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8-K - FORM 8-K - VMWARE, INC.d287202d8k.htm

Exhibit 99.1

 

LOGO

VMware Reports Fourth Quarter and Full Year 2016 Results

Record Annual Revenue Exceeds $7 Billion; Q4 Revenue $2.03 billion, up 9% y-y

Additional $1.2B in Stock Repurchases Authorized through February 2018

PALO ALTO, Calif., January 26, 2017 — VMware, Inc. (NYSE: VMW), a leader in cloud infrastructure and business mobility, today announced financial results for the fourth quarter and full year of 2016:

Quarterly Review

 

    Revenue for the fourth quarter was $2.03 billion, an increase of 9% from the fourth quarter of 2015.

 

    License revenue for the fourth quarter was $887 million, an increase of 8% from the fourth quarter of 2015.

 

    GAAP net income for the fourth quarter was $441 million, or $1.04 per diluted share, up 18% per diluted share compared to $373 million, or $0.88 per diluted share, for the fourth quarter of 2015. Non-GAAP net income for the quarter was $597 million, or $1.43 per diluted share, up 13% per diluted share compared to $534 million, or $1.26 per diluted share, for the fourth quarter of 2015.

 

    GAAP operating income for the fourth quarter was $543 million, an increase of 21% from the fourth quarter of 2015. Non-GAAP operating income for the fourth quarter was $747 million, an increase of 14% from the fourth quarter of 2015.

 

    Operating cash flows for the fourth quarter were $463 million. Free cash flows for the quarter were $419 million.

 

    Total revenue plus sequential change in total unearned revenue grew 13% year-over-year.

 

    License revenue plus sequential change in unearned license revenue grew 14% year-over-year.

Annual Review

 

    Revenue for 2016 was $7.09 billion, an increase of 8% from 2015 on a GAAP basis and up 7% on a non-GAAP basis.

 

    License revenue for 2016 was $2.79 billion, an increase of 3% from 2015.

 

    GAAP net income for 2016 was $1.19 billion, or $2.78 per diluted share, up 19% per diluted share compared to $997 million, or $2.34 per diluted share, for 2015. Non-GAAP net income for 2016 was $1.86 billion, or $4.39 per diluted share, up 8% per diluted share compared to $1.73 billion, or $4.06 per diluted share, for 2015.

 

    GAAP operating income for 2016 was $1.44 billion, an increase of 20% from 2015. Non-GAAP operating income for 2016 was $2.29 billion, an increase of 9% from 2015.

 

    Operating cash flows for 2016 were $2.38 billion. Free cash flows for 2016 were $2.23 billion.

 

    Cash, cash equivalents and short-term investments were $7.99 billion, and unearned revenue was $5.62 billion as of December 31, 2016.


The company also announced that its Board of Directors has authorized the repurchase of up to $1.2 billion of its Class A common stock through the end of fiscal 2018, ending on February 2, 2018. Stock will be purchased from time to time, in the open market or through private transactions, subject to market conditions. The stock repurchase authorization is in addition to the Company’s ongoing $500 million stock repurchase program announced in December 2016.

“Q4 closed out a strong fiscal 2016 and was one of the most balanced quarters for VMware in years,” said Pat Gelsinger, chief executive officer, VMware. “We’re very pleased with our strong product momentum and customer enthusiasm for our Cloud strategy. We believe we have the world’s most complete and capable hybrid cloud architecture, uniquely offering customers freedom and control in their infrastructure decisions.”

Zane Rowe, executive vice president and chief financial officer, VMware, said, “This was a very good year for VMware demonstrated by strong revenue, earnings and cash flow growth, as well as a significant amount of capital returned to shareholders in the form of stock repurchases. We’re pleased to announce the authorization of an additional $1.2 billion of stock repurchases to be completed during fiscal 2018.”

Recent Highlights & Strategic Announcements

 

    In October, VMware and Amazon Web Services announced a partnership to provide a new VMware vSphere®-based cloud service running on AWS. VMware Cloud™ on AWS will make it easier to run any application, using a common set of familiar software and tools, in a consistent hybrid cloud environment. This new service will be delivered, sold and supported by VMware and will be available later in 2017.

 

    VMware hosted over 75,000 customers, partners and influencers at VMworld® 2016, VMworld 2016 Europe and across APJ vForums in 17 cities across 13 countries.

