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VMware Reports Second Quarter 2014 Results

                  VMware Reports Second Quarter 2014 Results  - Year-over-Year Revenue Growth of 17% to $1.46 Billion  - Year-over-Year Revenue Growth of 18% excluding Pivotal and divestitures in 2013(1)  - Growing customer adoption of Software-Defined Data Center portfolio and growth product lines drive Q2 results  PR Newswire  PALO ALTO, Calif., July 22, 2014  PALO ALTO, Calif., July 22, 2014 /PRNewswire/ -- VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the second quarter of 2014:    oRevenues for the second quarter were $1.46 billion, an increase of 17%     from the second quarter of 2013. Excluding revenues attributable to     Pivotal and all divestitures that occurred in 2013, revenues for the     second quarter increased 18% from the second quarter of 2013.^1    oOperating income for the second quarter was $200 million, a decrease of     26% from the second quarter of 2013, reflecting the impact of the AirWatch     acquisition. Non-GAAP operating income for the second quarter was $428     million, an increase of 3% from the second quarter of 2013, also     reflecting the impact of the AirWatch acquisition.    oNet income for the second quarter was $167 million, or $0.38 per diluted     share, down 32% per diluted share compared to $245 million, or $0.57 per     diluted share, for the second quarter of 2013. Non-GAAP net income for the     quarter was $351 million, or $0.81 per diluted share, up 2% per diluted     share compared to $343 million, or $0.79 per diluted share, for the second     quarter of 2013. Both GAAP and Non-GAAP results on a year-over-year basis     primarily reflect the acquisition of AirWatch, completed in the first     quarter of 2014.    oCash, cash equivalents and short-term investments were $6.64 billion, and     unearned revenues were $4.39 billion as of June 30, 2014.  "We continue to see strong performance across our business, further evidence that VMware is uniquely positioned as IT transitions from client server computing to the mobile cloud era," said Pat Gelsinger, chief executive officer, VMware. "Across the board, customers are turning to VMware solutions to help chart an efficient path to the future without sacrificing the vital needs for security, availability and compliance required by all businesses."  "Our comparable second-quarter revenue grew 18%, reflecting strong customer adoption of our products and services," said Jonathan Chadwick, chief financial officer, VMware. "We are extremely pleased by the performance of our growth businesses, which made significant progress in accelerating our growth and delivering against our long-term strategy."  Recent Highlights & Strategic Announcements    oLast week, VMware announced the expansion of its hybrid cloud service into     Asia-Pacific with two new partnerships in Japan and China. In Japan,     VMware announced a joint venture with SoftBank which launches our first     vCloud Hybrid Service in Asia. This service is available now as a private     beta and will become generally available in Q4 of this year. In China, the     company announced plans with China Telecom for China Telecom to build a     world-class hybrid cloud service in Beijing leveraging VMware's     technology. By the end of the year, VMware operated clouds are expected to     be available in over 75% of the world's cloud market. With approximately     4000 service provider partners, a VMware solution will be available in     essentially every market on the planet.   oIn April, VMware announced VMware vCloud® Hybrid Service™ - Disaster     Recovery, a new cloud-based disaster recovery (DR) service that provides a     continuously available recovery site for VMware virtualized data centers.     This service is simple to set up, can be self-managed and is a fraction of     the cost and complexity of traditional DR solutions.   oVMware and SAP AG announced availability of the SAP HANA® platform on     VMware vSphere® 5.5. By combining the power of SAP HANA with VMware     vSphere 5.5, a foundational component of VMware vCloud® Suite, customers     can innovate and simplify their data centers by achieving faster     time-to-value, higher service levels and lower total cost of ownership     (TCO). SAP HANA support of VMware vSphere 5.5's virtualized environment     will help further simplify and streamline data center operation for     customers implementing a data center virtualization strategy.   oVMware announced VMware Horizon™ 6, an integrated solution that delivers     published applications and desktops on a single platform. Horizon 6 is the     industry's most comprehensive desktop solution, with centralized     management of any type of enterprise application and desktop, including     physical desktops and laptops, virtual desktops and applications and     employee-owned PCs.   oIn the second quarter, VMware received further industry recognition from     Gartner, Inc.         oFor the fifth consecutive year Gartner named VMware a leader in the          2014 x86 Server Virtualization Infrastructure Magic Quadrant (MQ).^2        oIn June, AirWatch by VMware was positioned as a leader in the          Enterprise Mobility Management MQ, and for the second year in a row          has been placed highest on the ability to execute axis. ^ 3         oIn April, VMware appeared in their Data Center Networking MQ for the          first time as a Visionary, with Gartner positioning us furthest on          the completeness of vision axis in this space.^4  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 revenues and unearned revenues, excluding revenues generated each period by the products and services contributed to Pivotal on April 1, 2013 and the products and services associated with the divestitures that occurred in 2013 will also be made available at http://ir.vmware.comin conjunction with the conference call.  ^1 Comparative growth percentages exclude revenues in each period attributable to the products and services contributed to Pivotal Software, Inc. and the products and services associated with divestitures consummated by VMware in 2013. ^2 Gartner, Thomas J. Bittman, Mark A. Margevicius, Philip Dawson, Magic Quadrant for x86 Server Virtualization Infrastructure, July 2, 2014 ^3 Gartner, Terrence Cosgrove, et. al., Magic Quadrant for Enterprise Mobility Management Suites, June 3, 2014 ^4 Gartner, Mark Fabbi, Tim Zimmerman, Andrew Lerner, Magic Quadrant for Data Center Networking, April 24, 2014  About VMware  VMware is the leader in virtualization and cloud infrastructure solutions that enable businesses to thrive in the Cloud Era. Customers rely on VMware to help them transform the way they build, deliver and consume Information Technology resources in a manner that is evolutionary and based on their specific needs. With 2013 revenues of $5.21 billion, VMware has more than 500,000 customers and 75,000 partners. The company is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com.  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, AirWatch, Horizon, VMware Virtual SAN, vCloud, vCloud Hybrid Service and vSphere are registered trademarks or trademarks of VMware in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective organizations.  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 future business performance, continued customer adoption, general availability of VMware's vCloud Hybrid Service in Japan and the China Telecom service, and the expected benefits to customers of newly available VMware products and services, such as Horizon 6, vCloud Hybrid Service – Disaster Recovery and SAP HANA on VMware vSphere. 