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VMware Reports Fiscal 2018 Third Quarter Results

Year-over-year revenue growth of 11% to $1.98 billion; Continued broad-based strength across product portfolio and geographies

PALO ALTO, CA --(Marketwired - November 30, 2017) - VMware, Inc. (NYSE: VMW), a global leader in cloud infrastructure and business mobility, today announced financial results for fiscal 2018 third quarter:

  • Revenue for the third quarter was $1.98 billion, an increase of 11% from the third quarter of 2016.
  • License revenue for the third quarter was $785 million, an increase of 14% from the third quarter of 2016.
  • GAAP net income for the third quarter was $443 million, or $1.07 per diluted share, up 43% per diluted share compared to $319 million, or $0.75 per diluted share, for the third quarter of 2016. Non-GAAP net income for the quarter was $553 million, or $1.34 per diluted share, up 17% per diluted share compared to $485 million, or $1.14 per diluted share, for the third quarter of 2016.
  • GAAP operating income for the third quarter was $465 million, an increase of 22% from the third quarter of 2016. Non-GAAP operating income for the third quarter was $689 million, an increase of 16% from the third quarter of 2016.
  • Operating cash flows for the third quarter were $970 million. Free cash flows for the quarter were $911 million.
  • Cash, cash equivalents and short-term investments were $11.6 billion, and unearned revenue was $5.6 billion as of November 3, 2017.
  • Total revenue plus sequential change in total unearned revenue grew 21% year-over-year.
  • License revenue plus sequential change in unearned license revenue grew 16% year-over-year.

"Coming off of a strong VMworld season, we are excited about the new products and services we have introduced this past quarter demonstrating our commitment to innovation and solving complex customer problems," commented Pat Gelsinger, chief executive officer, VMware. "We are very pleased with our Q3 results; our strategy continues to resonate with customers as they embrace and leverage our broad portfolio of products and services."

"We had a solid third quarter," said Zane Rowe, executive vice president and chief financial officer, VMware. "Our results reflect continued strength across the portfolio and customers' commitment to VMware as a strategic partner for both on-premises and hybrid-cloud software solutions."

Recent Highlights & Strategic Announcements

• At VMworld 2017, VMware hosted over 30,000 customers, partners and influencers in Las Vegas and Barcelona and introduced a wave of new products and services focused on the key technologies across cloud, mobility, networking and security. Highlights include:

  • VMware unveiled an expanded set of products and services as part of VMware Cloud™ that are available through VMware and partners, including:
    • VMware Cloud on AWS is now initially available in AWS U.S. West region. VMware Cloud on AWS brings VMware's software-defined data center to the AWS Cloud, allowing customers to run applications across operationally consistent VMware vSphere®-based private, public and hybrid cloud environments, with optimized access to AWS services
    • New VMware Cloud Services that enable end-to-end visibility into cloud usage, costs and networks, with consistent networking and security across public clouds and on-premises environments
  • VMware announced its breakthrough solution for securing applications running on virtualized or cloud environments -- VMware AppDefense™. It helps to deliver an intent-based security model and enables least privilege environments for critical applications.
  • VMware and Pivotal Software, Inc., in collaboration with Google Cloud, unveiled Pivotal Container Service™ (PKS), a commercial release of the open source Cloud Foundry Container Runtime technology that, when available, will help Global 2000 companies operationalize Kubernetes.

• VMware announced its intent to acquire VeloCloud Networks, Inc., provider of industry-leading cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. Once the acquisition closes, VeloCloud will enable VMware to build on the success of its industry-leading network virtualization platform -- VMware NSX® -- and expand its networking portfolio to address end-to-end automation, application continuity, branch transformation and security from data center to cloud to edge.

• According to IDC's 2Q2017 Worldwide Quarterly Converged Systems Tracker, VMware, based on sales of hyperconverged solutions running VMware vSAN™, was the largest hyperconverged infrastructure software vendor during the first half of calendar year 2017.(1)

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 Calendar-Year-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 will end February 2, 2018. The period from January 1, 2017 through February 3, 2017 was recorded as a transition period and was reported as a separate period in VMware's Form 10-Q filing for the first quarter of fiscal 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 third quarter (August 5, 2017 through November 3, 2017) to VMware's fiscal 2016 third quarter (July 1, 2016 through September 30, 2016). Sequential changes in total unearned revenue and unearned license revenue for the third quarter of fiscal 2018 compare VMware's total unearned revenue and unearned license revenue balances as of August 4, 2017, the last day of the VMware's fiscal 2018 second quarter, to the respective balances as of November 3, 2017, the last day of VMware's fiscal 2018 third quarter.