 

    At VMworld 2016 Europe, the company introduced a wave of new products and services designed to help customers accelerate their digital transformation:

 

    Now generally available, the new releases of VMware vSphere®, VMware vSAN™ and VMware vRealize® Automation™ all introduced support for containers, enabling developers to become more productive and IT to easily run containerized applications in production.

 

    VMware further expanded the company’s growing ecosystem of VMware Ready™ for Network Functions Virtualization (NFV) certified solutions, with 22 Virtual Network Functions now certified from 19 vendors worldwide. VMware’s growing set of NFV partners helps global communications service providers adopt and deploy NFV to transform their operations and service portfolio with speed and confidence.

 

    VMware was positioned as a leader in the “IDC MarketScape: Worldwide Virtual Client Computing Software 2016 Vendor Assessment (doc # US40700016, November 2016).” The report evaluated eight vendors based on criteria that span across strategies and capabilities. VMware was recognized for the second consecutive year for having the most complete mix of business and solution strategies and capabilities for delivering virtual desktops and applications through its VMware Horizon® portfolio of solutions and services that includes VMware Horizon® 7, Horizon Air™, Horizon FLEX™ and VMware App Volumes™.

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 which include year-over-year comparisons will also be made available at http://ir.vmware.com in conjunction with the conference call.

# # #


About VMware

VMware, a global leader in cloud infrastructure and business mobility, helps customers accelerate their digital transformation. VMware enables enterprises to master a software-defined approach to business and IT with its Cross-Cloud Architecture™ and solutions for the data center, mobility, and 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, vSphere, VMware Cloud, VMworld, VMware vSAN, vRealize, vRealize Automation, VMware Ready, Horizon, Horizon Air, Horizon FLEX, VMware App Volumes, and Cross-Cloud Architecture are registered trademarks or trademarks of VMware or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective 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 VMware’s product momentum and stock repurchase plans; the anticipated availability of the VMware Cloud on AWS; and the expected benefits to customers of VMware Cloud on AWS, VMware’s recent product releases and VMware’s growing number of NFV partnerships. 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; (vi) the uncertainty of customer acceptance of emerging technology; (vii) rapid technological changes in the virtualization software and cloud, end user and mobile computing industries; (viii) changes to product and service development timelines; (ix) VMware’s relationship with Dell Technologies and Dell’s ability to control matters requiring stockholder approval, including the election of VMware’s board members and matters relating to Dell’s investment in VMware; (x) VMware’s ability to protect its proprietary technology; (xi) VMware’s ability to attract and retain highly qualified employees; (xii) the ability to successfully integrate acquired companies and assets into VMware; (xiii) the ability of VMware to realize synergies from Dell; (xiv) disruptions resulting from key management changes; (xv) fluctuating currency exchange rates; (xvi) changes in VMware’s financial condition; (xvii) potential disruptions relating to the transition to Dell’s fiscal year and further business integrations with Dell, (xviii) changes in business opportunities and priorities that could cause VMware to consider alternative uses of cash; and (xix) fluctuations in the level of cash held in the United States that is available for stock repurchases. These forward-looking statements are made as of the date of this press release, are based on current expectations and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission, including VMware’s most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. VMware assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.


Contacts:

Paul Ziots

VMware Investor Relations

pziots@vmware.com

650-427-3267

Michael Thacker

VMware Global PR

mthacker@vmware.com

650-427-4454


VMware, Inc.

CONSOLIDATED STATEMENTS OF INCOME

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

 

     Three Months Ended
December 31,
    Twelve Months Ended
December 31,
 
     2016     2015     2016     2015  

Revenue:

        

License

   $ 887      $ 825      $ 2,794      $ 2,720   

Services

     1,145        1,043        4,299        3,927   

GSA settlement

     —          —          —          (76
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,032        1,868        7,093        6,571   

Operating expenses (1):

        

Cost of license revenue

     38        44        159        186   

Cost of services revenue

     237        222        894        832   

Research and development

     395        342        1,503        1,300   

Sales and marketing

     646        612        2,357        2,267   

General and administrative

     173        198        689        766   

Realignment

     —          3        52        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     543        447        1,439        1,197   

Investment income

     21        11        77        49   

Interest expense with Dell

     (7     (7     (26     (26

Other income (expense), net

     (8     2        (17     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax

     549        453        1,473        1,213   

Income tax provision

     108        80        287        216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 441      $ 373      $ 1,186      $ 997   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per weighted-average share, basic for Class A and Class B

