News Column

VMWARE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 5, 2014

The following management's discussion and analysis ("MD&A") is provided in addition to the accompanying condensed consolidated financial statements and notes to assist in understanding our results of operations and financial condition. Financial information as of June 30, 2014 should be read in conjunction with our consolidated financial statements for the year ended December 31, 2013 contained in our Form 10-K filed February 25, 2014. All dollar amounts expressed as numbers in this MD&A (except share and per share amounts) are in millions. Period-over-period changes are calculated based upon the respective underlying, non-rounded data. Unless the context requires otherwise, we are referring to VMware, Inc. and its consolidated subsidiaries when we use the terms "VMware," the "Company," "we," "our" or "us." Overview We are the leader in virtualization infrastructure solutions utilized by organizations to help transform the way they build, deliver and consume information technology ("IT") resources. We develop and market our product and service offerings within three main product groups, and we also seek to leverage synergies across these three product areas. SDDC or Software-Defined Data Center End-User Computing Hybrid Cloud Computing We pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. The benefits to our customers include lower IT costs and a more automated and resilient systems infrastructure capable of responding dynamically to variable business demands. Our broad and proven suite of virtualization technologies are designed to establish secure and, reliable IT environments and address a range of complex IT challenges that include cost reduction, operational inefficiencies, access to cloud computing capacity, business continuity and corporate end-user computing device management. Our solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity that can be allocated dynamically, securely and reliably to applications as needed. Once created, these internal computing infrastructures, or "clouds," can be dynamically extended by our customers to the public cloud environment. When linked, this results in a "hybrid" computing cloud of highly available internal and external computing resources that organizations can access on demand. Our customers' deployments range in size from a single virtualized server for small businesses to thousands of virtual machines for our Fortune 1000 enterprise customers. We have articulated a vision for the software-defined data center ("SDDC"), where increasingly infrastructure is virtualized and delivered as a service, enabling control of the data center to be entirely automated by software. The SDDC is designed to transform the data center into an on-demand service that addresses application requirements by abstracting, pooling, and automating the services that are required from the underlying hardware. SDDC promises to dramatically simplify data center operations and lower costs. The VMware vCloud Suite, which is our first integrated solution toward realizing the SDDC vision and is based upon our VMware vSphere virtualization platform, was initially introduced in late 2012. The VMware vCloud Suite addresses virtualization of not only CPU and memory, but also networks and associated security services. In addition, the vCloud Suite delivers a new approach to management, leveraging policy-based automation. VMware vCloud Suite is engineered for hybrid cloud computing so that it federates with other pools of infrastructure. We believe that our solutions enable organizations to realize significant operational and cost efficiencies as they transition their underlying legacy IT infrastructure. We work closely with more than 1,200 technology partners, including leading server, microprocessor, storage, networking, software and security vendors. We have shared the economic opportunities surrounding virtualization with our partners by facilitating solution development through open application programming interface ("APIs") formats and protocols and providing access to our source code and technology. The endorsement and support of our partners further enhances the awareness, reputation and adoption of our virtualization solutions. We expect to grow our business by building long-term relationships with our customers, which includes continuing to sell our solutions through enterprise license agreements ("ELAs"). ELAs are comprehensive volume license offerings offered both directly by us and through certain channel partners that provide for multi-year maintenance and support. Under a typical ELA, a portion of the revenues is attributed to license revenues and the remainder is primarily attributed to software maintenance revenues. In addition, the initial maintenance and support period is typically longer for ELAs compared to our transactional business. We believe that ELAs facilitate our objective of building long-term relationships with our customers as they commit to our virtual infrastructure solutions in their data centers. ELAs comprised 37% of our overall sales during each of the second quarters of 2014 and 2013, and 32% and 33% of our overall sales during the six months ended June 30, 2014 and 2013, respectively, with the balance primarily represented by our non-ELA, or transactional, business. 22