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) factors that affect timing of license revenue recognition such as product announcements and promotions and beta programs; (v) VMware's customers' ability to transition to, new products and computing strategies such as cloud computing, desktop virtualization and the software defined data center; (vi) the uncertainty of customer acceptance of emerging technology; (vii) changes in the willingness of customers to enter into longer term licensing and support arrangements; (viii) rapid technological changes in the virtualization software and cloud, end user and mobile computing industries; (ix) changes to product and service development timelines; (x) VMware's relationship with EMC Corporation and EMC's ability to control matters requiring stockholder approval, including the election of VMware's board members; (xi) VMware's ability to protect its proprietary technology; (xii) VMware's ability to attract and retain highly qualified employees; (xiii) the successful integration of acquired companies and assets into VMware; and (xiv) fluctuating currency exchange rates. These forward-looking statements 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.  Gartner Statement  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. 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.  Contacts:  Paul Ziots VMwareInvestor Relations pziots@vmware.com 650-427-3267  Joan Stone VMware Global Communications joanstone@vmware.com 650-427-4436    VMware, Inc. CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share amounts, and shares in thousands) (unaudited)                           For the Three Months Ended      For the Six Months                                                           Ended                           June 30,                        June 30,                           2014       2013                 2014       2013 Revenues: License                   $      $        531  $      $                                 614                         1,175    1,019 Services                  843        712                  1,642      1,416 Total revenues            1,457      1,243                2,817      2,435 Operating expenses (1): Cost of license revenues  46         55                   96         112 Cost of services          172        118                  323        243 revenues Research and development  317        261                  610        532 Sales and marketing       544        442                  1,018      859 General and               179        96                   330        194 administrative Realignment charges       (1)        1                    (1)        63 Operating income          200        270                  441        432 Investment income         9          7                    18         15 Interest expense with     (7)        (1)                  (12)       (2) EMC Other income              ―        18                   ―        13 Income before income      202        294                  447        458 taxes Income tax provision      35         49                   81         40 Net income                $      $        245  $      $                                  167                          366     418 Net income per weighted-average share,   $      $       0.57  $      $     basic for Class A and       0.39                         0.85    0.98 Class B Net income per weighted-average share,   $      $       0.57  $      $     diluted for Class A and     0.38                         0.84    0.97 Class B Weighted-average shares, basic for Class A and     430,216    428,336              430,050    428,172 Class B Weighted-average shares, diluted for Class A and   434,199    431,987              434,218    432,406 Class B ______ (1) Includes stock-based compensation as follows:                           $      $   $      $     Cost of license revenues        ―                                                       1                               2          1 Cost of services          11         7                    20         14 revenues Research and development  66         51                   126        113 Sales and marketing       43         33                   84         69 General and               18         12                   35         26 administrative Realignment charges       ―        ―                  ―        6      VMware, Inc. CONSOLIDATED BALANCE SHEETS (amounts in millions, except per share amounts, and shares in thousands) (unaudited)                                         June 30,           December 31,                                         2014               2013 ASSETS Current assets: Cash and cash equivalents               $            $       2,305                                         2,054 Short-term investments                  4,583              3,870 Accounts receivable, net of allowance   1,119              1,220 for doubtful accounts of $2 Due from related parties, net           40                 ― Deferred tax asset                      215                190 Other current assets                    150                96 Total current assets                    8,161              7,681 Property and equipment, net             936                845 Other assets, net                       230                107 Deferred tax asset                      135                60 Intangible assets, net                  799                607 Goodwill                                3,898              3,027 Total assets                            $             $      12,327                                         14,159 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable                        $          $        109                                         102 Accrued expenses and other              826                608 Due to related parties, net             ―                18 Unearned revenues                       2,713              2,558 Total current liabilities               3,641              3,293 Note payable to EMC                     1,500              450 Unearned revenues                       1,676              1,534 Other liabilities                       253                234 Total liabilities                       7,070              5,511 Commitments and contingencies Stockholders' equity: Class A common stock, par value $.01; authorized 2,500,000 shares; issued and                                     1                  1  outstanding 129,983 and 130,349 shares Class B convertible common stock, par value $.01; authorized 1,000,000 shares;                                 3                  3  issued and outstanding 300,000 shares Additional paid-in capital              3,399              3,496 Accumulated other comprehensive income  8                  4 Retained earnings                       3,678              3,312 Total stockholders' equity              7,089              6,816 Total liabilities and stockholders'     $             $      12,327 equity                                  14,159      VMware, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited)                                 For the Three Months  For the Six Months Ended                                 Ended                                 June 30,              June 30,                                 2014        2013      2014          2013 Operating activities: Net income                      $  167    $  245  $  366      $  418 Adjustments to reconcile net income to net cash provided by  operating activities: Depreciation and amortization  81          88        164           179 Stock-based compensation        139         103       267           219 Excess tax benefits from        (11)        (26)      (26)          (48) stock-based compensation Deferred income taxes, net      (50)        37        (79)          9 Non-cash realignment charges    ―         ―       ―           14 Gain on disposition of certain lines of business and other,    ―         (19)      ―           (19) net Other                         ―         1         2             (1) Changes in