UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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þ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 1, 2019January 28, 2022
OR
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33622
VMWARE, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | 94-3292913 |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification Number) |
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Delaware | 94-3292913 |
(State or other jurisdiction of
incorporation or organization)
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Identification Number)
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3401 Hillview Avenue Palo Alto, CA
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| Palo Alto, | | CA | 94304 |
| (Address of principal executive offices) | (Zip Code) |
(650) 427-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Class A Common Stock, par value $0.01common stock | | VMW | | New York Stock Exchange |
Securities registered pursuant to sectionSection 12(g) of the Act: None
None
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ☑ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ Noþ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑ No o☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☑ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | þ
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| Non-accelerated filer | o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑
At August 3, 2018,As of July 30, 2021, the aggregate market value of the registrant’s Class A common stock held by non-affiliates of the registrant (based upon the closing sale price of such shares on the New York Stock Exchange on August 3, 2018)July 30, 2021) was approximately $11,457,619,520.$12.4 billion. Shares of the registrant’s Class A common stock and Class B common stock held by each executive officer and director and by each entity or person, other than investment companies, that, to the registrant’s knowledge, owned 5% or more of the registrant’s outstanding Class A common stock as of August 3, 2018July 30, 2021 have been excluded in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 19, 2019,15, 2022, the number of shares of Class A common stock, par value $0.01 per share, of the registrant outstanding was 410,440,998, of which 110,440,998 shares were Class A common stock and 300,000,000 were Class B common stock.421,056,294.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in 2019.2022. The Proxy Statement will be filed by the registrant with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year ended February 1, 2019.
January 28, 2022.
TABLE OF CONTENTS
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| PART I | |
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VMware, Tanzu, Pivotal, Bitnami, Heptio, Wavefront, CloudHealth, vRealize, vSphere, VMware vSAN, vRealize,NSX, vCenter, VMware Cloud, NSX, Heptio, CloudHealth, VeloCloud, Wavefront, vCloud, vCloud Air, Horizon, Horizon Suite, AirWatch,HCX, Carbon Black, Workspace ONE, VxRail, vCenter, vCenter Site Recovery Manager, AppDefense,Anywhere Workspace, Horizon, VMworld, vForum, SpringONE, VeloCloud, Nyansa, Datrium, Lastline, Avi Networks and VMworldAetherPal are registered trademarks or trademarks of VMware, Inc. or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.organizations.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical fact could be deemed forward-looking statements and words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intent,” “plan,” “believe,” “momentum,” “seek,” “estimate,” “continue,” “potential,” “future,” “endeavor,” “will,” “may”,“may,” “should,” “could,” “depend,” “predict,” and variations or the negative expression of such words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this report include, but are not limited to, statements relating to expected industry trends and conditions; future financial performance, trends or plans; anticipated impacts of developments in accounting rules and tax laws and rates; VMware’sour expectations regarding the timing of tax payments;payments and the impacts of changes in our corporate structure and alignment; plans for and anticipated benefits of VMware products, services and solutions and partner and alliance relationships; plans for, timing of and anticipated impacts and benefits of corporate transactions, capital-raising activities, acquisitions, stock repurchases and investment activities; the outcome or impact of pending litigation, claims or disputes; our ESG-related programs including the objectives of our 2030 Agenda and our programs to further diversity, equity and inclusion; the continuing impact of the COVID-19 pandemic on the global economy as well as any related effects on our business operations, financial performance, results of operations and stock price; our commercial relationship with Dell following completion of the Spin-Off and the related payment of the Special Dividend; our plans to repay our outstanding indebtedness, including the indebtedness incurred to pay a portion of the Special Dividend; our commitment and ability to maintain an investment-grade credit rating; the sufficiency of our cash sources to fund our operations; and any statements of assumptions underlying any of the foregoing. These statements are based on current expectations about the industries in which VMware operates and the beliefs and assumptions of management. 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. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof. We assume no obligation to and do not currently intend to, update these forward-looking statements.
Risk Factor Summary
VMware is subject to various risks as set forth in Part I, Item 1A of this Annual Report on Form 10-K, including:
Operation of Business and Strategic Risks
•A significant decrease in demand for our data center virtualization products would adversely affect our operating results.
•Our subscription and software-as-a-service (“SaaS”) offerings, which constitute a growing portion of our business and our initiatives to extend our data center virtualization and container platforms into the public cloud, involve various risks.
•Our success depends upon our ability to adapt our business and pricing models to a subscription and SaaS model appropriately.
•We face intense competition.
•Our commercial relationship with Dell could adversely impact our business, stock price, market share and ability to build and maintain other strategic relationships.
•Our success depends increasingly on customer acceptance of our newer products and services.
•Competition for our highly skilled employees is intense and costly.
•The loss of key management personnel could harm our business.
•Our current research and development efforts may not produce significant revenue.
