VMware Reports Fourth Quarter and Fiscal Year 2018 Results


Record annual revenue of $7.92 billion, increasing 12% year-over year
Q4 revenue of $2.31 billion, increasing 14% year-over-year

PALO ALTO, Calif., March 01, 2018 (GLOBE NEWSWIRE) -- VMware, Inc. (NYSE:VMW), a leading innovator in enterprise software, today announced financial results for the fourth quarter and full fiscal year 2018:   

Quarterly Review

  • Revenue for the fourth quarter was $2.31 billion, an increase of 14% from the fourth quarter of 2016.
  • License revenue for the fourth quarter was $1.07 billion, an increase of 20% from the fourth quarter of 2016.
     
  • GAAP net loss for the fourth quarter was $440 million, or $1.09 per diluted share, compared to GAAP net income of $441 million, or $1.04 per diluted share, for the fourth quarter of 2016. GAAP results include an estimated net tax expense recognized in connection with the enactment of the Tax Cuts and Jobs Act of $970 million.  An estimated $800 million of this tax relates to the international portion of our earnings, and an estimated $167 million of this tax relates to the re-measurement of deferred taxes using lower U.S. tax rates.  Non-GAAP net income for the quarter was $691 million, or $1.68 per diluted share, up 18% per diluted share compared to $597 million, or $1.43 per diluted share, for the fourth quarter of 2016.
  • GAAP operating income for the fourth quarter was $648 million, an increase of 19% from the fourth quarter of 2016. Non-GAAP operating income for the fourth quarter was $862 million, an increase of 15% from the fourth quarter of 2016.
  • Operating cash flows for the fourth quarter were $847 million. Free cash flows for the quarter were $748 million.
     
  • Total revenue plus sequential change in total unearned revenue grew 14% year-over-year.
     
  • License revenue plus sequential change in unearned license revenue grew 13% year-over-year.

Annual Review

  • Revenue for fiscal year 2018 was $7.92 billion, an increase of 12% from 2016.
  • License revenue for fiscal year 2018 was $3.19 billion, an increase of 14% from 2016.
  • GAAP net income for fiscal year 2018 was $570 million, or $1.38 per diluted share, compared to $1.19 billion, or $2.78 per diluted share, for 2016.  GAAP results include an estimated net tax expense recognized in connection with the enactment of the Tax Cuts and Jobs Act of $970 million.  An estimated $800 million of this tax relates to the international portion of our earnings, and an estimated $167 million of this tax relates to the re-measurement deferred taxes using lower U.S. tax rates. Non-GAAP net income for the year was $2.15 billion, or $5.19 per diluted share, up 18% per diluted share compared to $1.86 billion, or $4.39 per diluted share, for 2016.
  • GAAP operating income for fiscal year 2018 was $1.69 billion, an increase of 17% from 2016. Non-GAAP operating income for the year was $2.63 billion, an increase of 15% from 2016.
  • Operating cash flows for fiscal year 2018 were $3.21 billion. Free cash flows for the year were $2.95 billion.
     
  • Cash, cash equivalents and short-term investments were $11.65 billion, and unearned revenue was $6.25 billion as of February 2, 2018.

“Our strong Q4 and terrific fiscal year 2018 results demonstrate the power of our broad-based portfolio and a strategy that continues to resonate, resulting in strong customer momentum,” commented Pat Gelsinger, chief executive officer, VMware. “As we celebrate our twentieth anniversary this year, we remain committed to delivering breakthrough software innovation that drives customer success.”

“Q4 closed a strong fiscal year 2018 for VMware,” said Zane Rowe, executive vice president and chief financial officer, VMware. “We achieved $7.9 billion in revenue and operating cash flows of over $3.2 billion for the year, while continuing to invest in products and services to drive future growth.”

Recent Highlights & Strategic Announcements

  • VMware announced expanded availability of VMware Cloud on AWS to include the AWS U.S. East (N. Virginia) region in addition to the U.S. West (Oregon) region. VMware and AWS also introduced additional VMware capabilities and support for VMware Site Recovery and VMware vMotion, making it even easier for customers to move, run and protect mission-critical applications at scale.
     
  • VMware completed its acquisition of VeloCloud Networks. This industry-leading, cloud-delivered SD-WAN solution is now a part of VMware’s growing software-based networking portfolio. The acquisition of VeloCloud significantly advances the company’s strategy of enabling customers to run, manage, connect and secure any application on any cloud to any device.
     
  • VMware introduced VMware Cloud Foundation 2.3, the latest release of its integrated hybrid cloud platform. VMware Cloud Foundation 2.3 introduces integrated cloud management platform (CMP) capabilities that provide customers with a simplified path to building a hybrid cloud, based on consistent infrastructure and operations.
     
  • In February, VMware and Pivotal announced the general availability of Pivotal Container Service (PKS). PKS is a Kubernetes-based container service designed to meet the needs of operators and developers by providing native Kubernetes combined with advanced day-1 and day-2 capabilities needed to run Kubernetes at scale in production.
     