assets and liabilities, net of acquisitions: Accounts receivable             (288)       (172)     130           208 Other assets                    (13)        (34)      (43)          (75) Due to/from related parties,    (66)        (25)      (33)          34 net Accounts payable                3           26        (8)           18 Accrued expenses                160         92        56            (23) Income taxes receivable from    ―         16        ―           16 EMC Income taxes payable            71          (4)       112           (2) Unearned revenues               216         206       251           263 Net cash provided by operating  409         534       1,159         1,210 activities Investing activities: Additions to property and       (76)        (75)      (153)         (153) equipment Purchases of                    (1,445)     (918)     (1,976)       (1,655) available-for-sale securities Sales of available-for-sale     530         333       941           819 securities Maturities of                   169         188       322           370 available-for-sale securities Proceeds from disposition of    ―         31        ―           31 certain lines of business Purchase of strategic           (37)        (2)       (40)          (2) investments Business acquisitions, net of   ―         ―       (1,068)       (184) cash acquired Increase in restricted cash     ―         (1)       (76)          (2) Other investing                 (3)         ―         (10)          1 Net cash used in investing      (862)       (444)     (2,060)       (775) activities Financing activities: Proceeds from issuance of       11          47        99            115 common stock Proceeds from issuance of note  ―         ―       1,500         ― payable to EMC Repayment of note payable to    ―         ―       (450)         ― EMC Reduction in capital from EMC   ―         ―       (24)          ― Repurchase of common stock      (238)       (120)     (407)         (302) Excess tax benefits from        11          26        26            48 stock-based compensation Shares repurchased for tax withholdings on vesting of      (65)        (43)      (94)          (65) restricted stock Net cash provided by (used in)  (281)       (90)      650           (204) financing activities Net increase (decrease) in      (734)       ―       (251)         231 cash and cash equivalents Cash and cash equivalents at    2,788       1,840     2,305         1,609 beginning of the period Cash and cash equivalents at    $ 2,054    $ 1,840  $ 2,054      $ 1,840 end of the period      VMware, Inc. SUPPLEMENTAL REVENUES SCHEDULE (INCLUDES RECONCILIATION OF GAAP TO NON-GAAP DATA) (in millions) (unaudited)                   For the Three Months   For the Three Months Ended                   Ended                   June 30,    March      December     September  June   March                               31,        31,          30,        30,    31,                   2014        2014       2013         2013       2013   2013 Revenues as reported (1):                               $                               $    $                     $              $        $             License                                                                 614      561        687        564                                                                             531   488 Software          737         701        699          644        614    605 maintenance Professional      106         98         97           81         98     98 services                               $                               $    $                     $              $        $             Total revenues                                                           1,457       1,360      1,483        1,289                                                                              1,243  1,191 Change (%) over prior year License          15.8%       14.8%      15.1%        14.8%      2.6%   1.3% Software          20.0%       15.8%      18.3%        16.9%      18.3%  23.0% maintenance Professional      7.5%        0.4%       -8.4%        -11.4%     13.4%  20.8% services Total revenues    17.2%       14.2%      14.7%        13.7%      10.7%  12.9% Revenues as reported, excluding Pivotal (2)                               $                               $    $                     $              $        $             License                                                                 614      561        687        564                                                                             531    485 Software          737         701        699          644        614    601 maintenance Professional      106         98         97           81         98     84 services                                                                  $    $                     $       $       $        $             Total revenues                                                           1,457       1,360   1,483       1,289                                                                              1,243  1,170 Change (%) over prior year License          15.8%       15.7%      16.6%        16.0%      4.4%   1.5% Software          20.0%       16.6%      19.2%        17.8%      19.3%  23.0% maintenance Professional      7.5%        17.4%      24.5%        14.0%      45.1%  19.8% services Total revenues    17.2%       16.3%      18.3%        16.8%      14.0%  12.8% Revenues as reported, excluding Pivotal and all dispositions (3)                               $                               $    $                     $              $        $             License                                                                 614      561        687        562                                                                             526   476 Software          737         701        699          642        611    590 maintenance Professional      106         98         97           81         98     83 services                               $                               $    $                     $              $        $             Total revenues                                                            1,457      1,360      1,483        1,285                                                                              1,235  1,149 Change (%) over prior year License          16.7%       17.8%      18.2%        17.3%      5.3%   1.1% Software          20.7%       18.9%      21.8%        20.0%      21.3%  23.4% maintenance Professional      8.0%        18.2%      24.8%        15.4%      45.6%  19.9% services Total revenues    18.0%       18.4%      20.3%        18.5%      15.4%  12.9% Reconciliation of "revenues as reported" to "revenues as reported, excluding Pivotal and all dispositions": Revenues as reported, excluding Pivotal                               $                               $    $   and all           $              $        $             dispositions (3)                                                         1,457       1,360      1,483        1,285                                                                              1,235  1,149 Pivotal           —           —          —            —          —      22 All dispositions  —           —          —            4          8      20                               $                               $    $   Revenues as       $              $        $             reported (1)                                                             1,457       1,360      1,483        1,289                                                                              1,243  1,191 (1) Represents revenues reported each quarter. (2) Represents revenues reported each quarter less the revenues attributable to products and services contributed by VMware to Pivotal Software, Inc. ("Pivotal") on April 1, 2013. All quarters have been adjusted to exclude the related revenues. (3) Represents revenues reported each quarter less a) the revenues attributable to products and services contributed by VMware to Pivotal on April 1, 2013 and b) the revenues attributable to all lines of businesses which were disposed of in 2013, including Zimbra which was disposed of in July 2013. All quarters have been adjusted to exclude the related revenues.      