•Acquisitions and divestitures could materially harm our business and operating results.
•Disruptions to our distribution channels, including our various routes to market through Dell, could harm our business.
•The evolution of our business requires more complex go-to-market strategies.
•We may not be able to respond to rapid technological changes with new solutions and services offerings.
•We operate a global business that exposes us to additional risks.
•Russia’s military actions in Ukraine have affected and may continue to affect our business.
•Our success depends on the interoperability of our products and services with those of other companies.
•Failure to effectively manage our product and service lifecycles could harm our business.
Financial Risks
•Our operating results may fluctuate significantly.
•Adverse economic conditions may harm our business.
•We have substantial indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
•We have potential tax liabilities as a result of our former controlling ownership by Dell, which could have an adverse effect on our operating results and financial condition.
•Our operating results may be adversely impacted by exposure to additional tax liabilities and higher than expected tax rates.
Security Risks
•Cybersecurity breaches of our systems or the systems of our vendors, partners and suppliers could materially harm our business.
•Our products and services are highly technical and may contain or be subject to our own or suppliers’ errors, defects or security vulnerabilities.
•Problems with our information systems could interfere with our business and could adversely impact our operations.
Legal and Compliance Risks
•We are involved in litigation, investigations and regulatory inquiries and proceedings that could negatively affect us.
•We may not be able to adequately protect our intellectual property rights.
•Actual or perceived non-compliance with privacy and data protection laws, regulations and standards could adversely impact our business.
•Our use of “open source” software in our products could negatively affect our ability to sell our products and subject us to litigation.
•If we fail to comply with government contracting regulations, our business could be adversely affected.
•Some of our directors have potential conflicts of interest with Dell.
Risks Related to Owning Our Class A Common Stock
•The MSD Stockholders and the SLP Stockholders have significant influence over us and their interests may conflict with our interests and the interests of our other stockholders.
•The price of our Class A common stock has fluctuated significantly in recent years and may fluctuate significantly in the future.
•Anti-takeover provisions in Delaware law and our charter documents could discourage takeover attempts.
•Our bylaws provide for an exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
General Risks
•We are exposed to foreign exchange risks.
•If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
•Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.
•Natural disasters, catastrophic events or geo-political conditions could disrupt our business.
•Climate change may have a long-term negative impact on our business.
•Social and ethical issues, including our ability to make progress on our ESG goals and commitments, may result in reputational harm and liability.
PART I
ITEM 1. BUSINESS
Overview
VMware, Inc. (“VMware”) originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware.hardware, and then evolved to become the private cloud and mobility management leader. Building upon that leadership, VMware is focused on becoming the multi-cloud leader. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. Organizations’ IT isdepartments and corporate divisions are working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses and their businessproduct teams through a digital transformation. To take on these challenges, we are working withhelping customers indrive their multi-cloud strategy by providing the areas of hybridmulti-cloud platform for all applications, enabling digital innovation and enterprise control.
Our multi-cloud portfolio, spanning application modernization, cloud multi-cloud, modern applications,management, cloud infrastructure, networking, and security and digital workspaces. Our software providesanywhere workspaces, forms a flexible, consistent digital foundation to help enableon which customers incan build, run, manage, connect and protect their digital transformation.
We help customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments by offering solutions across three categories: Software-Defined Data Center (“SDDC”), Hybrid Cloud Computing and End-User Computing (“EUC”). This portfolio supports and addresses the key IT priorities of our customers: accelerating their cloud journey, empowering digital workspaces and transforming networking and security. These VMware solutions enable the digital transformation our customers need as they ready their applications, infrastructure and devices for their future business needs.mission-critical workloads.
We incorporated in Delaware in 1998 and were acquired by EMC Corporation (“EMC”) in 2004 and2004. In August 2007, we conducted ouran initial public offering of our Class A common stock in August 2007. Effective(“Class A Stock”), but remained majority-owned by EMC, the sole stockholder of our Class B common stock (“Class B Stock”). In September 7, 2016, Dell Technologies Inc. (“Dell”) acquired EMC. As a result, EMC became a wholly-owned subsidiary of Dell, and we became an indirectly-held,a majority-owned subsidiary of Dell. We are consideredOn November 1, 2021, our spin-off from Dell was completed, each share of Class B Stock converted into one fully paid and non-assessable share of Class A Stock and we became a “controlled company” understandalone company (the “Spin-Off”). In connection with the rulesSpin-Off, we paid an $11.5 billion cash dividend, pro rata, to each of the New York Stock Exchange. As of February 1, 2019, Dell controlled approximately 80.5% of our outstanding common stock, including 31 million sharesholders of our Class A common stockStock and all of our Class B common stock.Stock as of the close of business on October 29, 2021 (the “Special Dividend”).