--------------------------------------------------------------------------------

Table of Contents

On February 24, 2014, we acquired A.W.S. Holding, LLC ("AirWatch Holding"), the sole member and equity holder of AirWatch LLC ("AirWatch"). AirWatch is a leader in enterprise mobile management and security solutions. The acquisition of AirWatch expands our portfolio of mobile solutions within the enterprise mobile and security space. We have grown our headcount during the three and six months ended June 30, 2014 due to organic growth and the AirWatch acquisition. The increased headcount has resulted in higher cash and stock-based employee-related expenses across our income statement expense categories when compared to the same periods in 2013 and we expect this trend to continue. See further discussion under "Results of Operations" below. Results of Operations Revenues Our revenues during the three and six months ended June 30, 2014 and 2013 were as follows: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 $ Change % Change 2014 2013 $ Change % Change Revenues: License $ 614$ 531$ 84 16 % $ 1,175$ 1,019$ 156 15 % Services: Software maintenance 737 614 123 20 1,438 1,220 219 18 Professional services 106 98 7 8 204 196 8 4 Total services 843 712 130 18 1,642 1,416 227 16 Total revenues $ 1,457$ 1,243$ 214 17 $ 2,817$ 2,435$ 383 16 Revenues: United States $ 683$ 590$ 93 16 % $ 1,332$ 1,159$ 173 15 % International 774 653 121 19 1,485 1,276 209 16 Total revenues $ 1,457$ 1,243$ 214 17 $ 2,817$ 2,435$ 383 16 License Revenues License revenues during the three and six months ended June 30, 2014 were up 16% and 15%, respectively, compared to the three and six months ended June 30, 2013. Our license revenue growth rate was favorably impacted during the three and six months ended June 30, 2014 compared to the same periods in the prior year as a result of increased sales of our integrated product suites, including VMware vCloud Suite. Our customers continue to shift to purchasing our suite solutions rather than purchasing certain products sold on a standalone basis such as vSphere. Our integrated product suites include various product offerings and are generally sold at a higher price than our products that are sold on an individual basis. Our license revenue growth rate was negatively impacted by the contribution to Pivotal and the disposition of other net assets under our realignment plan during fiscal 2013. License revenues related to Pivotal and all dispositions under our realignment plan were $4 and $17 during the three and six months ended June 30, 2013, respectively. Services Revenues During the three and six months ended June 30, 2014, software maintenance revenues benefited from renewals, multi-year software maintenance contracts sold in previous periods, and additional maintenance contracts sold in conjunction with new software license sales. In each period presented, customers bought, on average, more than 24 months of support and maintenance with each new license purchased, which we believe demonstrates our customers' commitment to our SDDC strategy. Our services revenue growth rate was negatively impacted by the contribution to Pivotal and the disposition of other net assets under our realignment plan. Service revenues related to Pivotal and all dispositions under our realignment plan were $4 and $34 during the three and six months ended June 30, 2013, respectively. 23



--------------------------------------------------------------------------------

Table of Contents

Foreign Currency We invoice and collect in the Euro, the British Pound, the Japanese Yen, the Australian Dollar and the Chinese Renminbi in their respective regions. As a result, our total revenues are affected by changes in the value of the U.S. Dollar against these currencies. Foreign currency fluctuations did not have a material impact when comparing license revenues during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, respectively. Unearned Revenues Our unearned revenues as of June 30, 2014 and December 31, 2013 were as follows: June 30, 2014 December 31, 2013 Unearned license revenues $ 476 $ 465 Unearned software maintenance revenues 3,541



3,304

Unearned professional services revenues 372 323 Total unearned revenues $ 4,389 $ 4,092 Unearned license revenues are generally recognized upon delivery of existing or future products or services, or they are otherwise recognized ratably over the term of the arrangement. Future products include, in some cases, emerging products that are offered as part of product promotions where the purchaser of an existing product is entitled to receive the future product at no additional charge. To the extent the future product has not been delivered and vendor-specific objective evidence ("VSOE") of fair value cannot be established, the revenue for the entire order is deferred until such time as all product delivery obligations have been fulfilled. In the event the arrangement does not include professional services, unearned license revenue may also be recognized ratably, if the customer is granted the right to receive unspecified future products or VSOE of fair value on the software maintenance element of the arrangement does not exist. Total unearned license revenues may vary over periods for a variety of factors, including the type and level of promotions offered, and the timing of when the products are delivered upon general availability. Unearned software maintenance revenues are attributable to our maintenance contracts and are generally recognized ratably, typically over terms from one to five years with a weighted-average remaining term at June 30, 2014 of approximately two years. Unearned professional services revenues result primarily from prepaid professional services, including training, and are generally recognized as the services are delivered. Cost of License and Services Revenues, and Operating Expenses Cost of License Revenues Our cost of license revenues principally consists of the cost of fulfillment of our software, royalty costs in connection with technology licensed from third-party providers and amortization of intangible assets and capitalized software. The cost of fulfillment of our software includes IT development efforts, personnel costs and related overhead associated with the physical and electronic delivery of our software products. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 $ Change % Change