About VMware

VMware, a global leader in cloud infrastructure and business mobility, helps customers realize possibilities by accelerating their digital transformation journeys. With VMware solutions, organizations are improving business agility by modernizing data centers and integrating public clouds, driving innovation with modern apps, creating exceptional experiences by empowering the digital workspace, and safeguarding customer trust by transforming security. With 2016 revenue of $7.09 billion, VMware is headquartered in Palo Alto, CA and has over 500,000 customers and 75,000 partners worldwide.

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, vSphere, AppDefense, NSX and VMware vSAN 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) IDC Worldwide Quarterly Converged Systems Tracker, 2Q2017

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 expected benefits to customers of VMware products and services, as well as VMware's intention to acquire VeloCloud Networks, Inc. and the expected complementary nature and strategic advantages of combined product and solutions offerings after the acquisition's close. 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 of the parties to satisfy closing conditions to VMware's acquisition of VeloCloud Networks, Inc. on a timely basis or at all; (xiii) market conditions, regulatory requirements and other corporate considerations that could affect the timing and closing conditions to VMware's acquisition of VeloCloud Networks, Inc.; (xiv) the ability to successfully integrate into VMware acquired companies and assets and smoothly transition services related to divested assets from VMware; (xv) the ability of VMware to realize synergies from Dell; (xvi) disruptions resulting from key management changes; (xvii) fluctuating currency exchange rates; (xviii) changes in VMware's financial condition; and (xix) potential disruptions relating to the transition to Dell's fiscal year and 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.

                                                                            
                CONDENSED CONSOLIDATED STATEMENTS OF INCOME                 
  (amounts in millions, except per share amounts, and shares in thousands)  
                                (unaudited)                                 
                                                                            
                         Three Months Ended           Nine Months Ended     
                     --------------------------  -------------------------- 
                     November 3,  September 30,  November 3,  September 30, 
                         2017          2016          2017          2016     
                     -----------  -------------  -----------  ------------- 
                                                                            
Revenue:                                                                    
  License            $       785  $         691  $     2,127  $       1,907 
  Services                 1,191          1,087        3,485          3,153 
                     -----------  -------------  -----------  ------------- 
Total revenue              1,976          1,778        5,612          5,060 
Operating                                                                   
 expenses(1):                                                               
  Cost of license                                                           
   revenue                    38             40          116            121 
  Cost of services                                                          
   revenue                   240            226          721            658 
  Research and                                                              
   development               449            389        1,298          1,109 
  Sales and                                                                 
   marketing                 607            564        1,862          1,708 
  General and                                                               
   administrative            175            178          486            516 
  Realignment and                                                           
   loss on                                                                  
   disposition                 2              -           88             52 
                     -----------  -------------  -----------  ------------- 
Operating income             465            381        1,041            896 
Investment income             33             21           82             56 
Interest expense             (28)            (7)         (41)           (20)
Other income                                                                
 (expense), net               (2)            (8)          51             (8)
                     -----------  -------------  -----------  ------------- 
Income before income                                                        
 tax                         468            387        1,133            924 
Income tax provision          25             68          124            179 
                     -----------  -------------  -----------  ------------- 
Net income           $       443  $         319  $     1,009  $         745 
                     ===========  =============  ===========  ============= 
                                                                            
Net income per                                                              
 weighted-average                                                           
 share, basic for                                                           
 Classes A and B     $      1.09  $        0.76  $      2.47  $        1.76 
Net income per                                                              
 weighted-average                                                           
 share, diluted for                                                         
 Classes A and B     $      1.07  $        0.75  $      2.44  $        1.75 
                                                                            
Weighted-average                                                            
 shares, basic for                                                          
 Classes A and B         406,733        421,704      407,856        423,341 
Weighted-average                                                            
 shares, diluted for                                                        
 Classes A and B         413,013        425,008      413,957        425,851 
__________                                                                  
  (1) Includes                                                              
   stock-based                                                              
   compensation as                                                          
   follows:                                                                 
  Cost of license                                                           
   revenue           $         -  $           -  $         1  $           2 
  Cost of services                                                          
   revenue                    13             13           38             38 
  Research and                                                              
   development                96             80          266            224 
  Sales and                                                                 
   marketing                  52             51          150            146 
  General and                                                               
   administrative             21             26           58             62 
                                                                            