VMware, Inc. SUPPLEMENTAL UNEARNED REVENUES SCHEDULE (INCLUDES RECONCILIATION OF GAAP TO NON-GAAP DATA) (in millions) (unaudited)                  June 30,   March      December   September   June     March                             31,        31,        30,         30,      31,                  2014       2014       2013       2013        2013     2013 Unearned revenues as reported (1)                  $       $       $      $       $     $    License                                                                 476       459      465        415          427     446 Software         3,541      3,378      3,304      2,937       2,903    2,797 maintenance Professional     372        335        323        284         266      247 services Total unearned   $       $       $      $       $     $    revenues                                    3,636                            4,389     4,172     4,092                 3,596   3,490 Change (%) over prior year License         11.5%      2.8%       0.5%       13.3%       13.7%    19.6% Software         22.0%      20.8%      19.9%      21.6%       23.2%    24.5% maintenance Professional     39.7%      35.6%      33.1%      34.3%       26.8%    30.6% services Total unearned   22.0%      19.6%      18.3%      21.5%       22.2%    24.3% revenues Unearned revenues as reported, excluding Pivotal and all dispositions (2)                  $       $       $      $       $     $    License                                                                 476       459      465        414          427     407 Software         3,541      3,378      3,304      2,933       2,903    2,736 maintenance Professional     372        335        323        285         266      246 services Total unearned   $       $       $      $       $     $    revenues                                    3,632                            4,389     4,172     4,092                 3,596   3,389 Change (%) over prior year License         11.5%      12.8%      12.3%      26.4%       27.1%    15.7% Software         22.0%      23.5%      23.7%      25.0%       26.8%    25.0% maintenance Professional     39.7%      36.5%      34.4%      35.7%       28.7%    31.7% services Total unearned   22.0%      23.1%      23.0%      26.0%       27.0%    24.3% revenues Reconciliation of "unearned revenues as reported" to  "unearned revenues as reported, excluding Pivotal  and all dispositions": Unearned revenues as reported, excluding Pivotal and all          $       $       $      $       $     $    dispositions (2)                            3,632                            4,389     4,172     4,092                 3,596   3,389 Pivotal and all  —          —          —          4           —        101 dispositions Unearned         $       $       $      $       $     $    revenues as                                 3,636           reported (1)     4,389     4,172     4,092                 3,596   3,490 (1) Represents unearned revenues reported each quarter. (2) Represents unearned revenues reported each quarter less a) the unearned revenues attributable to products and services contributed by VMware to Pivotal on April 1, 2013 and b) the unearned revenues attributable to all lines of businesses which were disposed of in 2013, including Zimbra which was disposed of in July 2013. All quarters have been adjusted to exclude the related unearned revenues.      VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended June 30, 2014 (amounts in millions, except per share amounts, and shares in thousands) (unaudited)                                                          Employer                                                          Payroll                                             Acquisition Certain       Tax                   GAAP                      Stock-Based  Taxes        Intangible   Realignment               and Other   Litigation    Adjustment Non-GAAP,                                             Compensation on Employee  Amortization Charges                   Related     and Other     (1)        as adjusted                                                          Stock                                               Items       Contingencies                                                          Transactions Operating expenses: Cost of license   $                                                                                                                   $       revenues          46                        (1)          ―          (27)         ―                       ―         ―           ―                                                                                                                                                                18 Cost of services  $              (11)         ―          ―          ―                       ―         ―           ―        $       revenues          172                                                                                                                                  161 Research and      $              (66)         (1)          (2)          ―                       ―         ―           ―        $       development      317                                                                                                                                  248 Sales and         $              (43)         (1)          (5)          ―                       ―         ―           ―        $       marketing        544                                                                                                                                  495 General and       $              (18)         ―          (1)          ―                       (42)        (11)          ―        $       administrative   179                                                                                                                                  107 Realignment       $                                                                                                                   $ charges           (1)                       ―          ―          ―          1                         ―         ―           ―                                                                                                                                                           ― Operating         $              139          2            35           (1)                       42          11            ―        $       income           200                                                                                                                                  428 Operating margin  13.7%                     9.6%         0.2%         2.4%         -0.1%                     2.9%        0.7%          ―        29.4% (2)                   $                                                                                                       $       Other income      ―                        ―          ―          ―          ―                       1           ―           ―                                                                                                                                                                 1 Income before     $              139          2            35           (1)                       43          11            ―        $       income taxes     202                                                                                                                                  431 Income tax        $                                                                                                                   $       provision        35                                                                                                                   45                                                                                                                                                                 80 Tax rate (2)      17.5%                                                                                                                           18.5% Net income       $              139          2            35           (1)                       43          11            (45)       $                         167                                                                                                                                  351 Net income per weighted-average share, basic for Class   $               $       $       $       $ $      $       $      $       A and Class B     0.39                                             ―                                   0.02           0.82 (2) (3)                                     0.32        0.01        0.08                                  0.10                     (0.10) Net income per weighted-average share, diluted for       $               $       $       $       $ $      $       $      $       ClassA and       0.38                                             ―                                   0.02           0.81 ClassB (2) (4)                             0.32        0.01        0.08                                  0.10                     (0.10) (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. 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 revenues 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) 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 430,216 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 434,199 diluted weighted-average shares for Class A and Class B.      VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended June 30, 2013 (amounts in millions, except per share amounts, and shares in thousands) (unaudited)                                                                                                                                             Gain on                                      Employer                                                         Acquisition               Capitalized Disposition                         Stock-Based  Payroll Taxes             Intangible   Realignment               and Other                 Software    of          Tax        Non-GAAP,                   GAAP  Compensation on Employee               Amortization Charges                   Related                   Development Certain     Adjustment as adjusted                                      Stock Transactions                                               Items                     Costs (1)   Lines of    (2)                                                                                                                                             Business &                                                                                                                                             Other, Net Operating expenses:                   $   Cost of license                                                                                                                                                 $      revenues             ―          (1)                       (22)         ―                       ―                       (13)        ―         ―                                                                                                                                                                               19                    55                   $   Cost of services                                                                                                                                                $      revenues             (7)          ―                       (1)          ―                       ―                       ―         ―         ―                                                                                                                                                                              110                   118                   $   Research and                                                                                                                                                    $      development         (51)         (2)                       (1)          ―                       ―                       ―         ―         ―                                                                                                                                                                              207                   261                   $   Sales and                                                                                                                                                       $      marketing           (33)         (1)                       (1)          ―                       ―                       ―         ―         ―                                                                                                                                                                              407                   442                   $   General and                                                                                                                                                     $      administrative      (12)         ―                       ―          ―                       (1)                       ―         ―         ―                                                                                                                                                                               83                    96                   $   Realignment                                                                                                                                                     $ charges              ―          ―                       ―          (1)                       ―                       ―         ―         ―                                                                                                                                                                          ―                     1                   $   Operating                                                                                                                                                       $      income              103          4                         25           1                         1                         13          ―         ―                                                                                                                                                                              417                   270 Operating margin  21.7% 8.3%         0.3%                      2.0%         0.1%                      ―                       1.1%        ―         ―        33.5% (3)                   $   Other income                                                                                                                                                    $      (expense), net       ―          ―                       ―          ―                       ―                       ―         (19)        ―                                                                                                                                                                               (1)                    18                   $   Income before                                                                                                                                                   $      income taxes        103          4                         25           1                         