  • VMware has been positioned in the Leaders quadrant of Gartner, Inc.’s February 2018 Magic Quadrant for Hyperconverged Infrastructure.(1)
     
  • VMware has been positioned as a leader in The Forrester Wave™: Enterprise Mobility Management, Q4 2017, evaluating enterprise mobility management (EMM) vendors.(2) The company was also named a leader in the “IDC MarketScape: Worldwide Enterprise Mobility Management Software for Ruggedized/IoT Device Deployments 2017 Vendor Assessment.”(3)
     
  • VMware announced the general availability of VMware Pulse IoT Center, the first solution in a new family of VMware Internet of Things (IoT) offerings. VMware Pulse IoT Center is an enterprise grade, IoT device management and monitoring solution that helps Information Technology and Operational Technology organizations to onboard, manage, monitor and secure their IoT use cases from the edge to the cloud.

The company will host a conference call today at 2:00 p.m. PT/ 5:00 p.m. ET to review financial results and business outlook. A live web broadcast of the event will be available on the VMware investor relations website at http://ir.vmware.com. Slides will accompany the web broadcast. The replay of the webcast and slides will be available on the website for two months. In addition, six quarters of historical data for unearned revenue that include year-over-year comparisons will also be made available at http://ir.vmware.com in conjunction with the conference call.

Revised Fiscal CalendarYear-over-Year Comparisons of Quarterly Results and Sequential Change in Unearned Revenue Balances

VMware revised its fiscal calendar effective January 1, 2017.  VMware’s first fiscal year under its revised fiscal calendar began on February 4, 2017 and ended February 2, 2018 (FY2018). The period from January 1, 2017 through February 3, 2017 was recorded as a transition period and was first reported as a separate period in VMware’s Form 10-Q filing for the first quarter of fiscal 2018 and will be reported as a separate period in VMware’s Form 10-K filing for the fiscal year ended February 2, 2018. 

Year-over-year comparisons of quarterly financial results included in this press release and the attached financial tables compare results for VMware’s fiscal 2018 fourth quarter (November 4, 2017 through February 2, 2018) to VMware’s fiscal 2016 fourth quarter (October 1, 2016 through December 31, 2016), and VMware's full fiscal year 2018 (February 4, 2017 through February 2, 2018) to VMware's full fiscal year 2016 (January 1, 2016 through December 31, 2016). Sequential changes in total unearned revenue and unearned license revenue for the fourth quarter of fiscal 2018 compare VMware’s total unearned revenue and unearned license revenue balances as of November 3, 2017, the last day of the VMware’s fiscal 2018 third quarter, to the respective balances as of February 2, 2018, the last day of VMware’s fiscal 2018 fourth quarter.

About VMware

VMware software powers the world’s most complex digital infrastructure. The company’s compute, cloud, mobility, networking and security offerings provide a dynamic and efficient digital foundation to over 500,000 customers globally, aided by an ecosystem of 75,000 partners. Headquartered in Palo Alto, California, this year VMware celebrates twenty years of breakthrough innovation benefiting business and society. For more information please visit https://www.vmware.com/company.html.

Additional Information

VMware’s website is located at www.vmware.com, and its investor relations website is located at http://ir.vmware.com. VMware’s goal is to maintain the investor relations website as a portal through which investors can easily find or navigate to pertinent information about VMware, all of which is made available free of charge. The additional information includes materials that VMware files with the SEC; announcements of investor conferences and events at which its executives talk about its products, services and competitive strategies; webcasts of its quarterly earnings calls, investor conferences and events (archives of which are also available for a limited time); additional information on its financial metrics, including reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures; press releases on quarterly earnings, product and service announcements, legal developments and international news; corporate governance information; and other news, blogs and announcements that VMware may post from time to time that investors may find useful or interesting.

VMware, VMware Cloud, VMware Site Recovery Manager, vMotion, VeloCloud, VMware Cloud Foundation, Pulse and Pulse IoT Center are registered trademarks of VMware, Inc. or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective organizations.

(1) Gartner, “Magic Quadrant for Hyperconverged Infrastructure,” John McArthur et al, 6 February 2018

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

(2) Forrester, David. K Johnson, et. al., The Forrester Wave: Enterprise Mobility Management, Q4 2017, November 30, 2017

(3) IDC, Phil Hochmuth, IDC MarketScape: Worldwide Enterprise Mobility Management Software for Ruggedized/IoT Device Deployments 2017 Vendor Assessment, #US43159917, November 2017

Use of Non-GAAP Financial Measures

Reconciliations of non-GAAP financial measures to VMware’s financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables titled “About Non-GAAP Financial Measures.”

Forward-Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding the momentum of customer interest in and expected benefits to customers of VMware products and services, the estimate of the net tax expense recognized in connection with the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”) and the schedule of preliminary adjustments to select financial data for the first quarter of fiscal 2018 and fiscal year 2018 pursuant to the update to accounting standards related to revenue recognition set forth in ASC 606. These forward-looking statements are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) adverse changes in general economic or market conditions; (ii) delays or reductions in consumer, government and information technology spending; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into the virtualization software and cloud, end user and mobile computing industries, and new product and marketing initiatives by VMware’s competitors; (iv) VMware’s customers’ ability to transition to new products and computing strategies such as cloud computing, desktop virtualization and the software defined data center; (v) VMware’s ability to enter into and maintain strategically effective partnerships and alliances; (vi) the uncertainty of customer acceptance of emerging technology; (vii) rapid technological changes in the virtualization software and cloud, end user and mobile computing industries; (viii) changes to product and service development timelines; (ix) VMware’s relationship with Dell Technologies and Dell’s ability to control matters requiring stockholder approval, including the election of VMware’s board members and matters relating to Dell’s investment in VMware; (x) VMware’s ability to protect its proprietary technology; (xi) VMware’s ability to attract and retain highly qualified employees; (xii) the ability to successfully integrate into VMware acquired companies and assets and smoothly transition services related to divested assets from VMware; (xiii) the ability of VMware to realize synergies from Dell; (xiv) disruptions resulting from key management changes; (xv) fluctuating currency exchange rates; (xvi) changes in VMware’s financial condition; (xvii) continuing analysis of the impact of the Tax Act, for which final calculations may differ materially from estimates, due to, among other things, additional analysis on the application of the tax laws and further clarification and guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies and authorities; (xviii) our continuing evaluation of the effect that ASC 606 will have on our financial statements that may result in the final recast financial statements for the first quarter of fiscal 2018 and fiscal year 2018 differing from preliminary adjustments to select financial data for those periods presented in the attached financial statements; and (xix) potential disruptions relating to further business integrations with Dell. These forward-looking statements are made as of the date of this press release, are based on current expectations and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission, including VMware’s most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. VMware assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