                                                                            
                   CONDENSED CONSOLIDATED BALANCE SHEETS                    
  (amounts in millions, except per share amounts, and shares in thousands)  
                                (unaudited)                                 
                                                                            
                                                   November 3, December 31, 
                                                       2017        2016     
                                                   ----------- ------------ 
                                                                            
                      ASSETS                                                
Current assets:                                                             
  Cash and cash equivalents                        $     6,012 $      2,790 
  Short-term investments                                 5,600        5,195 
  Accounts receivable, net of allowance for                                 
   doubtful accounts of $2 and $2                          900        1,856 
  Due from related parties, net                            254          132 
  Other current assets                                     160          362 
                                                   ----------- ------------ 
Total current assets                                    12,926       10,335 
Property and equipment, net                              1,031        1,049 
Other assets                                               282          248 
Deferred tax assets                                        641          462 
Intangible assets, net                                     443          517 
Goodwill                                                 4,271        4,032 
                                                   ----------- ------------ 
    Total assets                                   $    19,594 $     16,643 
                                                   =========== ============ 
                                                                            
       LIABILITIES AND STOCKHOLDERS' EQUITY                                 
Current liabilities:                                                        
  Accounts payable                                 $        99 $        125 
  Accrued expenses and other                               926          898 
  Unearned revenue                                       3,500        3,531 
                                                   ----------- ------------ 
Total current liabilities                                4,525        4,554 
Notes payable to Dell                                      270        1,500 
Long-term debt                                           3,962            - 
Unearned revenue                                         2,147        2,093 
Other liabilities                                          416          399 
                                                   ----------- ------------ 
    Total liabilities                                   11,320        8,546 
Contingencies                                                               
Stockholders' equity:                                                       
  Class A common stock, par value $.01; authorized                          
   2,500,000 shares; issued and outstanding                                 
   103,819 and 108,351                                       1            1 
  Class B convertible common stock, par value                               
   $.01; authorized 1,000,000 shares; issued and                            
   outstanding 300,000 shares                                3            3 
  Additional paid-in capital                               879        1,721 
  Accumulated other comprehensive income (loss)              9           (9)
  Retained earnings                                      7,382        6,381 
                                                   ----------- ------------ 
    Total stockholders' equity                           8,274        8,097 
                                                   ----------- ------------ 
      Total liabilities and stockholders' equity   $    19,594 $     16,643 
                                                   =========== ============ 
                                                                            
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS               
                               (in millions)                                
                                (unaudited)                                 
                                                                            
                         Three Months Ended           Nine Months Ended     
                     --------------------------  -------------------------- 
                     November 3,  September 30,  November 3,  September 30, 
                         2017          2016          2017          2016     
                     -----------  -------------  -----------  ------------- 
Operating                                                                   
 activities:                                                                
Net income           $       443  $         319  $     1,009  $         745 
Adjustments to                                                              
 reconcile net                                                              
 income to net cash                                                         
 provided by                                                                
 operating                                                                  
 activities:                                                                
 Depreciation and                                                           
  amortization                80             87          246            261 
 Stock-based                                                                
  compensation               182            170          513            472 
 Excess tax benefits                                                        
  from stock-based                                                          
  compensation                 -             (6)           -             (7)
 Deferred income                                                            
  taxes, net                  65            (19)         100            (24)
 Amortization of                                                            
  debt discount and                                                         
  issuance costs               1              -            1              - 
 Loss on disposition           2              -           80              - 
 Gain on disposition                                                        
  of strategic                                                              
  investments                  -              -          (38)            (1)
 Impairment of                                                              
  strategic                                                                 
  investments                  3              7            5             12 
 Gain on                                                                    
  extinguishment of                                                         
  debt                        (6)             -           (6)             - 
 Loss on Dell stock                                                         
  purchase                     -              -            2              - 
 Loss on disposal of                                                        
  assets                       -              5            1             12 
 Other                         -              -            2             (1)
 Changes in assets                                                          
  and liabilities,                                                          
  net of                                                                    
  acquisitions:                                                             
  Accounts                                                                  
   receivable                290             96          293            513 
  Other assets                (1)             4          (27)           (22)
  Due to/from                                                               
   related parties,                                                         
   net                       (47)            73         (162)            55 
  Accounts payable           (20)           (16)          39            (26)
  Accrued expenses                                                          
   and other                                                                
   liabilities               (96)           (83)          27            (64)
  Income taxes                                                              
   payable                   (70)            10          (63)           (26)
  Unearned revenue           144            (27)         342             18 
                     -----------  -------------  -----------  ------------- 
Net cash provided by                                                        
 operating                                                                  
 activities                  970            620        2,364          1,917 
                     -----------  -------------  -----------  ------------- 
                                                                            