2014 2013 $ Change % Change Cost of license revenues $ 45$ 55$ (8 ) (16 )%

$ 94$ 111$ (16 ) (14 )% Stock-based compensation 1 - - - 2 1 - 18 Total expenses $ 46$ 55$ (8 ) (15 ) $ 96$ 112$ (16 ) (14 ) % of License revenues 8 % 10 %



8 % 11 %

Cost of license revenues decreased during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 primarily due to a decrease of $13 and $26, respectively, in amortization of capitalized software development costs which was partially offset by an increase of $5 and $7, respectively, in amortization of intangible assets. As of December 31, 2013, all previously capitalized software development costs were fully amortized and as such, we do not expect significant amortization of capitalized software development costs during 2014. 24



--------------------------------------------------------------------------------

Table of Contents

Cost of Services Revenues Our cost of services revenues primarily includes the costs of personnel and related overhead to deliver technical support for our products and to provide our professional services. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 $ Change % Change

2014 2013 $ Change % Change Cost of services revenues $ 161$ 111$ 50 44 % $ 303$ 229$ 74 32 % Stock-based compensation 11 7 4 65 20 14 6 45 Total expenses $ 172$ 118$ 54 46 $ 323$ 243$ 81 33 % of Services revenues 20 % 17 % 20 % 17 % Cost of services revenues increased during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013. The increases were primarily due to growth in cash-based employee-related expenses of $29 and $51, during the three and six months ended June 30, 2014, respectively, driven by incremental growth in headcount, both organic and through the AirWatch acquisition. Costs we incur to provide technical support increased by $9 and $14 during the three and six months ended June 30, 2014, respectively. Additionally, increases in equipment and depreciation costs contributed to the increases in cost of services revenues. The increase during the six months ended June 30, 2014 was partially offset by a decrease of $10 in operating expenses related to Pivotal. Research and Development Expenses Our research and development ("R&D") expenses include the personnel and related overhead associated with the R&D of new product offerings and the enhancements, including major upgrades, of our existing software offerings. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 $ Change %



Change 2014 2013 $ Change % Change Research and development $ 251$ 210$ 41 20 % $ 484$ 419$ 65 16 % Stock-based compensation 66

51 15 29 126 113 13 11 Total expenses $ 317$ 261$ 56 21



$ 610$ 532$ 78 15 % of Total revenues

22 % 21 % 22 % 22 % R&D expenses increased during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013. The increases were primarily due to growth in cash-based employee-related expenses of $24 and $51 during the three and six months ended June 30, 2014, respectively, and increases in stock-based compensation of $15 and $13, respectively, driven by incremental growth in headcount, both organic and through the AirWatch acquisition. Additionally, contractor costs of $7 and $12 contributed to the increases during the three and six months ended June 30, 2014, respectively, as well as increases in equipment and depreciation expenses. The increase during the six months ended June 30, 2014 was partially offset by a decrease of $15 in research and development expenses related to Pivotal. 25



--------------------------------------------------------------------------------

Table of Contents

Sales and Marketing Expenses Our sales and marketing expenses include personnel costs, sales commissions and related overhead associated with the sale and marketing of our license and services offerings, as well as the cost of product launches. Sales commissions are generally earned and expensed when a firm order is received from the customer. Sales and marketing expenses also include the net impact from the expenses incurred and fees generated by certain marketing initiatives. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 $ Change % Change 2014 2013 $ Change % Change Sales and marketing $ 501$ 409$ 92 23 %