   $ 1.07      $ 0.89      $ 2.82      $ 2.35   

Net income per weighted-average share, diluted for Class A and Class B

   $ 1.04      $ 0.88      $ 2.78      $ 2.34   

Weighted-average shares, basic for Class A and Class B

     412,118        421,640        420,520        424,003   

Weighted-average shares, diluted for Class A and Class B

     416,512        422,858        423,994        426,547   

 

        

(1)       Includes stock-based compensation as follows:

        

Cost of license revenue

   $ 1      $ 1      $ 2      $ 2   

Cost of services revenue

     14        11        52        44   

Research and development

     81        62        305        226   

Sales and marketing

     49        44        195        168   

General and administrative

     20        17        82        64   


VMware, Inc.

CONSOLIDATED BALANCE SHEETS

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

 

     December 31,     December 31,  
     2016     2015  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 2,790      $ 2,493   

Short-term investments

     5,195        5,016   

Accounts receivable, net of allowance for doubtful accounts of $2 and $2

     1,856        1,633   

Due from related parties, net

     132        74   

Other current assets

     362        144   
  

 

 

   

 

 

 

Total current assets

     10,335        9,360   

Property and equipment, net

     1,049        1,128   

Other assets

     248        193   

Deferred tax assets

     462        456   

Intangible assets, net

     517        616   

Goodwill

     4,032        3,993   
  

 

 

   

 

 

 

Total assets

   $ 16,643      $ 15,746   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 125      $ 138   

Accrued expenses and other

     898        746   

Unearned revenue

     3,531        3,245   
  

 

 

   

 

 

 

Total current liabilities

     4,554        4,129   

Notes payable to Dell

     1,500        1,500   

Unearned revenue

     2,093        1,831   

Other liabilities

     399        363   
  

 

 

   

 

 

 

Total liabilities

     8,546        7,823   

Contingencies

    

Stockholders’ equity:

    

Class A common stock, par value $.01; authorized 2,500,000 shares; issued and

outstanding 108,351 and 121,947 shares

     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

     1,721        2,728   

Accumulated other comprehensive income (loss)

     (9     (8

Retained earnings

     6,381        5,195   
  

 

 

   

 

 

 

Total VMware, Inc.’s stockholders’ equity

     8,097        7,919   

Non-controlling interests

     —          4   
  

 

 

   

 

 

 

Total stockholders’ equity

     8,097        7,923   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 16,643      $ 15,746   
  

 

 

   

 

 

 


VMware, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

     Three Months Ended     Twelve Months Ended  
     December 31,     December 31,  
     2016     2015     2016     2015  

Operating activities:

        

Net income

   $ 441      $ 373      $ 1,186      $ 997   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     83        90        345        335   

Stock-based compensation

     165        135        636        504   

Excess tax benefits from stock-based compensation

     (9     —          (15     (28

Deferred income taxes, net

     16        12        (8     (31

Gain on Dell share repurchase

     (8     —          (8     —     

Impairment of strategic investments

     2        —          14        5   

Loss on disposal of assets

     4        —          16        —     

Other

     1        (1     (2     (1

Changes in assets and liabilities, net of acquisitions:

        

Accounts receivable

     (737     (622     (224     (114

Other assets

     (195     17        (215     32   

Due to/from related parties, net

     (109     (52     (54     (21

Accounts payable

     17        1        (9     (35

Accrued expenses

     251        154        187        1   

Income taxes payable

     11        (10     (15     13   

Unearned revenue

     530        391        547        242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     463        488        2,381        1,899   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Additions to property and equipment

     (44     (59     (153     (333

Purchases of available-for-sale securities

     (389     (648     (3,725     (3,323

Sales of available-for-sale securities

     458        494        2,227        2,193   

Maturities of available-for-sale securities

     294        261        1,307        1,100   

Proceeds from disposal of assets

     —          —          3        —     

Purchases of strategic investments

     (16     (3     (49     (14

Proceeds from sales of strategic investments

     —          1        1        4   

Business combinations, net of cash acquired

     (15     (17     (74     (38

Decrease (increase) in restricted cash

     —          (2     (2     75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     288        27        (465     (336
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Proceeds from issuance of common stock