Investing                                                                   
 activities:                                                                
Additions to                                                                
 property and                                                               
 equipment                   (59)           (30)        (164)          (109)
Purchases of                                                                
 available-for-sale                                                         
 securities               (1,186)        (1,126)      (3,339)        (3,337)
Sales of available-                                                         
 for-sale securities         492            790        1,745          1,769 
Maturities of                                                               
 available-for-sale                                                         
 securities                  436            396        1,207          1,015 
Proceeds from                                                               
 disposition of                                                             
 assets                        -              1            -              3 
Purchases of                                                                
 strategic                                                                  
 investments                  (1)            (7)         (33)           (33)
Proceeds from sales                                                         
 of strategic                                                               
 investments                   -              -            6              1 
Business                                                                    
 combinations, net                                                          
 of cash acquired              -              -         (236)           (59)
Net cash paid on                                                            
 disposition of a                                                           
 business                     (7)             -          (47)             - 
Increase in                                                                 
 restricted cash               -              -            -             (2)
                     -----------  -------------  -----------  ------------- 
Net cash provided by                                                        
 (used in) investing                                                        
 activities                 (325)            24         (861)          (752)
                     -----------  -------------  -----------  ------------- 
                                                                            
Financing                                                                   
 activities:                                                                
Proceeds from                                                               
 issuance of common                                                         
 stock                        28             54          104            106 
Net proceeds from                                                           
 issuance of long-                                                          
 term debt                 3,961              -        3,961              - 
Repayment of notes                                                          
 payable to Dell          (1,225)             -       (1,225)             - 
Payment to acquire                                                          
 non-controlling                                                            
 interests                     -              -            -             (4)
Repurchase of common                                                        
 stock                      (855)        (1,016)      (1,280)        (1,016)
Excess tax benefits                                                         
 from stock-based                                                           
 compensation                  -              6            -              7 
Shares repurchased                                                          
 for tax                                                                    
 withholdings on                                                            
 vesting of                                                                 
 restricted stock            (94)           (25)        (271)           (97)
                     -----------  -------------  -----------  ------------- 
Net cash provided by                                                        
 (used in) financing                                                        
 activities                1,815           (981)       1,289         (1,004)
                     -----------  -------------  -----------  ------------- 
Net increase                                                                
 (decrease) in cash                                                         
 and cash                                                                   
 equivalents               2,460           (337)       2,792            161 
Cash and cash                                                               
 equivalents at                                                             
 beginning of the                                                           
 period                    3,552          2,991        3,220          2,493 
                     -----------  -------------  -----------  ------------- 
Cash and cash                                                               
 equivalents at end                                                         
 of the period       $     6,012  $       2,654  $     6,012  $       2,654 
                     ===========  =============  ===========  ============= 
                                                                            
Supplemental                                                                
 disclosures of cash                                                        
 flow information:                                                          
Cash paid for                                                               
 interest            $         3  $           7  $        19  $          21 
Cash paid for taxes,                                                        
 net                          25             76           87            212 
Non-cash items:                                                             
Changes in capital                                                          
 additions, accrued                                                         
 but not paid        $        13  $           4  $        19  $         (15)
                                                                            
                                                                            
        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     
                                                 -------------------------- 
                                                 November 3,  September 30, 
                                                     2017          2016     
                                                 -----------  ------------- 
                                                                            
Total revenue, as reported                       $     1,976  $       1,778 
Sequential change in unearned revenue(1)                 143            (27)
                                                 -----------  ------------- 
Total revenue plus sequential change in unearned                            
 revenue                                         $     2,119  $       1,751 
                                                 ===========  ============= 
                                                                            
                                                 ------------               
Change (%) over prior year, as reported                   21%               
                                                 ------------               
                                                                            