$ 934$ 790$ 145 18 % Stock-based compensation 43

33 10 30 84 69 15 21 Total expenses $ 544$ 442$ 102 23 $ 1,018$ 859$ 159 19 % of Total revenues 37 % 36 % 36 % 35 % Sales and marketing expenses increased during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 primarily driven by growth in cash-based employee-related expenses of $65 and $111, respectively, and an increase in stock-based compensation of $10 and $15, respectively, due to incremental growth in headcount, both organic and through the AirWatch acquisition. Costs incurred for travel and marketing programs also contributed to increases of $18 and $29, respectively, in expenses during the three and six months ended June 30, 2014 compared to the same periods in 2013. The increase in expenses during the six months ended June 30, 2014 was partially offset by a decrease of $10 in sales and marketing expenses related to Pivotal. General and Administrative Expenses Our general and administrative expenses include personnel and related overhead costs to support the overall business. These expenses include the costs associated with our finance, human resources, IT infrastructure and legal, as well as expenses related to corporate costs and initiatives and facilities costs. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 $ Change % Change 2014 2013 $ Change % Change General and administrative $ 161$ 84$ 77 91 % $ 295$ 168$ 126 74 % Stock-based compensation 18 12 6 50 35 26 9 34 Total expenses $ 179$ 96$ 82 86 $ 330$ 194$ 134 69 % of Total revenues 12 % 8 %



12 % 8 %

General and administrative expenses increased during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013. Certain key employees of AirWatch may be paid consideration upon the achievement of specified future employment conditions. Compensation expense relating to the future employment conditions of the key AirWatch employees of $41 and $60 was recognized during the three and six months ended June 30, 2014, respectively. Other cash-based employee-related expenses increased by $14 and $28 during the three and six months ended June 30, 2014, respectively, and stock-based compensation expenses increased $6 and $9, respectively, due to incremental growth in headcount, both organic and through the AirWatch acquisition. Costs of $11 related to certain litigation and other contingencies and IT development costs further contributed to the increases in expenses during the three and six months ended June 30, 2014 compared to the same periods in 2013. 26



--------------------------------------------------------------------------------

Table of Contents Realignment Charges Six Months Ended June 30, 2014 2013 $ Change % Change

Realignment charges $ (1 )$ 57$ (59 ) (102 )% Stock-based compensation - 6 (6 ) (100 ) Total expenses $ (1 )$ 63$ (65 ) (102 ) Realignment charges during the six months ended June 30, 2013 were incurred in connection with our realignment plan that was initiated in January 2013. The realignment plan was completed at December 31, 2013. Interest Expense with EMC Interest expense with EMC Corporation ("EMC") of $7 and $12 during the three and six months ended June 30, 2014, respectively, increased by $6 and $9 compared to the same periods in 2013 primarily as a result of the additional debt we assumed from EMC. See "Our Relationship with EMC" disclosure for further information. Other Income, Net Other income, net, decreased by $18 and $13 during the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, primarily due to a pre-tax gain of $32 recognized during the three and six months ended June 30, 2013 as a result of exiting certain lines of business under our business realignment plan. Partially offsetting this gain during the three and six months ended June 30, 2013 was an other-than-temporary impairment charge of $13 that we recognized in connection with a non-recoverable strategic investment. Income Tax Provision For the three months ended June 30, 2014 and 2013, our effective income tax rate was 17.5% and 16.8%, respectively. For the six months ended June 30, 2014 and 2013, our effective income tax rate was 18.1% and 8.7%, respectively. Our effective income tax rate when comparing the three and six months ended June 30, 2014 to the same periods in 2013 was primarily impacted by the expiration of the federal research credit on December 31, 2013. During January 2013, the United States Congress retroactively enacted the extension of the federal research credit through December 31, 2013. Our rate of taxation in foreign jurisdictions is lower than our U.S. tax rate. Our international income is primarily earned by our subsidiaries in Ireland, where the statutory tax rate is 12.5%. Recent developments in non-U.S. tax jurisdictions and unfavorable changes in non-U.S. tax laws and regulations could have an adverse effect on our effective tax rate. Additionally, if earnings are lower than anticipated in countries where the statutory tax rates are lower than the U.S. federal tax rate, this could also have an adverse effect on our effective tax rate. All income earned abroad, except for previously taxed income for U.S. tax purposes is considered indefinitely reinvested in our foreign operations and no provision for U.S. taxes has been provided with respect to such income. Our intent is to indefinitely reinvest our non-U.S. funds in our foreign operations, and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We have been included in the EMC consolidated group for U.S. federal income tax purposes, and expect to continue to be included in such consolidated group for periods in which EMC owns at least 80% of the total voting power and value of our outstanding stock as calculated for U.S. federal income tax purposes. The percentage of voting power and value calculated for U.S. federal income tax purposes may differ from the percentage of outstanding shares beneficially owned by EMC due to the greater voting power of our Class B common stock as compared to our Class A common stock and other factors. Each member of a consolidated group during any part of a consolidated return year is jointly and severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Should EMC's ownership fall below 80% of the total voting power or value of our outstanding stock in any period, then we would no longer be included in the EMC consolidated group for U.S. federal income tax purposes, and our U.S. federal income tax would be reported separately from that of the EMC consolidated group. Although we file a consolidated federal tax return with EMC, the income tax provision is calculated primarily as though we were a separate taxpayer. However, certain transactions that we and EMC are parties to are assessed using consolidated tax return rules. Our effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The rate at which the provision for income taxes is calculated differs from the U.S. federal statutory income tax rate primarily due to different tax rates in foreign jurisdictions where income is earned. Our future effective tax rate may be affected by such factors as changes in tax laws, changes in our business, regulations, or rates, changing interpretation of existing laws or regulations, the impact of accounting for stock-based compensation, the 27