     2        3        109        126   

Proceeds from non-controlling interests

     —          —          —          4   

Payment to acquire non-controlling interests

     —          —          (4     —     

Repurchase of common stock

     (559     (75     (1,575     (1,125

Excess tax benefits from stock-based compensation

     9        —          15        28   

Shares repurchased for tax withholdings on vesting of restricted stock

     (67     (33     (164     (174
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (615     (105     (1,619     (1,141
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     136        410        297        422   

Cash and cash equivalents at beginning of the period

     2,654        2,083        2,493        2,071   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 2,790      $ 2,493      $ 2,790      $ 2,493   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

        

Cash paid for interest

   $ 8      $ 7      $ 29      $ 28   

Cash paid for taxes, net

     255        76        467        231   

Non-cash items:

        

Changes in capital additions, accrued but not paid

   $ 8      $ —        $ (7   $ (49

Changes in tax withholdings on vesting of restricted stock, accrued but not paid

     2        1        3        (2


VMware, Inc.

GROWTH IN REVENUE PLUS SEQUENTIAL CHANGE IN UNEARNED REVENUE

(in millions)

(unaudited)

Growth in Total Revenue Plus Sequential Change in Unearned Revenue

 

     Three Months Ended  
     December 31,  
     2016     2015  

Total revenue, as reported

   $ 2,032      $ 1,868   

Sequential change in unearned revenue

     530        391   
  

 

 

   

 

 

 

Total revenue plus sequential change in unearned revenue

   $ 2,562      $ 2,259   
  

 

 

   

 

 

 

Change (%) over prior year, as reported

     13  

Growth in License Revenue Plus Sequential Change in Unearned License Revenue

 

     Three Months Ended  
     December 31,  
     2016     2015  

Total license revenue, as reported

   $ 887      $ 825   

Sequential change in unearned license revenue

     78        24   
  

 

 

   

 

 

 

Total license revenue plus sequential change in unearned license revenue

   $ 965      $ 849   
  

 

 

   

 

 

 

Change (%) over prior year, as reported

     14  


VMware, Inc.

SUPPLEMENTAL REVENUE SCHEDULE

(INCLUDES RECONCILIATION OF GAAP TO NON-GAAP DATA)

(in millions)

(unaudited)

 

                                                                                                                                               
    Three Months Ended  
    December 31,     September 30,     June 30,     March 31,     December 31,     September 30,  
    2016     2016     2016     2016     2015     2015  

Revenue as reported (1):

           

License

  $ 887      $ 691      $ 644      $ 572      $ 825      $ 681   

Software maintenance

    987        947        915        891        901        863   

Professional services

    158        140        134        126        142        128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 2,032      $ 1,778      $ 1,693      $ 1,589      $ 1,868      $ 1,672   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change (%) over prior year:

           

License

    7.5     1.4     0.9     (0.7 )%      6.2     6.6

Software maintenance

    9.6     9.7     10.4     9.7     12.1     10.8

Professional services

    11.3     10.7     3.5     2.7     16.1     31.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    8.8     6.4     11.3     5.2     9.7     10.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue as reported, excluding GSA settlement (2):

           

License

  $ 887      $ 691      $ 644      $ 572      $ 825      $ 681   

Software maintenance

    987        947        915        891        901        863   

Professional services

    158        140        134        126        142        128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP total revenue

  $ 2,032      $ 1,778      $ 1,693      $ 1,589      $ 1,868      $ 1,672   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change (%) over prior year:

           

License

    7.5     1.4     0.9     (0.7 )%      6.2     6.6

Software maintenance

    9.6     9.7     10.4     9.7     12.1     10.8

Professional services

    11.3     10.7     3.5     2.7     16.1     31.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP total revenue

    8.8     6.4     6.0     5.2     9.7     10.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Represents revenue reported each quarter.
(2)  Represents revenue reported each quarter less the reduction of revenue due to the GSA settlement recognized in the second quarter of 2015.


VMware, Inc.