Contacts:

Paul Ziots
VMware Investor Relations
pziots@vmware.com
650-427-3267

Michael Thacker
VMware Global PR
mthacker@vmware.com
650-427-4454

 

 

VMware, Inc.
 
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
         
  Three Months Ended Twelve Months Ended
  February 2, December 31, February 2, December 31,
  2018 2016 2018 2016
         
Revenue:        
License $1,068  $887  $3,195  $2,794 
Services 1,241  1,145  4,727  4,299 
Total revenue 2,309  2,032  7,922  7,093 
Operating expenses(1):        
Cost of license revenue 41  38  157  159 
Cost of services revenue 263  237  984  894 
Research and development 457  395  1,755  1,503 
Sales and marketing 729  646  2,593  2,357 
General and administrative 169  173  654  689 
Realignment and loss on disposition 2    90  52 
Operating income 648  543  1,689  1,439 
Investment income 38  21  120  77 
Interest expense (33) (7) (74) (26)
Other income (expense), net 15  (8) 66  (17)
Income before income tax 668  549  1,801  1,473 
Income tax provision 1,108  108  1,231  287 
Net income (loss) $(440) $441  $570  $1,186 
         
Net income (loss) per weighted-average share, basic for Classes A and B $(1.09) $1.07  $1.40  $2.82 
Net income (loss) per weighted-average share, diluted for Classes A and B $(1.09) $1.04  $1.38  $2.78 
         
Weighted-average shares, basic for Classes A and B 403,383  412,118  406,738  420,520 
Weighted-average shares, diluted for Classes A and B 403,383  416,512  413,368  423,994 
__________        
(1)  Includes stock-based compensation as follows:        
Cost of license revenue $  $1  $2  $2 
Cost of services revenue 12  14  50  52 
Research and development 88  81  355  305 
Sales and marketing 49  49  197  195 
General and administrative 21  20  79  82 


VMware, Inc.
 
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
    
 February 2, February 3,
 2018 2017
    
ASSETS   
Current assets:   
Cash and cash equivalents$5,971  $3,220 
Short-term investments5,682  5,173 
Accounts receivable, net of allowance for doubtful accounts of $2 and $21,312  1,192 
Due from related parties, net532  93 
Other current assets237  173 
Total current assets13,734  9,851 
Property and equipment, net1,074  1,042 
Other assets323  249 
Deferred tax assets346  716 
Intangible assets, net548  507 
Goodwill4,597  4,032 
Total assets$20,622  $16,397 
    
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$15  $53 
Accrued expenses and other1,241  887 
Unearned revenue3,777  3,349 
Total current liabilities5,033  4,289 
Notes payable to Dell270  1,500 
Long-term debt3,964   
Unearned revenue2,473  1,991 
Income tax payable954  281 
Other liabilities152  120 
Total liabilities12,846  8,181 
Contingencies   
Stockholders’ equity:   
Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 103,776 and 110,0601  1 
Class B convertible common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares3  3 
Additional paid-in capital844  1,843 
Accumulated other comprehensive loss(15) (4)
Retained earnings6,943  6,373 
Total stockholders’ equity7,776  8,216 
Total liabilities and stockholders’ equity$20,622  $16,397 


VMware, Inc.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
        
 Three Months Ended Twelve Months Ended
 February 2, December 31, February 2, December 31,
 2018 2016 2018 2016
Operating activities:       
Net income (loss)$(440) $441  $570  $1,186 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:       
Depreciation and amortization89  83  336  345 
Stock-based compensation170  165  683  636 
Excess tax benefits from stock-based compensation  (9)   (15)
Deferred income taxes, net286  16  386  (8)
Loss on disposition1    82   
(Gain) loss on disposition of assets and impairment(13) 6  (45) 30 
Gain on extinguishment of debt    (6)  
(Gain) loss on Dell stock purchase  (8) 2  (8)
Other2  1  3  (2)
Changes in assets and liabilities, net of acquisitions:       
Accounts receivable(406) (737) (113) (224)
Other assets(107) (195) (136) (215)
Due to/from related parties, net(278) (109) (440) (54)
Accounts payable(75) 17  (35) (9)
Accrued expenses and other liabilities298  251  324  187 
Income taxes payable722  11  660  (15)
Unearned revenue598  530  940  547 
Net cash provided by operating activities847  463  3,211  2,381 
        