--------------------------------------------------------------------------------

Table of Contents

impact of accounting for business combinations, changes in our international organization, shifts in the amount of income before tax earned in the U.S. as compared with other regions in the world, and changes in overall levels of income before tax. Our Relationship with EMC As of June 30, 2014, EMC owned 43,025,000 shares of Class A common stock and all 300,000,000 shares of Class B common stock, representing 79.8% of our total outstanding shares of common stock and 97.2% of the combined voting power of our outstanding common stock. EMC Reseller Arrangement, Other Services and Note Payable We and EMC engaged in the following ongoing intercompany transactions, which resulted in revenues and receipts and unearned revenues for VMware: Pursuant to an ongoing reseller arrangement with EMC, EMC bundles our



products and services with EMC's products and sells them to end-users.

EMC purchases products and services from us for internal use.

We recognize revenues for professional services based upon such contractual agreements with EMC. From time to time, we and EMC enter into agreements to collaborate on technology projects, and EMC pays us for services that we provide to EMC in connection with such projects.



Information about our revenues and receipts from such arrangements with EMC during the three and six months ended June 30, 2014 and 2013 and unearned revenues as of June 30, 2014 and December 31, 2013 consisted of the following (table in millions):

Revenues and Receipts from Unearned Revenues from EMC EMC Three Months Ended Six Months Ended As of As of June 30, June 30, June 30, December 31, 2014 2013 2014 2013 2014 2013 Reseller revenues $ 43$ 35$ 89$ 72 $ 203 $ 188 Professional services revenues 18 30 40 46 10 12 Internal-use revenues 5 3 13 6 13 20 Collaborative technology project receipts - 2 - 4 n/a n/a We and EMC engaged in the following ongoing intercompany transactions, which resulted in costs to us: We purchase products and services for internal use from EMC.



From time to time, we and EMC enter into agreements to collaborate on

technology projects, and we pay EMC for services provided to us by EMC

related to such projects.

In certain geographic regions where we do not have an established legal

entity, we contract with EMC subsidiaries for support services and EMC

personnel who are managed by us. The costs incurred by EMC on our behalf

related to these employees are passed on to us and we are charged a

mark-up intended to approximate costs that would have been charged had we

contracted for such services with an unrelated third party. These costs

are included as expenses in our condensed consolidated statements of

income and primarily include salaries, benefits, travel and rent. EMC also

incurs certain administrative costs on our behalf in the U.S. that are

recorded as expenses in our condensed consolidated statements of income.

We incur interest expense on our note payable with EMC. See below.