1                         13          (19)        ―                                                                                                                                                                              422                   294                   $   Income tax                                                                                                                                                      $      provision                                                                                                                                            30                                                                                                                                                                                79                    49 Tax rate (3)      16.8%                                                                                                                                            18.5%                   $                                                                                                                                                                   $      Net income          103          4                         25           1                         1                         13          (19)        (30)                                                                                                                                                                             343                   245 Net income per weighted-average share,                   $   basic for Class      $       $               $       $ $ $      $      $      $      A and Class B                0.01                             ―                        ―                                                  (3) (4)               0.24                                  0.06                                                            0.03       (0.04)     (0.07)    0.80                   0.57 Net income per weighted-average share,                   $   diluted for          $       $ $       $ $ $      $      $      $      ClassA and                  ―                                ―                        ―                                                  ClassB (3) (5)       0.24                                  0.06                                                            0.03       (0.04)     (0.07)    0.79                   0.57 (1) For the second quarter of 2013, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $13 million. (2) 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. 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 revenues 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. (3) Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (4) Calculated based upon 428,336 basic weighted-average shares for Class A and Class B. (5) Calculated based upon 431,987 diluted weighted-average shares for Class A and Class B.      VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Six Months Ended June 30, 2014 (amounts in millions, except per share amounts, and shares in thousands) (unaudited)                                                          Employer                                                          Payroll                                             Acquisition Certain        Tax                   GAAP                      Stock-Based  Taxes        Intangible   Realignment               and Other   Litigation and Adjustment Non-GAAP,                                             Compensation on Employee  Amortization Charges                   Related     Other          (1)        as adjusted                                                          Stock                                               Items       Contingencies                                                          Transactions Operating expenses: Cost of license   $             (2)          ―          (52)         ―                       ―         ―            ―        $        revenues          96                                                                                                                                    42 Cost of services  $              (20)         ―          ―          ―                       ―         ―            ―        $        revenues          323                                                                                                                                  303 Research and      $              (126)        (3)          (3)          ―                       ―         ―            ―        $        development      610                                                                                                                                  478 Sales and         $                (84)         (2)          (9)          ―                       ―         ―            ―        $        marketing        1,018                                                                                                                               923 General and       $              (35)         ―          (1)          ―                       (65)        (11)           ―        $        administrative   330                                                                                                                                  218 Realignment       $             ―          ―          ―          1                         ―         ―            ―        $ charges           (1)                                                                                                                               ― Operating         $              267          5            65           (1)                       65          11             ―        $        income           441                                                                                                                                  853 Operating margin  15.7%                     9.4%         0.2%         2.3%         0.0%                      2.3%        0.4%           ―        30.3% (2) Other income      $ ―          ―          ―          ―                       2           ―            ―        $                          ―                                                                                                                                     2 Income before     $              267          5            65           (1)                       67          11             ―        $        income taxes     447                                                                                                                                  861 Income tax        $                                                                                                         78         $        provision        81                                                                                                                                   159 Tax rate (2)      18.1%                                                                                                                            18.5% Net income       $              267          5            65           (1)                       67          11             (78)       $                          366                                                                                                                                  702 Net income per weighted-average share, basic for Class   $               $       $       $       $ $      $        $      $        A and Class B     0.85                                             ―                                   0.02           1.63 (2) (3)                                     0.62        0.01        0.15                                  0.16                      (0.18) Net income per weighted-average share, diluted for       $               $       $       $       $ $      $        $      $        ClassA and       0.84                                             ―                                   0.02           1.60 ClassB (2) (4)                             0.61        0.01        0.15                                  0.15                      (0.18) (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. 