Investing activities:       
Additions to property and equipment(99) (44) (263) (153)
Purchases of available-for-sale securities(930) (389) (4,269) (3,725)
Sales of available-for-sale securities449  458  2,195  2,227 
Maturities of available-for-sale securities368  294  1,573  1,307 
Purchases of strategic investments(4) (16) (37) (49)
Proceeds from disposition of assets7    13  4 
Business combinations, net of cash acquired(436) (15) (671) (74)
Net cash paid on disposition of a business(5)   (53)  
Increase in restricted cash(7)   (6) (2)
Net cash provided by (used in) investing activities(657) 288  (1,518) (465)
        
Financing activities:       
Proceeds from issuance of common stock18  2  122  109 
Net proceeds from issuance of long-term debt    3,961   
Repayment of notes payable to Dell    (1,225)  
Payment to acquire non-controlling interests      (4)
Repurchase of common stock(169) (559) (1,449) (1,575)
Excess tax benefits from stock-based compensation  9    15 
Shares repurchased for tax withholdings on vesting of restricted stock(80) (67) (351) (164)
Net cash provided by (used in) financing activities(231) (615) 1,058  (1,619)
Net increase (decrease) in cash and cash equivalents(41) 136  2,751  297 
Cash and cash equivalents at beginning of the period6,012  2,654  3,220  2,493 
Cash and cash equivalents at end of the period$5,971  $2,790  $5,971  $2,790 
        
Supplemental disclosures of cash flow information:       
Cash paid for interest$2  $8  $21  $29 
Cash paid for taxes, net89  255  177  467 
Non-cash items:       
Changes in capital additions, accrued but not paid$(9) $8  $10  $(7)
Changes in tax withholdings on vesting of restricted stock, accrued but not paid(12) 2  (4) 3 


VMware, Inc.
 
GROWTH IN REVENUE PLUS SEQUENTIAL CHANGE IN UNEARNED REVENUE
(in millions)
(unaudited)
     
     
Growth in Total Revenue Plus Sequential Change in Unearned Revenue
     
  Three Months Ended
  February 2, December 31,
  2018 2016
     
Total revenue, as reported $2,309  $2,032 
Sequential change in unearned revenue(1) 603  530 
Total revenue plus sequential change in unearned revenue $2,912  $2,562 
     
Change (%) over prior year, as reported 14%  
     
Growth in License Revenue Plus Sequential Change in Unearned License Revenue
     
  Three Months Ended
  February 2, December 31,
  2018 2016
     
Total license revenue, as reported $1,068  $887 
Sequential change in unearned license revenue 20  78 
Total license revenue plus sequential change in unearned license revenue $1,088  $965 
     
Change (%) over prior year, as reported 13%  
     
(1) Sequential change in unearned revenue consists of the change in total unearned revenue from the preceding quarter. Total unearned revenue consists of current and non-current unearned revenue amounts presented in the consolidated balance sheets.


VMware, Inc.
 
SUPPLEMENTAL UNEARNED REVENUE SCHEDULE
(in millions)
(unaudited)
            
            
 February 2, November 3, August 4, May 5, February 3, December 31,
 2018(1) 2017 2017 2017 2017(2) 2016
Unearned revenue as reported:           
License$523  $503  $519  $472  $484  $503 
Software maintenance5,141  4,623  4,522  4,323  4,405  4,628 
Professional services586  521  463  440  451  493 
Total unearned revenue$6,250  $5,647  $5,504  $5,235  $5,340  $5,624 
            
Change (%) over prior year:           
License8.0% 18.4% 14.2% 13.8% 13.1% 17.4%
Software maintenance16.7% 10.0% 8.0% 5.3% 5.5% 10.9%
Professional services30.1% 11.1% (3.1)% (3.7)% (5.0)% 3.9%
Total unearned revenue17.0% 10.8% 7.5% 5.2% 5.2% 10.8%
            
(1) For February 2, 2018, change (%) over prior year was determined using the most comparable prior year period, February 3, 2017.
(2) For February 3, 2017, change (%) over prior year was determined using the most comparable prior year period, December 31, 2015.


VMware, Inc.
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Three Months Ended February 2, 2018
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
        
        
 GAAPStock-Based
Compensation
Employer
Payroll Taxes
on Employee
Stock Transactions
Intangible
Amortization
Acquisition, Disposition
and Other
Related
Items
Tax 
Adjustment(1)
Non-GAAP,
as adjusted(2)
Operating expenses:       
Cost of license revenue$41   (28)  $12 
Cost of services revenue$263 (12)1 (1)  $251 
Research and development$457 (88)  (1) $368 
Sales and marketing$729 (49)(1)(7)1  $674 
General and administrative$169 (21)  (6) $142 
Realignment and loss on disposition$2    (2) $ 
        
Operating income$648 170  36 8  $862 
Operating margin(2)28.1%7.4%%1.6%0.3% 37.3%
Other income (expense), net$15    (13) $2 
Income before income tax$668 170  36 (5) $869 
Income tax provision$1,108     (929)$178 
Tax rate(2)165.8%     20.5%
Net income (loss)$(440)170  36 (5)929 $691 
Net income (loss) per weighted-average share,
diluted for Classes A and B(2) (3) (4)
$(1.09)$0.41 $ $0.09 $(0.01)$2.27 $1.68 

 

(1) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above as well as significant tax adjustments, such as adjustments resulting from the U.S. Tax Cuts and Jobs Act  enacted on December 22, 2017 (the "Tax Act"). Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

(2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data.