    Growth in License Revenue Plus Sequential Change in Unearned License    
                                  Revenue                                   
--------------------------------------------------------------------------- 
                                                                            
                                                     Three Months Ended     
                                                 -------------------------- 
                                                 November 3,  September 30, 
                                                     2017          2016     
                                                 -----------  ------------- 
                                                                            
Total license revenue, as reported               $       785  $         691 
Sequential change in unearned license revenue            (16)           (30)
                                                 -----------  ------------- 
Total license revenue plus sequential change in                             
 unearned license revenue                        $       769  $         661 
                                                 ===========  ============= 
                                                                            
                                                 ------------               
Change (%) over prior year, as reported                   16%               
                                                 ------------               
                                                                            
(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 condensed consolidated balance sheets.                                 
                                                                            
                                                                            
                   SUPPLEMENTAL UNEARNED REVENUE SCHEDULE                   
                                (in millions)                               
                                 (unaudited)                                
                                                                            
                        November  August   May   December September   June  
                         3, 2017 4, 2017 5, 2017 31, 2016  30, 2016 30, 2016
                        -------- ------- ------- -------- --------- --------
Unearned revenue as                                                         
 reported:                                                                  
  License               $    503 $   519 $   472 $    503 $     425 $    455
  Software maintenance     4,623   4,522   4,323    4,628     4,201    4,189
  Professional services      521     463     440      493       468      478
                        -------- ------- ------- -------- --------- --------
Total unearned revenue  $  5,647 $ 5,504 $ 5,235 $  5,624 $   5,094 $  5,122
                        ======== ======= ======= ======== ========= ========
                                                                            
Change (%) over prior                                                       
 year:                                                                      
  License                 18.4 %  14.2 %  13.8 %   17.4 %     5.1 %  (5.5 )%
  Software maintenance    10.0 %   8.0 %   5.3 %   10.9 %     9.1 %    7.6 %
  Professional services   11.1 %  (3.1)%  (3.7)%    3.9 %     8.6 %    9.2 %
                        -------- ------- ------- -------- --------- --------
Total unearned revenue    10.8 %   7.5 %   5.2 %   10.8 %     8.7 %    6.4 %
                        ======== ======= ======= ======== ========= ========
                                                                            
                                                                            
                  RECONCILIATION OF GAAP TO NON-GAAP DATA                   
                For the Three Months Ended November 3, 2017                 
  (amounts in millions, except per share amounts, and shares in thousands)  
                                (unaudited)                                 
                                                                            
                                                  Employer                  
                                                   Payroll                  
                                                   Taxes                    
                                                on Employee                 
                                   Stock-Based      Stock      Intangible   
                            GAAP  Compensation  Transactions  Amortization  
                           -----  ------------  ------------  ------------  
Operating expenses:                                                         
 Cost of license revenue   $  38             -             -           (26) 
 Cost of services revenue  $ 240           (13)           (1)           (1) 
 Research and development  $ 449           (96)            -             -  
 Sales and marketing       $ 607           (52)           (1)           (6) 
 General and                                                                
  administrative           $ 175           (21)            -             -  
 Realignment and loss on                                                    
  disposition              $   2             -             -             -  
                                                                            
Operating income           $ 465           182             2            33  
Operating margin(2)         23.5%          9.2%          0.1%          1.6% 
                                                                            
Other income (expense),                                                     
 net                       $  (2)            -             -             -  
                                                                            
Income before income tax   $ 468           182             2            33  
                                                                            
Income tax provision       $  25                                            
Tax rate(2)                  5.4%                                           
                                                                            
Net income                 $ 443           182             2            33  
                                                                            
Net income per weighted-                                                    
 average share, diluted                                                     
 for Classes A and B(2)                                                     
 (3)                       $1.07  $       0.44  $          -  $       0.08  
                                                                            
table continued below
                                                                        
                          Acquisition,                                  
                           Disposition                                  
                           and Other                                    
                            Related          Tax           Non-GAAP,    
                              Items     Adjustment (1)  as adjusted (2) 
                          ------------  --------------  --------------- 
Operating expenses:                                                     
 Cost of license revenue             -               -  $            11 
 Cost of services revenue            -               -  $           225 
 Research and development           (1)              -  $           352 
 Sales and marketing                (1)              -  $           550 
 General and                                                            
  administrative                    (4)              -  $           149 
 Realignment and loss on                                                
  disposition                       (2)              -  $             - 
                                                                        