28



--------------------------------------------------------------------------------

Table of Contents

Information about our costs from such arrangements with EMC during the three and six months ended June 30, 2014 and 2013 consisted of the following (table in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013



Purchases of products and services $ 12 $ 15 $

33 $ 25 Collaborative technology project costs 3 2 7 2 EMC subsidiary support and administrative costs 35 27 76 63 Interest expense on note payable 7 1 12 2 Certain Stock-Based Compensation Effective September 1, 2012, Pat Gelsinger succeeded Paul Maritz as Chief Executive Officer of VMware. Prior to joining VMware, Pat Gelsinger was the President and Chief Operating Officer of EMC Information Infrastructure Products. Paul Maritz remains a board member of VMware and currently serves as Chief Executive Officer of Pivotal, a majority-owned subsidiary of EMC in which we have an ownership interest, and as an executive officer of EMC. Both Paul Maritz and Pat Gelsinger retain and continue to vest in certain of their respective equity awards that they held as of September 1, 2012. Stock-based compensation related to Pat Gelsinger'sEMC awards are being recognized on our condensed consolidated statements of income over the awards' remaining requisite service periods. Effective since September 1, 2012, stock-based compensation costs related to Paul Maritz'sVMware awards have been charged to EMC and have not been recognized by us. Pivotal During 2013, we transferred certain assets and liabilities to Pivotal. We contributed certain assets, including intellectual property to Pivotal, and Pivotal assumed substantially all liabilities, related to certain of our Cloud Application Platform products and services, including VMware's Cloud Foundry, VMware vFabric (including Spring and GemFire) and Cetas organizations, except for certain tangible assets related to Cloud Foundry. As of June 30, 2014, our ownership interest in Pivotal is 28%. Additionally, we and Pivotal entered into an agreement pursuant to which we will act as the selling agent for the products and services we contributed to Pivotal in exchange for a customary agency fee. We also agreed to provide various transition services to Pivotal. Pursuant to the support agreement, costs incurred by us to support Pivotal services are reimbursed to us by Pivotal and are recorded as a reduction to the costs incurred by us. Information about our revenues and costs from such arrangement with Pivotal during the three and six months ended June 30, 2014 and 2013 consisted of the following (table in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenues $ 1$ 2$ 2$ 2 Transition services 1 $ 8 3 $ 8 Additionally, we purchased an immaterial amount of products and services for internal use from Pivotal during the three and six months ended June 30, 2014 and 2013. 29



--------------------------------------------------------------------------------

Table of Contents

Tax Sharing Agreement with EMC Pursuant to a tax sharing agreement between us and EMC, we have made payments to EMC and EMC has made payments to us. The following table summarizes these payments made between us and EMC during the three and six months ended June 30, 2014 and 2013 (table in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Payments from us to EMC $ - $ - $ 20 $ - Payments from EMC to us - 16 - 16 Payments between us and EMC under the tax sharing agreement relate to our portion of federal income taxes on EMC's consolidated tax return as well as state payments for combined states. Payments from EMC to us relate to periods where we had a stand-alone loss for U.S. federal and state income tax purposes or where we had federal tax credits in excess of federal tax liabilities. Payments from us to EMC are for estimated tax payments primarily for U.S. federal income tax purposes. The amounts that we either pay to or receive from EMC for our portion of federal income taxes on EMC's consolidated tax return differ from the amounts we would owe on a separate return basis and the difference is presented as a component of stockholders' equity. During the three and six months ended June 30, 2014 and 2013, the difference between the amount of tax calculated on a stand-alone basis and the amount of tax calculated per the tax sharing agreement was not material. Due To/From Related Parties, Net As a result of the related-party transactions with EMC and Pivotal described above, amounts due to and from related parties, net as of June 30, 2014 consisted of the following (table in millions): As of June 30, 2014 Due to EMC $ (61 ) Due from EMC 108 Due to Pivotal (8 ) Due from Pivotal 1 Due (to) from related parties, net $ 40 Income tax payable due to EMC $ (81 ) Balances due to or from related parties, which are unrelated to tax obligations, are generally settled in cash within 60 days of each quarter-end. The timing of the tax payments due to and from EMC is governed by the tax sharing agreement with EMC. Note Payable to EMC In connection with our acquisition of AirWatch, we and EMC entered into a note exchange agreement on January 21, 2014 providing for the issuance of three promissory notes in the aggregate principal amount of $1,500. The total debt of $1,500 includes $450 that was exchanged for the $450 promissory note issued to EMC in April 2007, as amended and restated in June 2011. The three notes issued may be prepaid without penalty or premium, and outstanding principal is due on the following dates: $680 due May 1, 2018, $550 due May 1, 2020 and $270 due December 1, 2022. The notes bear interest, payable quarterly in arrears, at the annual rate of 1.75%. During the three and six months ended June 30, 2014, $7 and $12, respectively, of interest expense was recognized. During the three and six months ended June 30, 2013, $1 and $2, respectively, of interest expense was recognized. By nature of EMC's majority ownership of us, the amounts we recorded for our intercompany transactions with EMC may not be considered arm's length with an unrelated third party. Therefore the condensed consolidated financial statements included herein may not necessarily reflect our results of operations, financial position and cash flows had we engaged in such transactions with an unrelated third party during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance as a stand-alone company. 30