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 revenues 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) 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 430,050 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 434,218 diluted weighted-average shares for Class A and Class B.      VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Six Months Ended June 30, 2013 (amounts in millions, except per share amounts, and shares in thousands) (unaudited)                                      Employer                                                                      Gain on                                      Payroll                               Acquisition                 Capitalized Disposition                         Stock-Based  Taxes        Intangible   Realignment and Other                   Software    of          Tax        Non-GAAP,                   GAAP  Compensation on Employee  Amortization Charges     Related                     Development Certain     Adjustment as adjusted                                      Stock                                 Items                       Costs (1)   Lines of    (2)                                      Transactions                                                                  Business &                                                                                                                    Other, Net Operating expenses:                   $   Cost of license                                                                                                                        $          revenues             (1)          ―          (45)         ―         ―                         (26)        ―         ―          40                                       112                   $   Cost of services                                                                                                                       $          revenues             (14)         ―          (2)          ―         ―                         ―         ―         ―         227                                       243                   $   Research and                                                                                                                           $          development         (113)        (3)          (2)          ―         ―                         ―         ―         ―         414                                       532                   $   Sales and                                                                                                                              $          marketing           (69)         (2)          (4)          ―         ―                         ―         ―         ―         784                                       859                   $   General and                                                                                                                            $          administrative      (26)         ―          ―          ―         (2)                         ―         ―         ―         166                                       194                   $   Realignment                                                                                                                            $ charges              (6)          ―          ―          (57)        ―                         ―         ―         ―                                                                                                                                                ―                   63                   $   Operating                                                                                                                              $          income              229          5            53           57          2                           26          ―         ―         804                                       432 Operating margin  17.7% 9.2%         0.2%         2.2%         2.6%        ―                         1.1%        ―         ―        33.0% (3)                   $   Other income                                                                                                                           $          (expense), net                                                                                                  (19)                     (6)                                        13                   $   Income before                                                                                                                          $          income taxes        229          5            53           57          2                           26          (19)        ―         811                                       458                   $   Income tax                                                                                                                             $          provision                                                                                                                   110         150                                        40 Tax rate (3)      8.7%                                                                                                                    18.5%                   $                                                                                                                                          $          Net income          229          5            53           57          2                           26          (19)        (110)       661                                       418 Net income per weighted-average share,                   $   basic for Class      $       $       $       $                                  $      $      $      $          A and Class B                    0.02                  $―                          1.55 (3) (4)               0.52                     0.12        0.15                                    0.06        (0.04)     (0.26)                   0.98 Net income per weighted-average share,                   $   diluted for          $       $       $       $                                  $      $      $      $          ClassA and                      0.01                  $―                          1.53 ClassB (3) (5)       0.52                     0.12        0.15                                    0.06       (0.04)     (0.26)                   0.97 (1) For the first six months of 2013, no costs were capitalized for the development of software products. Amortization expense from previously capitalized amounts was $26 million. (2) 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. 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 revenues 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. (3) Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (4) Calculated based upon 428,172 basic weighted-average shares for Class A and Class B. (5) Calculated based upon 432,406 diluted weighted-average shares for Class A and Class B.      