Operating income                     8               -  $           689 
Operating margin(2)                0.4%              -             34.8%
                                                                        
Other income (expense),                                                 
 net                                 3               -  $             2 
                                                                        
Income before income tax            11               -  $           696 
                                                                        
Income tax provision                               118  $           143 
Tax rate(2)                                                        20.5%
                                                                        
Net income                          11            (118) $           553 
                                                                        
Net income per weighted-                                                
 average share, diluted                                                 
 for Classes A and B(2)                                                 
 (3)                      $       0.03  $        (0.28) $          1.34 
                                                                        

(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 413,013 diluted weighted-average shares for Classes A and B.

                                                                            
                  RECONCILIATION OF GAAP TO NON-GAAP DATA                   
                For the Three Months Ended September 30, 2016               
  (amounts in millions, except per share amounts, and shares in thousands)  
                                (unaudited)                                 
                                                                            
                                                  Employer                  
                                                   Payroll                  
                                                   Taxes                    
                                                on Employee                 
                                   Stock-Based      Stock      Intangible   
                            GAAP  Compensation  Transactions  Amortization  
                           -----  ------------  ------------  ------------  
                                                                            
Operating expenses:                                                         
 Cost of license revenue   $  40             -             -           (26) 
 Cost of services revenue  $ 226           (13)            -            (1) 
 Research and development  $ 389           (80)            -             -  
 Sales and marketing       $ 564           (51)           (2)           (5) 
 General and                                                                
  administrative           $ 178           (26)            -             -  
                                                                            
Operating income           $ 381           170             2            32  
Operating margin(2)         21.4%          9.6%          0.1%          1.8% 
                                                                            
Other income (expense),                                                     
 net                       $  (8)            -             -             -  
                                                                            
Income before income tax   $ 387           170             2            32  
                                                                            
Income tax provision       $  68                                            
Tax rate(2)                 17.6%                                           
                                                                            
Net income                 $ 319           170             2            32  
                                                                            
Net income per weighted-                                                    
 average share, diluted                                                     
 for Classes A and B(2)                                                     
 (3)                       $0.75  $       0.40  $       0.01  $       0.08  
                                                                            
table continued below
                                                                        
                          Acquisition,                                  
                           Disposition                                  
                           and Other                                    
                            Related          Tax           Non-GAAP,    
                              Items     Adjustment (1)  as adjusted (2) 
                          ------------  --------------  --------------- 
                                                                        
Operating expenses:                                                     
 Cost of license revenue             -               -  $            13 
 Cost of services revenue            -               -  $           212 
 Research and development            -               -  $           309 
 Sales and marketing                 -               -  $           507 
 General and                                                            
  administrative                    (6)              -  $           145 
                                                                        
Operating income                     6               -  $           592 
Operating margin(2)                0.4%              -             33.3%
                                                                        
Other income (expense),                                                 
 net                                13               -  $             5 
                                                                        
Income before income tax            19               -  $           611 
                                                                        
Income tax provision                                57  $           126 
Tax rate(2)                                                        20.5%
                                                                        
Net income                          19             (57) $           485 
                                                                        
Net income per weighted-                                                
 average share, diluted                                                 
 for Classes A and B(2)                                                 
 (3)                      $       0.04  $        (0.13) $          1.14 
                                                                        

(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 425,008 diluted weighted-average shares for Classes A and B.

                                                                            
                  RECONCILIATION OF GAAP TO NON-GAAP DATA                   
                 For the Nine Months Ended November 3, 2017                 
  (amounts in millions, except per share amounts, and shares in thousands)  
                                (unaudited)                                 
                                                                            
                                                  Employer                  
                                                   Payroll                  
                                                   Taxes                    
                                                on Employee                 
                                   Stock-Based      Stock      Intangible   
                            GAAP  Compensation  Transactions  Amortization  
                           -----  ------------  ------------  ------------  
Operating expenses:                                                         
 Cost of license revenue   $ 116            (1)            -           (79) 
 Cost of services revenue  $ 721           (38)           (1)           (2) 
 Research and development   1,29                                            
                           $   8          (266)           (1)            -  
 Sales and marketing        1,86                                            
                           $   2          (150)           (3)          (15) 
 General and                                                                
  administrative           $ 486           (58)           (1)            -  
 Realignment and loss on                                                    
  disposition              $  88             -             -             -  
                                                                            