Effective January 1, 2017, ourOur fiscal year changed from a fiscal year ending on December 31 of each calendar year to a fiscal year consisting of a 52-is the 52 or 53-week period53 weeks ending on the Friday nearest to January 31 of each year. The period that began on January 1, 2017 and ended on February 3, 2017 is reflected as a transition period (the “Transition Period”). Our first full fiscal year under the revised fiscal calendar began on February 4, 2017 and ended on February 2, 2018. We refer to our fiscal year ending February 3, 2023 and fiscal years ended January 31, 2020, February 1, 201928, 2022 and February 2, 2018January 29, 2021 as “fiscal 2020,2023,” “fiscal 2019”2022,” and “fiscal 2018,2021,” respectively. Fiscal 2023 is a 53-week fiscal year, while fiscal 2022 and fiscal 2021 were each 52-week fiscal years.
Total revenue in fiscal 20192022 increased 14%9% to $8,974 million.$12.9 billion. Total revenue is comprised of license revenue of $3,788 million$3.1 billion, subscription and software-as-a-service (“SaaS”) revenue of $3.2 billion and services revenue of $5,186 million. While sales$6.5 billion. As customers shift from our on-premises offerings to our subscription and SaaS offerings, license revenue and software maintenance revenue may be lower and subject to greater fluctuation in the future, resulting from a higher proportion of our VMware vSphere (“vSphere”) product have remained strong, the majority ofsales occurring through our license sales originate from solutions across our broad portfolio beyond our compute products.subscription and SaaS offerings.
Our corporate headquarters are located at 3401 Hillview Avenue, Palo Alto, California and we have 125111 offices worldwide.
Products and Technology Solutions
Software-Defined Data Center
We wereOur portfolio supports and addresses our customers’ key priorities, including modernizing their applications, managing multi-cloud environments, accelerating their cloud journey, modernizing the first company to articulate a vision for SDDC, whereby infrastructure is increasingly virtualized and delivered as a service, enabling data center management to be entirely automated by software, from one unified platform. Traditional data centers are collections of technology silos where each application type has its own vertical stack consisting of a CPU and operating system, storage pool, networking andnetwork using commodity hardware, embracing zero-trust security and management systems. Over time, costsempowering anywhere workspaces. We enable digital transformation of customers’ applications, infrastructure and operations for their constantly evolving business and employee needs.
Application Modernization
VMware Tanzu, a portfolio of products and services for modernizing applications and infrastructure, enables customers to maintain data center infrastructure have increased asdeliver better software to production, continuously. The portfolio enables customers to build, run and manage modern applications on any cloud and simplifies the data center environment has become more heterogeneoususe of Kubernetes, an open-source platform for managing containers, in a multi-cloud environment. The modern or cloud-native applications allow businesses to bring new ideas to market faster and complex, which requires greater resourcesrespond sooner to managecustomer demands. Tanzu uses cloud native patterns to build applications with microservices and maintain IT infrastructures. SDDC is designedapplication programming interfaces and uses Kubernetes to transformsimplify how these applications are deployed, observed and modernize the data center into an on-demand service that addresses application requirements by abstracting, poolingmanaged across on-premises, public clouds and automating the services that are required from the underlying hardware. SDDC dramatically simplifies data center operations and lowers costs.
Our SDDC architecture consists of four main product categories, which are available separately oredge environments. Tanzu includes technologies acquired as part of our Software-Defined Data Center SuitesPivotal, Bitnami, Heptio and Wavefront acquisitions.
Key products within our Application Modernization portfolio include:
•Tanzu Application Platform—a modular, application-aware platform that provides a rich set of developer tooling and a prepared path to production to build and deploy software quickly and more securely on any compliant public cloud or Platform:on-premises Kubernetes cluster.
•Tanzu Operations Platform—a platform thatsimplifies operating Kubernetes for multi-cloud deployment by centralizing management and governance for clusters and teams across on-premises, public clouds and edge environments.
•Tanzu Application Service—a platform that allows enterprises to accelerate cloud-native software development with managed access to native cloud services and portability to run across any cloud.
•Tanzu Observability— an enterprise-grade monitoring and observability platform, with out-of-the-box integration with Tanzu, that Development and IT operations (“DevOps”) and Site Reliability Engineering teams use to troubleshoot and optimize the performance of their multi-cloud applications operating at massive, cloud-native scale.
•Tanzu Community Edition—afull-featured, easy-to-manage Kubernetes platform for learners and users. It is a freely available, community-supported, open-source distribution of VMware Tanzu that can be installed and configured in minutes on local workstations or any cloud.
•Tanzu Labs—a service that provides guidance and support to help customers modernize existing applications or build new, modern applications with agile development practices.
Cloud Management
NetworkingOur cloud management productshelp customers manage multi-cloud environments running a range of workloads, including virtual machines and Securitycontainers. VMware Cloud Management offerings optimize cloud usage and costs; automate the deployment, management and migration of applications and data; improve cloud security and compliance; and monitor application and cloud infrastructure.