--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources At June 30, 2014 and 2013, we held cash, cash equivalents and short-term investments as follows:

June 30, 2014 2013 Cash and cash equivalents $ 2,054$ 1,840 Short-term investments 4,583 3,483



Total cash, cash equivalents and short-term investments $ 6,637$ 5,323

As of June 30, 2014, we held a diversified portfolio of money market funds and fixed income securities totaling $6,053. Our fixed income securities are denominated in U.S. Dollars and consisted of highly liquid debt instruments of the U.S. government and its agencies, U.S. municipal obligations, and U.S. and foreign corporate debt securities. We limit the amount of our domestic and international investments with any single issuer and any single financial institution, and also monitor the diversity of the portfolio, thereby diversifying the credit risk. As of June 30, 2014, our total cash, cash equivalents and short-term investments were $6,637, of which $4,695 was held outside the U.S. If these overseas funds were needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes on related undistributed earnings to repatriate these funds. However, our intent is to indefinitely reinvest our non-U.S. earnings in our foreign operations and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We expect that cash generated by operations will be used as our primary source of liquidity. We also believe that existing cash and cash equivalents, together with any cash generated from operations will be sufficient to meet normal operating requirements for at least the next twelve months. While we believe our existing cash and cash equivalents and cash to be generated by operations will be sufficient to meet our normal operating requirements, our overall level of cash needs may be impacted by the number and size of acquisitions, investments and stock repurchases. On January 21, 2014, in connection with our agreement to acquire AirWatch, we and EMC entered into a note exchange agreement providing for the issuance of three promissory notes in the aggregate principal amount of $1,500. Please see below for further details regarding these promissory notes. Should we require additional liquidity, we may seek to arrange debt financing or enter into credit facilities. Our cash flows summarized for the three and six months ended June 30, 2014 and 2013 were as follows: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net cash provided by (used in): Operating activities $ 409$ 534$ 1,159$ 1,210 Investing activities (862 ) (444 ) (2,060 ) (775 ) Financing activities (281 ) (90 ) 650 (204 ) Net (decrease) increase in cash and cash equivalents $ (734 ) $ - $ (251 )$ 231 Operating Activities Cash provided by operating activities decreased by $125 and $51 during the three and six months ended June 30, 2014 from the three and six months ended June 30, 2013, respectively. The decrease during the three and six months ended June 30, 2014 was primarily driven by a decrease in profitability, change in deferred taxes, and an increase in accounts receivable compared to the same periods in 2013. Investing Activities Cash used in investing activities is generally attributable to the purchase of fixed income securities, business acquisitions, and capital expenditures. Cash provided by investing activities is also impacted by the timing of purchases, sales and maturities of our available-for-sale securities. Cash used in investing activities increased during the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to increases in purchases of available-for-sale securities and purchases of strategic investments. Additionally, cash used in investing activities during the six months ended June 30, 2014 increased significantly as a result of our acquisition of AirWatch during the first quarter of 2014. The increase in restricted cash during the six months ended June 30, 2014 primarily relates to amounts due to certain AirWatch employees, subject to achievement of certain employment conditions. 31