Operating income            1,04                                            
                           $   1           513             6            96  
Operating margin(2)         18.5%          9.1%          0.1%          1.7% 
                                                                            
Other income (expense),                                                     
 net                       $  51             -             -             -  
                                                                            
Income before income tax    1,13                                            
                           $   3           513             6            96  
                                                                            
Income tax provision       $ 124                                            
Tax rate(2)                 10.9%                                           
                                                                            
Net income                  1,00                                            
                           $   9           513             6            96  
                                                                            
Net income per weighted-                                                    
 average share, diluted                                                     
 for Classes A and B(2)                                                     
 (3)                       $2.44  $       1.24  $       0.01  $       0.23  
                                                                            
table continued below
                                                                            
                          Acquisition,                                      
                           Disposition                                      
                           and Other      Loss on     Tax       Non-GAAP,   
                            Related        Share   Adjustment   as adjusted 
                              Items     Repurchase     (1)          (2)     
                          ------------  ---------- ----------  ------------ 
Operating expenses:                                                         
 Cost of license revenue             -           -          -  $         35 
 Cost of services revenue            -           -          -  $        679 
 Research and development           (4)          -          -  $      1,028 
 Sales and marketing                (3)          -          -  $      1,692 
 General and                                                                
  administrative                   (17)          -          -  $        409 
 Realignment and loss on                                                    
  disposition                      (88)          -          -  $          - 
                                                                            
Operating income                   112           -          -  $      1,769 
Operating margin(2)                2.0%          -          -          31.5%
                                                                            
Other income (expense),                                                     
 net                               (33)          2          -  $         19 
                                                                            
Income before income tax            79           2          -  $      1,829 
                                                                            
Income tax provision                                      251  $        375 
Tax rate(2)                                                            20.5%
                                                                            
Net income                          79           2       (251) $      1,454 
                                                                            
Net income per weighted-                                                    
 average share, diluted                                                     
 for Classes A and B(2)                                                     
 (3)                      $       0.19  $        - $    (0.61) $       3.51 
                                                                            

(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 413,957 diluted weighted-average shares for Classes A and B.

                                                                            
                  RECONCILIATION OF GAAP TO NON-GAAP DATA                   
                For the Nine Months Ended September 30, 2016                
  (amounts in millions, except per share amounts, and shares in thousands)  
                                (unaudited)                                 
                                                                           
                                                 Employer                  
                                                  Payroll                  
                                                  Taxes                    
                                               on Employee                 
                                  Stock-Based      Stock      Intangible   
                           GAAP  Compensation  Transactions  Amortization  
                          -----  ------------  ------------  ------------  
Operating expenses:                                                        
 Cost of license revenue  $ 121            (2)            -           (76) 
 Cost of services revenue $ 658           (38)           (1)           (2) 
 Research and development  1,10                                            
                          $   9          (224)           (1)            -  
 Sales and marketing       1,70                                            
                          $   8          (146)           (3)          (16) 
 General and                                                               
  administrative          $ 516           (62)           (1)           (1) 
 Realignment              $  52             -             -             -  
                                                                           
Operating income          $ 896           472             6            95  
Operating margin(2)        17.7%          9.3%          0.1%          1.9% 
                                                                           
Other income (expense),                                                    
 net                      $  (8)            -             -             -  
                                                                           
Income before income tax  $ 924           472             6            95  
                                                                           
Income tax provision      $ 179                                            
Tax rate(2)                19.4%                                           
                                                                           
Net income                $ 745           472             6            95  
                                                                           
Net income per weighted-                                                   
 average share, diluted                                                    
 for Classes A and B(2)                                                    
 (3)                      $1.75  $       1.11  $       0.01  $       0.22  
                                                                           
table continued below
                                                                            
                                      Acquisition,                          
                                       Disposition                          
                                       and Other       Tax       Non-GAAP,  
                         Realignment    Related     Adjustment  as adjusted 
                           Charges        Items         (1)         (2)     
                         -----------  ------------  ----------  ----------- 
Operating expenses:                                                         
 Cost of license revenue           -             -           -  $        43 
 Cost of services revenue          -             -           -  $       617 
 Research and development          -             -           -  $       883 
 Sales and marketing               -             -           -  $     1,542 
 General and                                                                
  administrative                   -           (25)          -  $       428 
 Realignment                     (52)            -           -  $         - 
                                                                            