SUPPLEMENTAL UNEARNED REVENUE SCHEDULE

(in millions)

(unaudited)

 

                                                                                                                                               
     December 31,     September 30,     June 30,     March 31,     December 31,     September 30,  
     2016     2016     2016     2016     2015     2015  

Unearned revenue as reported:

            

License

   $ 503      $ 425      $ 455      $ 415      $ 428      $ 404   

Software maintenance

     4,628        4,201        4,189        4,105        4,174        3,850   

Professional services

     493        468        478        456        474        432   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unearned revenue

  

 

$

 

5,624

 

  

  $ 5,094      $ 5,122      $ 4,976      $ 5,076      $ 4,686   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change (%) over prior year:

            

License

     17.4     5.1     (5.5 )%      (11.0 )%      (12.2 )%      (5.6 )% 

Software maintenance

     10.9     9.1     7.6     6.7     6.9     8.2

Professional services

     3.9     8.6     9.2     6.0     7.9     11.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unearned revenue

     10.8     8.7     6.4     4.9     5.0     7.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Three Months Ended December 31, 2016

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

 

       GAAP       Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock
Transactions
    Intangible
Amortization
    Acquisition
and Other
Related
Items
    Gain on
Share
Repurchase (4)
    Tax
Adjustment (1)
    Non-GAAP,
as adjusted (2)
 

Operating expenses:

                

Cost of license revenue

   $ 38        (1     —          (24     —          —          —        $ 14   

Cost of services revenue

   $ 237        (14     —          (1     —          —          —        $ 222   

Research and development

   $ 395        (81     —          —          —          —          —        $ 314   

Sales and marketing

   $ 646        (49     (2     (5     —          —          —        $ 591   

General and administrative

   $ 173        (20     —          —          (9     —          —        $ 144   

Operating income

   $ 543        165        2        30        9        —          —        $ 747   

Operating margin (2)

     26.7 %      8.1 %      0.1 %      1.5 %      0.4 %      —          —          36.8 % 

Other income (expense), net

   $ (8     —          —          —          6        (8     —        $ (11

Income before income tax

   $ 549        165        2        30        15        (8     —        $ 751   

Income tax provision

   $ 108                  46      $ 154   

Tax rate (2)

     19.6 %                  20.5 % 

Net income

   $ 441        165        2        30        15        (8     (46   $ 597   

Net income per weighted-average share,  diluted
for Class A and Class B (2) (3)

   $ 1.04      $ 0.40      $ —        $ 0.07      $ 0.04      $ —        $ (0.11   $ 1.43   

 

(1)  Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above as well as significant tax adjustments. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
(2)  Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data.
(3)  Calculated based upon 416,512 diluted weighted-average shares for Class A and Class B.
(4)  In December 2016, VMware entered into a stock purchase agreement with Dell and Dell’s wholly-owned subsidiary, EMC Equity Assets LLC (“EMC”) pursuant to which VMware agreed to purchase $500 million of VMware Class A common stock from EMC. The final aggregate number of shares purchased will be determined based on a volume-weighted average price, less a contractually agreed upon discount. As of December 31, 2016, VMware had made an up-front payment of $375 million, as well as recognized a derivative asset and related $8 million gain in Other income (expense), net. The derivative asset is related to its obligation to repurchase $125 million of additional shares and is measured at fair value on a recurring basis. In accordance with U.S. GAAP, diluted net income per share does not include the impact of the remeasurement.


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Three Months Ended December 31, 2015

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

 

      GAAP       Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock
Transactions
    Intangible
Amortization
    Realignment
Charges
    Acquisition
and Other
Related
Items
    Tax
Adjustment (1)
    Non-GAAP,
as adjusted (2)
 

Operating expenses:

               

Cost of license revenue

  $ 44        (1     —          (25     —          —          —        $ 18   

Cost of services revenue

  $ 222        (11     —          (1     —          —          —        $ 210   

Research and development

  $ 342        (62     (1     —          —          —          —        $ 280   

Sales and marketing

  $ 612        (44     (1     (7     —          —          —        $ 559   

General and administrative

  $ 198        (17     —          (1     —          (35     —        $ 145   

Realignment

  $ 3        —          —          —          (3     —          —        $ —     

Operating income

  $ 447        135        2        34        3        35        —        $ 656   

Operating margin (2)

    23.9     7.2     0.1     1.8     0.2     1.9     —          35.1

Other income (expense), net

  $ 2        —          —          —          —          (2     —        $ —     

Income before income tax

  $ 453        135        2        34        3        33        —        $ 660   

Income tax provision

  $ 80                  46      $ 126   

Tax rate (2)

    17.5                 19.0

Net income

  $ 373        135        2        34        3        33        (46   $ 534   

Net income per weighted-average share, diluted for Class A and Class B (2) (3)

  $ 0.88      $ 0.32      $ 0.01      $ 0.08      $ 0.01      $ 0.08      $ (0.11   $ 1.26   

 

(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 422,858 diluted weighted-average shares for Class A and Class B.


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Twelve Months Ended December 31, 2016

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

 

    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock
Transactions
    Intangible
Amortization
    Realignment
Charges
    Acquisition
and Other
Related
Items
    Gain on Share
Repurchase (4)
    Tax
Adjustment (1)
    Non-GAAP,
as adjusted (2)
 

Operating expenses:

                 

Cost of license revenue

  $ 159        (2     —          (100     —          —          —          —        $ 57   

Cost of services revenue

  $ 894        (52     (1     (2     —          —          —          —        $ 839   

Research and development

  $ 1,503        (305     (1     —          —          —          —          —        $ 1,197   

Sales and marketing

  $ 2,357        (195     (5     (22     —          —          —          —        $ 2,134   

General and administrative

  $ 689        (82     (1     (1     —          (34     —          —        $ 572   

Realignment

  $ 52        —          —          —          (52     —          —          —        $ —     

Operating income

  $ 1,439        636        8        125        52        34        —          —        $ 2,294   

Operating margin (2)

    20.3     9.0     0.1     1.8     0.7     0.5     —          —          32.3

Other income (expense), net

  $ (17     —          —          —          —          20        (8     —        $ (5

Income before income tax

  $ 1,473        636        8        125        52        54        (8     —        $ 2,340   

Income tax provision

  $ 287                    191      $ 478   

Tax rate (2)

    19.5                   20.4

Net income

  $ 1,186        636        8        125        52        54        (8     (191   $ 1,862   

Net income per weighted-average share, diluted for Class A and Class B (2) (3)

  $ 2.78      $ 1.50      $ 0.02      $ 0.30      $ 0.12      $ 0.13      $ —        $ (0.45   $ 4.39   

 

(1)  Non-GAAP financial information for the quarter is adjusted for a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating the non-GAAP financial measures presented above as well as significant tax adjustments. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.
(2)  Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data.
(3)  Calculated based upon 423,994 diluted weighted-average shares for Class A and Class B.
(4)  In December 2016, VMware entered into a stock purchase agreement with Dell and Dell’s wholly-owned subsidiary, EMC Equity Assets LLC (“EMC”) pursuant to which VMware agreed to purchase $500 million of VMware Class A common stock from EMC. The final aggregate number of shares purchased will be determined based on a volume-weighted average price, less a contractually agreed upon discount. As of December 31, 2016, VMware had made an up-front payment of $375 million, as well as recognized a derivative asset and related $8 million gain in Other income (expense), net. The derivative asset is related to its obligation to repurchase $125 million of additional shares and is measured at fair value on a recurring basis. In accordance with U.S. GAAP, diluted net income per share does not include the impact of the remeasurement.


VMware, Inc.

RECONCILIATION OF GAAP TO NON-GAAP DATA

For the Twelve Months Ended December 31, 2015

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

 

      GAAP       Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock
Transactions
    Intangible
Amortization
    Realignment
Charges
    Acquisition
and Other
Related
Items
    GSA
Settlement
    Certain
Litigation
and Other
Contingencies
    Tax
Adjustment (1)
    Non-GAAP,
as adjusted (2)
 

Revenue:

                   

GSA settlement

  $ (76     —          —          —          —          —          76        —          —        $ —     

Total revenue

  $ 6,571        —          —          —          —          —          76        —          —        $ 6,647   

Operating expenses:

                   

Cost of license revenue

  $ 186        (2     —          (107     —          —          —          —          —        $ 77   

Cost of services revenue

  $ 832        (44     (1     (3     —          —          —          —          —        $ 784   

Research and development

  $ 1,300        (226     (3     —          —          —          —          —          —        $ 1,072   

Sales and marketing

  $ 2,267        (168     (5     (28     —          —          —          —          —        $ 2,066   

General and administrative

  $ 766        (64     (2     (3     —          (158     6        (11     —        $ 534   

Realignment

  $ 23        —          —          —          (23     —          —          —          —        $ —     

Operating income

  $ 1,197        504        11        141        23        158        70        11        —        $ 2,114   

Operating margin (2)

    18.2     7.7     0.2     2.1     0.4     2.4     1.1     0.2     —          31.8

Other income (expense), net

  $ (7     —          —          —          —          (1     —          —          —        $ (7

Income before income tax

  $ 1,213        504        11        141        23        158        70        11        —        $ 2,130   

Income tax provision

  $ 216                      181      $ 398   

Tax rate (2)

    17.8                     18.7

Net income

  $ 997        504        11        141        23        158        70        11        (181   $ 1,732   

Net income per weighted-average share, diluted for Class A and Class B (2) (3)

  $ 2.34      $ 1.18      $ 0.03      $ 0.33      $ 0.05      $ 0.37      $ 0.16      $ 0.03      $ (0.42   $ 4.06   

 

(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 426,547 diluted weighted-average shares for Class A and Class B.


VMware, Inc.

REVENUE BY TYPE

(in millions)

(unaudited)

 

     Three Months Ended     Twelve Months Ended  
     December 31,     December 31,  
     2016     2015     2016     2015  

Revenue:

        

License

   $ 887      $ 825      $ 2,794      $ 2,720   

Services:

        

Software maintenance

     987        901        3,740        3,405   

Professional services

     158        142        559        522   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total services

     1,145        1,043        4,299        3,927   

GSA settlement

     —          —          —          (76
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 2,032      $ 1,868      $ 7,093      $ 6,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of revenue:

        

License

     43.6     44.2     39.4     41.4

Services:

        

Software maintenance

     48.6     48.2     52.7     51.8

Professional services

     7.8     7.6     7.9     7.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total services

     56.4     55.8     60.6     59.7

GSA settlement

     —       —       —       (1.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 


VMware, Inc.

REVENUE BY GEOGRAPHY

(in millions)

(unaudited)

 

     Three Months Ended     Twelve Months Ended  
     December 31,     December 31,  
     2016     2015     2016     2015  

Revenue:

        

United States

   $ 1,001      $ 947      $ 3,588      $ 3,311   

International

     1,031        921        3,505        3,260   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 2,032      $ 1,868      $ 7,093      $ 6,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of revenue:

        

United States

     49.3     50.7     50.6     50.4

International

     50.7     49.3     49.4     49.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     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)

 

     Three Months Ended     Twelve Months Ended  
     December 31,     December 31,  
     2016     2015     2016     2015  

GAAP cash flows from operating activities

   $ 463      $ 488      $ 2,381      $ 1,899   

Capital expenditures

     (44     (59     (153     (333
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flows

   $ 419      $ 429      $ 2,228      $ 1,566   
  

 

 

   

 

 

   

 

 

   

 

 

 


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 revenue, 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 and other-related items, gain on share repurchase, certain litigation and other contingencies, and the GSA settlement, each as discussed below. Free cash flows differ from GAAP cash flows from operating activities with respect to the treatment of capital expenditures.

VMware has also presented in this earnings release (i) quarterly historical data for total revenue, excluding the GSA settlement, and unearned revenue; and (ii) data on the percentage change in total revenue and license revenue plus the sequential change in unearned revenue and unearned license revenue, respectively. VMware’s management believes that these measures are useful to investors because they allow investors to make meaningful comparisons of VMware revenue and unearned revenue 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 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 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 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. These accruals are primarily composed of amounts VMware paid to designated founders and key executives of AirWatch. Such payments were completed in the first quarter of 2016.

 

    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 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 (“EMC”) pursuant to which VMware agreed to purchase $500 million of VMware Class A common stock. The final aggregate number of shares purchased will be determined based on a volume-weighted average price, less a contractually agreed upon discount. As of December 31, 2016, VMware had made an up-front payment of $375 million, as well as recognized a derivative asset and related $8 million gain in Other income (expense), net. The derivative asset is related to its obligation to repurchase $125 million of additional shares and is measured at fair value on a recurring basis. VMware’s management believes it is useful to exclude this item, 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.

 

    GSA Settlement. During the second quarter of 2015, VMware reached an agreement with the Department of Justice (“DOJ”) and the General Services Administration (“GSA”) to resolve allegations that its sales practices between 2006 and 2013 had violated the federal False Claims Act. The settlement amount was $76 million and was recorded as a reduction of total revenue. VMware believes it is useful to exclude this amount because it does not consider it to be part of the ongoing operations of VMware’s business and because of the singular nature of the claims underlying the matter.

 

    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.