--------------------------------------------------------------------------------

Table of Contents

Financing Activities Net cash provided by financing activities during the six months ended June 30, 2014 changed compared to net cash used in financing activities during the same period in 2013 primarily as a result of the note payable exchange agreement we entered into with EMC in connection with our acquisition of AirWatch. Notes Payable to EMC As of June 30, 2014, $1,500 remained outstanding on a note payable to EMC, with interest payable quarterly in arrears. In connection with our acquisition of AirWatch, we entered into a note exchange agreement with EMC on January 21, 2014 providing for the issuance of three promissory notes in the aggregate principal amount of $1,500. The total debt of $1,500 includes $450 that was exchanged for the $450 promissory note issued to EMC in April 2007, as amended and restated in June 2011. The three notes issued have the following principal amounts and maturity dates: $680 due May 1, 2018, $550 due May 1, 2020 and $270 due December 1, 2022. The notes bear interest at the annual rate of 1.75%. Interest is payable quarterly in arrears. The notes may be prepaid without penalty or premium. We drew down on all three notes in late January 2014. Critical Accounting Policies Our condensed consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United States of America that require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the critical accounting policies set forth within Item 7 of our 2013 Annual Report on Form 10-K may involve a higher degree of judgment and complexity in their application than our other significant accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. New Accounting Pronouncements During May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The updated revenue standard establishes principles for recognizing revenue and develops a common revenue standard for all industries. Upon adoption, entities will be required to recognize the amount of revenue that they expect to be entitled to for the transfer of promised goods or services to their customers. The updated standard is effective for us in the first quarter of 2017 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements, including, without limitation, statements regarding: achieving future business growth by building long-term relationships with our customers through the adoption of enterprise license agreements; our vision and expected benefits of the SDDC; increased operating expenses resulting from our acquisition of AirWatch; maintaining our industry leadership position; benefits of our products and services to customers; the recognition of unearned revenue; the impact of our relationship with EMC Corporation on taxes; acquisition accounting and the deductibility of goodwill and identifiable intangible assets for U.S. income tax purposes; the sufficiency of our liquidity and capital reserves to fund our operations and business strategy; our ability to generate positive cash flows from operations; continuation of our stock repurchase program; our effective tax rate and the effects of potential developments in U.S. and non-U.S. tax jurisdictions; future amortization of software development costs; our intent to indefinitely reinvest our overseas earnings in our foreign operations; the lack of a material adverse effect on us due to the resolution of pending claims, legal proceedings and investigations including the GSA and DOJ inquiries; and gains and losses associated with foreign currency fluctuations. These forward-looking statements involve risks and uncertainties and the cautionary statements set forth above and those contained in the section of this report entitled "Risk Factors" identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We assume no obligation to, and do not currently intend to, update these forward-looking statements. 32



--------------------------------------------------------------------------------

Table of Contents

Available Information Our website is located at www.vmware.com, and our investor relations website is located at http://ir.vmware.com. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, all of which is made available free of charge, including: our annual report on Form 10-K, quarterly reports on Form 10-Q, current



reports on Form 8-K, and any amendments to those reports, as soon as

reasonably practicable after we electronically file that material with or

furnish it to the Securities and Exchange Commission ("SEC");

announcements of investor conferences, speeches and events at which our

executives talk about our products, services and competitive strategies;

webcasts of our quarterly earnings calls and links to webcasts of investor

conferences at which our executives appear (archives of these events are also available for a limited time);



additional information on financial metrics, including reconciliations of

non-GAAP financial measures discussed in our presentations to the nearest

comparable GAAP measure;

press releases on quarterly earnings, product and service announcements,

legal developments and international news; corporate governance information including our certificate of



incorporation, bylaws, corporate governance guidelines, board committee

charters, business conduct guidelines (which constitutes our code of business conduct and ethics) and other governance-related policies; other news, blogs and announcements that we may post from time to time that investors might find useful or interesting; and opportunities to sign up for email alerts and RSS feeds to have information pushed in real time.



The information found on our website is not part of, and is not incorporated by reference into, this or any other report we file with, or furnish to, the SEC.


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters