all items of income and expense that affect VMware'soperations. Specifically, in the case of stock-based compensation, ifVMware did not pay out a portion of its compensation in the form ofstock-based compensation and related employer payroll taxes, the cashsalary expense included in costs of revenues and operating expenses wouldbe higher, which would affect VMware's cash position. VMware compensatesfor these limitations by reconciling the non-GAAP financial measures to themost comparable GAAP financial measures. These non-GAAP financial measuresshould be considered in addition to, not as a substitute for or inisolation from, measures prepared in accordance with GAAP and should not beconsidered measures of VMware's liquidity. Further, these non-GAAP measuresmay differ from the non-GAAP information used by other companies, includingpeer companies, and therefore comparability may be limited. Managementencourages investors and others to review VMware's financial information inits entirety and not rely on a single financial measure.
Revenue Growth in Constant Currency
We have invoiced and collected in the Euro, the British Pound, the JapaneseYen, and the Australian Dollar in their respective regions since May 2009.As a result, our total revenues are affected by changes in the U.S. Dollaragainst these currencies. In order to provide a comparable framework forassessing how our business performed excluding the effect of foreigncurrency fluctuations, management analyzes year-over-year revenue growth ona constant currency basis. Since all of our entities operate with the U.S.Dollar as their functional currency, unearned revenues for orders booked incurrencies other than U.S. Dollars are converted into U.S. Dollars at theexchange rate in effect for the month in which each order is booked Wecalculate constant currency on license revenues recognized during thecurrent period that were originally booked in currencies other than U.S.Dollars by comparing the exchange rates at which the revenue was recognizedagainst the exchange rate that was used in the comparable period. We do notcalculate constant currency on services revenues, which include softwaremaintenance revenues and professional services revenues.
Contact Information:
Contacts:
Michael Haase
VMware Investor Relations
mhaase@vmware.com
650-427-2875
Gloria Lee
VMware Investor Relations
glee@vmware.com
650-427-3267
Joan Stone
VMware Global Communications
joanstone@vmware.com
650-427-4436