(3) GAAP net loss per weighted-average share, diluted, was based upon 403,383 diluted weighted-average shares for Classes A and B. During the three months ended February 2, 2018, VMware incurred a GAAP net loss. As a result, all potentially dilutive securities were anti-dilutive and excluded from the computation of GAAP net loss per weighted-average share, diluted.

(4) Non-GAAP net income per weighted-average share, diluted, was calculated based upon 410,096 diluted weighted-average shares for Classes A and B.


 

VMware, Inc.
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Three Months Ended December 31, 2016
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
         
         
 GAAPStock-Based
Compensation
Employer
Payroll Taxes
on Employee
Stock Transactions
Intangible
Amortization
Acquisition, Disposition
and Other
Related
Items
Gain on Share Repurchase(4)Tax 
Adjustment(1)
Non-GAAP,
as adjusted(2)
Operating expenses:        
Cost of license revenue$38 (1) (24)   $14 
Cost of services revenue$237 (14) (1)   $222 
Research and development$395 (81)     $314 
Sales and marketing$646 (49)(2)(5)   $591 
General and administrative$173 (20)  (9)  $144 
Operating income$543 165 2 30 9   $747 
Operating margin(2)26.7%8.1%0.1%1.5%0.4%  36.8%
Other income (expense), net$(8)   6 (8) $(11)
Income before income tax$549 165 2 30 15 (8) $751 
Income tax provision$108      46 $154 
Tax rate(2)19.6%      20.5%
Net income$441 165 2 30 15 (8)(46)$597 
Net income per weighted-average share,
diluted for Classes A and B(2) (3)
$1.04 $0.40 $ $0.07 $0.04 $ $(0.11)$1.43 

(1) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above as well as significant tax adjustments. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

(2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data.

(3) Calculated based upon 416,512 diluted weighted-average shares for Classes A and B.

(4) In December 2016, VMware entered into a stock purchase agreement with Dell and Dell’s wholly-owned subsidiary, EMC Equity Assets LLC (“EMC”) pursuant to which VMware agreed to purchase $500 million of VMware Class A common stock from EMC. The final aggregate number of shares purchased will be determined based on a volume-weighted average price, less a contractually agreed upon discount. As of December 31, 2016, VMware had made an up-front payment of $375 million, as well as recognized a derivative asset and related $8 million gain in Other income (expense), net. The derivative asset is related to its obligation as of December 31, 2016 to repurchase $125 million of additional shares and is measured at fair value on a recurring basis. In accordance with U.S. GAAP, diluted net income per share does not include the impact of the remeasurement.


VMware, Inc.
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Twelve Months Ended February 2, 2018
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
         
         
 GAAPStock-Based
Compensation
Employer
Payroll Taxes
on Employee
Stock Transactions
Intangible
Amortization
Acquisition, Disposition
and Other
Related
Items
Loss on Share RepurchaseTax 
Adjustment(1)
Non-GAAP,
as adjusted(2)
Operating expenses:        
Cost of license revenue$157 (2) (107)   $48 
Cost of services revenue$984 (50)(1)(2)   $930 
Research and development$1,755 (355)(1) (5)  $1,395 
Sales and marketing$2,593 (197)(3)(23)(2)  $2,367 
General and administrative$654 (79)(1) (23)  $551 
Realignment and loss on disposition$90    (90)  $ 
Operating income$1,689 683 6 132 120   $2,631 
Operating margin(2)21.3%8.6%0.1%1.7%1.5%  33.2%
Other income (expense), net$66    (46)2  $21 
Income before income tax$1,801 683 6 132 74 2  $2,698 
Income tax provision$1,231      (678)$553 
Tax rate(2)68.4%      20.5%
Net income$570 683 6 132 74 2 678 $2,145 
Net income per weighted-average share,
diluted for Classes A and B(2) (3)
$1.38 $1.65 $0.02 $0.32 $0.18 $ $1.64 $5.19 

(1) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above as well as significant tax adjustments, such as adjustments resulting from the Tax Act. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

(2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data.

(3) Calculated based upon 413,368 diluted weighted-average shares for Classes A and B.


VMware, Inc.
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Twelve Months Ended December 31, 2016
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
          
          
 GAAPStock-Based
Compensation
Employer
Payroll Taxes
on Employee
Stock Transactions
Intangible
Amortization
Realignment
Charges
Acquisition, Disposition
and Other
Related
Items
Gain on Share Repurchase(4)Tax 
Adjustment(1)
Non-GAAP,
as adjusted(2)
Operating expenses:         
Cost of license revenue$159 (2) (100)    $57 
Cost of services revenue$894 (52)(1)(2)    $839 
Research and development$1,503 (305)(1)     $1,197 
Sales and marketing$2,357 (195)(5)(22)    $2,134 
General and administrative$689 (82)(1)(1) (34)  $572 
Realignment$52    (52)   $ 
Operating income$1,439 636 8 125 52 34   $2,294 
Operating margin(2)20.3%9.0%0.1%1.8%0.7%0.5%  32.3%
Other income (expense), net$(17)    20 (8) $(5)
Income before income tax$1,473 636 8 125 52 54 (8) $2,340 
Income tax provision$287       191 $478 
Tax rate(2)19.5%       20.4%
Net income$1,186 636 8 125 52 54 (8)(191)$1,862 
Net income per weighted-average share,
diluted for Classes A and B(2) (3)
$2.78 $1.50 $0.02 $0.30 $0.12 $0.13 $ $(0.45)$4.39 

(1) Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above as well as significant tax adjustments. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

(2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data.