Operating income                  52            25           -  $     1,547 
Operating margin(2)              1.0%          0.5%          -         30.6%
                                                                            
Other income (expense),                                                     
 net                               -            15           -  $         6 
                                                                            
Income before income tax          52            40           -  $     1,589 
                                                                            
Income tax provision                                       145  $       324 
Tax rate(2)                                                            20.4%
                                                                            
Net income                        52            40        (145) $     1,265 
                                                                            
Net income per weighted-                                                    
 average share, diluted                                                     
 for Classes A and B(2)                                                     
 (3)                     $      0.12  $       0.09  $    (0.34) $      2.97 
                                                                            

(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 425,851 diluted weighted-average shares for Classes A and B.

                                                                            
                              REVENUE BY TYPE                               
                               (in millions)                                
                                (unaudited)                                 
                                                                            
                         Three Months Ended           Nine Months Ended     
                     --------------------------  -------------------------- 
                     November 3,  September 30,  November 3,  September 30, 
                         2017          2016          2017          2016     
                     -----------  -------------  -----------  ------------- 
                                                                            
Revenue:                                                                    
 License             $       785  $         691  $     2,127  $       1,907 
 Services:                                                                  
  Software                                                                  
   maintenance             1,023            947        3,011          2,753 
  Professional                                                              
   services                  168            140          474            400 
                     -----------  -------------  -----------  ------------- 
 Total services            1,191          1,087        3,485          3,153 
                     -----------  -------------  -----------  ------------- 
Total revenue        $     1,976  $       1,778  $     5,612  $       5,060 
                     ===========  =============  ===========  ============= 
                                                                            
                                                                            
Percentage of                                                               
 revenue:                                                                   
 License                    39.7%          38.9%        37.9%          37.7%
 Services:                                                                  
  Software                                                                  
   maintenance              51.8%          53.3%        53.7%          54.4%
  Professional                                                              
   services                  8.5%           7.8%         8.4%           7.9%
                     -----------  -------------  -----------  ------------- 
 Total services             60.3%          61.1%        62.1%          62.3%
                     -----------  -------------  -----------  ------------- 
Total revenue              100.0%         100.0%       100.0%         100.0%
                     ===========  =============  ===========  ============= 
                                                                            
                                                                            
                            REVENUE BY GEOGRAPHY                            
                               (in millions)                                
                                (unaudited)                                 
                                                                            
                         Three Months Ended           Nine Months Ended     
                     --------------------------  -------------------------- 
                     November 3,  September 30,  November 3,  September 30, 
                         2017          2016          2017          2016     
                     -----------  -------------  -----------  ------------- 
                                                                            
Revenue:                                                                    
 United States       $       978  $         916  $     2,800  $       2,587 
 International               998            862        2,812          2,473 
                     -----------  -------------  -----------  ------------- 
Total revenue        $     1,976  $       1,778  $     5,612  $       5,060 
                     ===========  =============  ===========  ============= 
                                                                            
                                                                            
Percentage of                                                               
 revenue:                                                                   
 United States              49.5%          51.5%        49.9%          51.1%
 International              50.5%          48.5%        50.1%          48.9%
                     -----------  -------------  -----------  ------------- 
Total revenue              100.0%         100.0%       100.0%         100.0%
                     ===========  =============  ===========  ============= 
                                                                            
                                                                            
        RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES         
                             TO FREE CASH FLOWS                             
                       (A NON-GAAP FINANCIAL MEASURE)                       
                               (in millions)                                
                                (unaudited)                                 
                                                                            
                         Three Months Ended           Nine Months Ended     
                     --------------------------  -------------------------- 
                     November 3,  September 30,  November 3,  September 30, 
                         2017          2016          2017          2016     
                     -----------  -------------  -----------  ------------- 
                                                                            
GAAP cash flows from                                                        
 operating                                                                  
 activities          $       970  $         620  $     2,364  $       1,917 
Capital expenditures         (59)           (30)        (164)          (109)
                     -----------  -------------  -----------  ------------- 
Free cash flows      $       911  $         590  $     2,200  $       1,808 
                     ===========  =============  ===========  ============= 
                                                                            

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, and certain litigation and other contingencies, each as discussed below. 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 and to facilitate comparison of its results to those of peer companies.
  • 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 ongoing 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 ongoing 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 significant tax adjustments. 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.

Contacts:

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

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

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