VMware, Inc. REVENUES BY TYPE (in millions) (unaudited)                        For the Three Months Ended   For the Six Months Ended                        June 30,                     June 30,                        2014           2013          2014          2013 Revenues: License                $        $        $        $                             614             531         1,175         1,019 Services: Software maintenance   737            614           1,438         1,220 Professional services  106            98            204           196 Total services         843            712           1,642         1,416 Total revenues         $         $        $        $                             1,457          1,243         2,817         2,435 Percentage of revenues: License                42.0%          42.7%         41.7%         41.8% Services: Software maintenance   50.7%          49.4%         51.1%         50.1% Professional services  7.3%           7.9%          7.2%          8.1% Total services         58.0%          57.3%         58.3%         58.2% Total revenues         100.0%         100.0%        100.0%        100.0%      VMware, Inc. REVENUES BY GEOGRAPHY (in millions) (unaudited)                        For the Three Months Ended   For the Six Months Ended                        June 30,                     June 30,                        2014           2013          2014          2013 Revenues: United States          $        $        $        $                             683             590         1,332         1,159 International          774            653           1,485         1,276 Total revenues         $         $        $        $                             1,457          1,243         2,817         2,435 Percentage of revenues: United States          46.9%          47.5%         47.3%         47.6% International          53.1%          52.5%         52.7%         52.4% Total revenues         100.0%         100.0%        100.0%        100.0%      VMware, Inc. RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES TO FREE CASH FLOWS (A NON-GAAP FINANCIAL MEASURE) (in millions) (unaudited)                             For the Three Months      For the Six Months Ended                             Ended                             June 30,                  June 30,                             2014         2013         2014         2013 GAAP cash flows from        $       $       $       $      operating activities          409        534       1,159       1,210 Capital expenditures        (76)         (75)         (153)        (153) Free cash flows             $       $       $       $                                    333        459       1,006       1,057      About Non-GAAP Financial Measures  To provide investors and others with additional information regarding VMware's results, VMware has disclosed in this press release the following non-GAAP financial measures: non-GAAP operating income, non-GAAP operating margin, non-GAAP other income (expense), net, 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 and other-related items, certain litigation and other contingencies, the net effect of the amortization and capitalization of software development costs and gain on disposition of certain lines of business and other net, each as discussed below. Free cash flows differ from GAAP cash flows from operating activities in its treatment of capital expenditures.  VMware has also presented in this press release quarterly and annual historical data for revenue and unearned revenue, excluding revenue generated each period by the products and services contributed to Pivotal Software, Inc. on April1, 2013 and the products and services associated with the divestures consummated by VMware in 2013. VMware management believes that these measures are useful to investors because they allow investors to make meaningful comparisons of VMware revenues and unearned revenues across periods.  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 expenses 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:    oStock-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 our 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. Furthermore, unlike cash     compensation, the value of stock options is determined using a complex     formula that incorporates factors, such as market volatility, that are     beyond VMware's control. Additionally, in order to establish the amount of     expense to recognize for performance-based stock awards, which are also an     element of ongoing stock-based compensation, VMware is required to apply     judgment to estimate the probability of the extent to which performance     objectives will be achieved. 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.    oEmployer 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 our control and do     not correlate to the operation of the business.    oAmortization 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.    oRealignment charges: Realignment charges include workforce reductions,     asset impairments and losses on asset disposals, and costs to exit     facilities. VMware management believes it is useful to exclude these     items, when significant, as they are not reflective of VMware's ongoing     business and operating results.    oAcquisition and other-related items. Acquisition and other-related items     include direct costs of acquisitions and dispositions, such as transaction     and advisory fees. Also included are accruals for the portion of merger     consideration payable in installments that VMware has committed to make to     designated founders and key executives of AirWatch, subject to employment     conditions and indemnification claims, if any. Such installment payments     may be paid in cash or VMware stock, at the option of VMware.     Additionally, charges recognized for non-recoverable strategic investments     or gains recognized on the disposition of strategic investments during     2014 are included as 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 these items when looking for a     consistent basis for comparison across accounting periods.    oCertain Litigation and Other Contingencies. VMware from time to time may     incur charges or benefits that are outside of the ordinary course of our     business related to litigation and other contingencies. VMware believes     it is useful to exclude such charges or benefits because we do not     considersuch amounts to be part of the ongoing operation of our business     and because of the singular nature of the claims underlying the matter.    oCapitalized software development costs. Capitalized software development     costs encompass capitalization of development costs and the subsequent     amortization of the capitalized costs over the useful life of the product.     Amortization and capitalization of software development costs can vary     significantly depending upon the timing of products reaching technological     feasibility and being made generally available. VMware did not capitalize     software development costs related to product offerings in either fiscal     year 2014 or fiscal year 2013 given its current go-to-market strategy. In     future periods, VMware does not expect amortization expense as previously     capitalized software development costs have become fully amortized.    oGain on disposition of certain lines of business and other, net. In 2013,     VMware recognized a gain as a result of exiting certain lines of business     under its business realignment plan, which was partially offset by a     charge recognized for a non–recoverable strategic investment. These     transactions resulted in a net gain of $31 million. To the extent that     significant gains or losses are realized on such dispositions and     strategic investments, they do not occur on a predictable cycle, and such     gains and losses are not reflective of VMware's ongoing business and     operating results.    oTax adjustment. 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 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. 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 revenues 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 management believes that the non-GAAP financial measure 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.  VMware, Inc. Logo  Logo - http://photos.prnewswire.com/prnh/20140722/129401    SOURCE VMware, Inc.  Website: http://www.vmware.com  
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