(3) Calculated based upon 423,994 diluted weighted-average shares for Classes A and B.

(4) In December 2016, VMware entered into a stock purchase agreement with Dell and Dell’s wholly-owned subsidiary, EMC Equity Assets LLC (“EMC”) pursuant to which VMware agreed to purchase $500 million of VMware Class A common stock from EMC. The final aggregate number of shares purchased will be determined based on a volume-weighted average price, less a contractually agreed upon discount. As of December 31, 2016, VMware had made an up-front payment of $375 million, as well as recognized a derivative asset and related $8 million gain in Other income (expense), net. The derivative asset is related to its obligation as of December 31, 2016 to repurchase $125 million of additional shares and is measured at fair value on a recurring basis. In accordance with U.S. GAAP, diluted net income per share does not include the impact of the remeasurement.


 

VMware, Inc.
 
REVENUE BY TYPE
(in millions)
(unaudited)
         
         
  Three Months Ended Twelve Months Ended
  February 2, December 31, February 2, December 31,
  2018 2016 2018 2016
         
Revenue:        
License $1,068  $887  $3,195  $2,794 
Services:        
Software maintenance 1,076  987  4,088  3,740 
Professional services 165  158  639  559 
Total services 1,241  1,145  4,727  4,299 
Total revenue $2,309  $2,032  $7,922  $7,093 
         
         
Percentage of revenue:        
License 46.3% 43.6% 40.3% 39.4%
Services:                
Software maintenance 46.6% 48.6% 51.6% 52.7%
Professional services 7.1% 7.8% 8.1% 7.9%
Total services 53.7% 56.4% 59.7% 60.6%
Total revenue 100.0% 100.0% 100.0% 100.0%


VMware, Inc.
 
REVENUE BY GEOGRAPHY
(in millions)
(unaudited)
        
        
 Three Months Ended Twelve Months Ended
 February 2, December 31, February 2, December 31,
 2018 2016 2018 2016
        
Revenue:       
United States$1,110  $1,001  $3,911  $3,588 
International1,199  1,031  4,011  3,505 
Total revenue$2,309  $2,032  $7,922  $7,093 
        
        
Percentage of revenue:       
United States48.1% 49.3% 49.4% 50.6%
International51.9% 50.7% 50.6% 49.4%
Total revenue100.0% 100.0% 100.0% 100.0%


 
VMware, Inc.
 
RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES
TO FREE CASH FLOWS
(A NON-GAAP FINANCIAL MEASURE)
(in millions)
(unaudited)
        
        
 Three Months Ended Twelve Months Ended
 February 2, December 31, February 2, December 31,
 2018 2016 2018 2016
        
GAAP cash flows from operating activities$847  $463  $3,211  $2,381 
Capital expenditures(99) (44) (263) (153)
Free cash flows$748  $419  $2,948  $2,228 


 
VMware, Inc.
 
SUPPLEMENTAL SCHEDULE OF PRELIMINARY ASC 606 ADJUSTMENTS
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
 
During May 2014, the Financial Accounting Standards Board issued updates to accounting standards related to revenue recognition ("ASC 606"). VMware will adopt ASC 606 using the full retrospective transition method during the first quarter of fiscal 2019. The following tables present a preliminary view of selected financial information for the first quarter of fiscal 2018 and fiscal year 2018, as adjusted under ASC 606, to provide a comparable comparison to VMware's first quarter of fiscal 2019 and fiscal year 2019 guidance. The Company is continuing to evaluate the effect that ASC 606 will have on our consolidated financial statements, and these preliminary adjustments could differ from the final adjusted consolidated financial statements for the first quarter of fiscal 2018 and fiscal year 2018 to be disclosed in our Form 10-Q for the quarter ended May 4, 2018 and our Form 10-K for the year ended February 1, 2019.
 
Selected Income Statement Captions
         
Selected consolidated income statement captions, which reflect preliminary adjustments under ASC 606 are as follows (tables in millions):
         
  For the Three Months Ended May 5, 2017
  GAAP
As Reported
 Preliminary ASC 606 Adjustments Non-GAAP Adjustments(1) Preliminary Non-GAAP As Adjusted
Revenue:        
License $610  33    $643 
Services $1,126  6    $1,132 
Total revenue(2) $1,736  39    $1,775 
Operating expenses:        
Sales and marketing(3) $586  (8) (54) $524 
Realignment and loss on disposition $51  13  (64) $ 
Operating income $238  34  270  $542 
Operating margin 13.7%     30.5%
Income before income tax $258  34  273  $565 
Income tax provision(4) $26      $116 
Tax rate 10.1%     20.5%
Net income $232      $449 
Net income per weighted-average share, diluted for Classes A and B(5) $0.56      $1.08 


  For the Twelve Months Ended February 2, 2018
  GAAP
As Reported
 Preliminary ASC 606 Adjustments Non-GAAP Adjustments(1) Preliminary Non-GAAP As Adjusted
Revenue:        
License $3,195  8    $3,203 
Services $4,727  (54)   $4,673 
Total revenue(2) $7,922  (46)   $7,876 
Operating expenses:        
Sales and marketing(3) $2,593  (94) (226) $2,273 
Realignment and loss on disposition $90  13  (103) $ 
Operating income $1,689  35  955  $2,679 
Operating margin 21.3%     34.0%
Income before income tax $1,801  35  910  $2,746 
Income tax provision(4) $1,231      $563 
Tax rate 68.4%     20.5%
Net income $570      $2,183 
Net income per weighted-average share, diluted for Classes A and B(5) $1.38      $5.28 

(1) Represents the aggregate non-GAAP adjustments presented in the Reconciliation of GAAP to Non-GAAP data for the three months ended May 5, 2017 and twelve months ended February 2, 2018. Non-GAAP realignment and loss on disposition was also adjusted by $13 million relating to the preliminary ASC 606 adjustment.

(2) Under ASC 606, revenue increased during three months ended May 5, 2017 and decreased during the twelve months ended February 2, 2018, primarily due to changes in the timing of revenue recognition for license and services arrangements where revenue was previously deferred.

(3) Under ASC 606, additional sales commission costs are deferred and are amortized over a longer duration. Adjustments to sales and marketing expense are primarily due to the increased deferral of commission costs, net of related amortization.

(4) Adjustment to non-GAAP income tax provision reflects the non-GAAP tax rate of 20.5% applied against the preliminary ASC 606 adjustments. The non-GAAP income tax rate excludes the impact of discrete items, such as adjustments resulting from the implementation of the Tax Act. The Company is continuing to evaluate the tax impact on adjustments resulting from ASC 606 and a reasonable estimate of the impact to GAAP income tax provision cannot be made at this time.

(5) Calculated based upon 414,018 and 413,368 diluted weighted-average shares for Classes A and B for the three months ended May 5, 2017 and twelve months ended February 2, 2018, respectively.


VMware, Inc.
 
SUPPLEMENTAL SCHEDULE OF PRELIMINARY ASC 606 ADJUSTMENTS (cont.)
 
Selected Balance Sheet Captions
      
Selected consolidated balance sheet captions, which reflect preliminary adjustments under ASC 606 are as follows (table in millions):
 February 2, 2018
 As Reported Preliminary ASC 606 Adjustments Preliminary
As Adjusted
Accounts receivable, net of allowance for doubtful accounts(1)$1,312  70  $1,382 
Other current assets$237  22  $259 
Other assets(2)$323  609  $932 
Accrued expenses and other(3)$1,241  105  $1,346 
Unearned revenue(4)$6,250  (409) $5,841 


(1)
Accounts receivable increased under ASC 606 primarily due to the recognition of unbilled receivables arising from the unconditional right to payment for licenses and services transferred.

(2) Under ASC 606, additional sales commission costs are deferred and are amortized over a longer duration. Adjustments to other assets primarily include the unamortized portion of deferred commission costs.

(3) Accrued expenses and other under ASC 606 includes customer prepayments related to contracts with various cancellation rights. Previously, these customer prepayments were included in unearned revenue.

(4) Generally, revenue that was previously deferred for on-premise license sales is accelerated under ASC 606 and reduces unearned revenue. In addition, customer prepayments on contracts with various cancellation rights are included in accrued expenses and other under ASC 606, which reduces unearned revenue.

The following table summarizes preliminary unearned revenue by type, as adjusted:

 February 2, 2018
 As Reported Preliminary
ASC 606 Adjustments
 Preliminary
As Adjusted
Unearned revenue as reported:     
License$523  $(341) $182 
Software maintenance5,141  (57) 5,084 
Professional services586  (11) 575 
Total unearned revenue$6,250  $(409) $5,841 


 
VMware, Inc.
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Three Months Ended May 5, 2017
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
         
         
 GAAPStock-Based
Compensation
Employer
Payroll Taxes
on Employee
Stock Transactions
Intangible
Amortization
Acquisition, Disposition
and Other
Related
Items
Loss on Share RepurchaseTax
Adjustment(1)
Non-GAAP,
as adjusted(2)
Operating expenses:        
Cost of license revenue$39 (1) (26)   $12 
Cost of services revenue$250 (14)(1)(1)(1)  $233 
Research and development$421 (82)  (3)  $337 
Sales and marketing$586 (48)(2)(4)   $531 
General and administrative$151 (18)  (5)  $128 
Realignment and loss on disposition$51    (51)  $ 
         
Operating income$238 163 3 31 60   $495 
Operating margin(2)13.7%9.4%0.2%1.8%3.5%  28.5%
         
Other income (expense), net$4    1 2  $7 
         
Income before income tax$258 163 3 31 61 2  $518 
         
Income tax provision$26      80 $106 
Tax rate(2)10.1%      20.5%
         
Net income$232 163 3 31 61 2 (80)$412 
         
Net income per weighted-average share, diluted for Classes A and B(2) (3)$0.56 $0.39 $0.01 $0.08 $0.15 $ $(0.19)$0.99 

(1)   Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above as well as significant tax adjustments. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

(2)   Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data.

(3)   Calculated based upon 414,018 diluted weighted-average shares for Classes A and B.

 

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding VMware’s results, VMware has disclosed in this earnings release the following non-GAAP financial measures: non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP income per diluted share, and free cash flows. VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These non-GAAP financial measures, other than free cash flows, differ from GAAP in that they exclude stock-based compensation, employer payroll tax on employee stock transactions, amortization of acquired intangible assets, realignment charges, acquisition, disposition and other-related items, gain or loss on share repurchase, certain litigation and other contingencies and discrete items that impacted our GAAP tax rate, each as discussed below. Our non-GAAP financial measures also reflect the application of our non-GAAP tax rate.  Free cash flows differ from GAAP cash flows from operating activities with respect to the treatment of capital expenditures.

VMware’s management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, to calculate bonus payments and to evaluate VMware’s financial performance, the performance of its individual functional groups and the ability of operations to generate cash. Management believes these non-GAAP financial measures reflect VMware’s ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in VMware’s business, as they exclude charges and gains that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating VMware’s operating results and future prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies. Additionally, management believes information regarding free cash flows provides investors and others with an important perspective on the cash available to make strategic acquisitions and investments, to repurchase shares, to fund ongoing operations and to fund other capital expenditures.

Management believes these non-GAAP financial measures are useful to investors and others in assessing VMware’s operating performance due to the following factors:

  • Stock-based compensation. Stock-based compensation is generally fixed at the time the stock-based instrument is granted and amortized over a period of several years. Although stock-based compensation is an important aspect of the compensation of VMware’s employees and executives, the expense for the fair value of the stock-based instruments VMware utilizes may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of VMware’s core business.
  • Employer payroll tax on employee stock transactions. The amount of employer payroll taxes on stock-based compensation is dependent on VMware’s stock price and other factors that are beyond VMware’s control and do not correlate to the operation of the business.
  • Amortization of acquired intangible assets. A portion of the purchase price of VMware’s acquisitions is generally allocated to intangible assets, such as intellectual property, and is subject to amortization. However, VMware does not acquire businesses on a predictable cycle. Additionally, the amount of an acquisition’s purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition. Therefore, VMware believes that the presentation of non-GAAP financial measures that adjust for the amortization of intangible assets provides investors and others with a consistent basis for comparison across accounting periods.
  • Realignment charges. Realignment charges include workforce reductions, asset impairments, losses on asset disposals and costs to exit facilities. VMware’s management believes it is useful to exclude these items, when significant, as they are not reflective of VMware’s core business and operating results.
  • Acquisition, disposition and other-related items. As VMware does not acquire or dispose of businesses on a predictable cycle and the terms of each transaction can vary significantly and are unique to each transaction, VMware believes it is useful to exclude acquisition, disposition and other-related items when looking for a consistent basis for comparison across accounting periods. These items include:
    • Direct costs of acquisitions and dispositions, such as transaction and advisory fees.
    • Accruals for the portion of merger consideration payable in installments that may be paid in cash or VMware stock, at the option of VMware.
    • Charges recognized for non-recoverable strategic investments or gains recognized on the disposition of strategic investments are included as other-related items.
    • Gains or losses on sale or disposal of distinct lines of business or product offerings, or transactions with features similar to discontinued operations, including recoveries or charges recognized to adjust the fair value of assets that qualify as “held for sale.”
    • Certain costs incurred related to Dell’s acquisition of VMware’s parent company, EMC Corporation.
  • Gain or loss on share repurchase. In December 2016, VMware entered into a stock purchase agreement with Dell and Dell’s wholly-owned subsidiary, EMC Equity Assets LLC, pursuant to which VMware agreed to purchase $500 million of VMware Class A common stock. Through December 31, 2016, VMware had purchased 4.8 million shares for $375 million, as well as recognized a derivative asset related to its obligation to repurchase $125 million of additional shares. The derivative asset was measured at fair value on a recurring basis and resulted in the recognition of gains and losses, which were recorded to other income (expense), net on the condensed consolidated statements of income. On February 15, 2017, the stock purchase agreement with Dell was completed. VMware’s management believes it is useful to exclude the mark-to-market adjustment on the derivative asset, as it is not reflective of VMware’s core business and operating results.
  • Certain litigation and other contingencies. VMware, from time to time, may incur charges or benefits that are outside of the ordinary course of VMware’s business related to litigation and other contingencies. VMware believes it is useful to exclude such charges or benefits because it does not consider such amounts to be part of the ongoing operation of VMware’s business and because of the singular nature of the claims underlying such matters.
  • Tax adjustment. Non-GAAP financial information for the quarter is adjusted for a tax rate equal to VMware’s annual estimated tax rate on non-GAAP income. This rate is based on VMware’s estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating VMware’s non-GAAP income as well as discrete items, such as the estimated net tax expense recognized in the fourth quarter of fiscal 2018 in connection with the enactment of the Tax Cuts and Jobs Act on December 22, 2017. VMware’s estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that VMware management believes materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to VMware’s estimated annual tax rates as described above, the estimated tax rate on non-GAAP income may differ from the GAAP tax rate and from VMware’s actual tax liabilities.

Additionally, VMware’s management believes that the non-GAAP financial measure of free cash flows is meaningful to investors because management reviews cash flows generated from operations after taking into consideration capital expenditures due to the fact that these expenditures are considered to be a necessary component of ongoing operations.

The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense that affect VMware’s operations. Specifically, in the case of stock-based compensation, if VMware did not pay out a portion of its compensation in the form of stock-based compensation and related employer payroll taxes, the cash salary expense included in operating expenses would be higher, which would affect VMware’s cash position. VMware compensates for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP and should not be considered measures of VMware’s liquidity. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited.

Management encourages investors and others to review VMware’s financial information in its entirety and not rely on a single financial measure.