StorageKey products within our Cloud Management portfolio include:
•vRealize Cloud Management—offers cloud management products, available as a service or as an on-premises offering, that are integrated together, delivering consistent operations from the data centers to the cloud and Availabilityto the edge, including:
•vRealize Automation—a modern infrastructure automation platform, enabling customers to accelerate their multi-cloud infrastructure transformations based on DevOps, open source and self-service automation.
Compute•vRealize Operations—enables self-driving operations with unified application-to-infrastructure visibility, capacity and cost management, workloads optimization and configuration and compliance management to better optimize, plan and scale private-, hybrid- and multi-cloud environments.
vSphere, •vRealize Log Insight—manages data at scale with centralized log management, deep operational visibility and intelligent analytics for troubleshooting and auditing across private-, hybrid- and multi-cloud environments.
•vRealize Network Insight—provides end-to-end network visibility to help customers monitor and build an optimized, highly available and more secure network infrastructure across clouds.
Our vRealize Cloud Universal combines SaaS and on-premises vRealize Cloud Management products into a single offering with a single license, providing customers with a consistent hybrid and multi-cloud management experience.
•vCloud Suite—an enterprise-grade cloud infrastructure and management solution combining vRealize Cloud Management with vSphere.
•CloudHealth by VMware Suite—available as a service offering, enables organizations to simplify financial management, streamline operations and strengthen security and compliance for public cloud and multi-cloud environments.
•CloudHealth —a robust multi-cloud management platform that helps organizations optimize and control spend and improve cross-organizational collaboration.
•CloudHealth Secure State —an intelligent multi-cloud security and compliance monitoring platform that helps organizations reduce risk and protect cloud resources.
Cloud Infrastructure
Our Cloud Infrastructure solutions include infrastructure products and services that enable customers to connect to multiple clouds and create a common operating environment, based on VMware Cloud Foundation, extending from on-premises data centers to the cloud and to the edge.
Key products within our Cloud Infrastructure portfolio include:
•vSphere—our flagship data center platform thatinfrastructure offering, utilizes our hypervisor software, provides the fundamental compute layer for VMware environments. A “hypervisor” is a layer of software thatwhich resides between the operating system and system hardware, to provide the fundamental compute layer for customer environments, enabling virtualization. We continue to build on vSphere with VMware Tanzu solutions, which provide a simple way for vSphere customers around the world to get started with Kubernetes and to modernize their workloads running on vSphere. Additionally, we are partnering to deliver an AI-Ready Enterprise platform that combines vSphere with the NVIDIA AI Enterprise suite to enable compute virtualization. Userscustomers to rapidly deploy, themanage and scale AI in production with confidence.
•vSAN and VxRail—offer cost-effective, holistic data storage and protection options for all applications running on vSphere. These products are applicable to hyperconverged infrastructure as well as traditional infrastructure solutions and enable customers to deploy on a broad range of hardware solutions. Our vSAN offering creates simple, shared storage designed for virtual machines. VxRail is a hyperconverged infrastructure solution comprised of a fully integrated and pre-configured Dell EMC appliance powered by vSAN and vSphere hypervisor when they implementsoftware.
•VMware Cloud Foundation—a cloud platform that combines our vSphere, vSAN and NSX, or network virtualization, offerings with vRealize Cloud Management into an integrated stack that delivers developer-ready infrastructure for public and private clouds. VMware Cloud Foundation or suite solutions that include vSphere, such as VMware vCloud Suite.
We have continuedextends to develop vSphere solutions to be compatible with new technologies and tools utilized by software developers and enterprises, including modern cloud-native applications. During fiscal 2018, we expanded our container solutions by announcing Pivotal Container Services (“PKS”), a jointly developed, marketed, sold and supported Kubernetes container solution with Pivotal Software, Inc. (“Pivotal”), an indirectly-held, majority-owned subsidiary of Dell in which we have an ownership interest.
During the fourth quarter of fiscal 2019, we acquired Heptio Inc. (“Heptio”), a leader in the open Kubernetes ecosystem. Kubernetes is an open-source container orchestration system used for automating deployment of scaling and managing applications across all cloud environments. Heptio’s products and services help enterprises deploy and operationalize Kubernetes.
Cloud Management
Our comprehensive cloud management platform manages hybrid environments running a range of workloads from traditional to container. Cloud management solutions are available as both an on-premises platform or as a service under ourmulti-cloud through these main routes: VMware Cloud Services offering, providing businesses with an automated operation, programmable provisioningon AWS and application monitoring. VMware Cloud Services optimizeon Dell EMC offerings; hyperscaler public cloud usageservices, including Azure VMware Solution, Google Cloud VMware Engine, IBM Cloud for VMware Solutions and cost, improve cloud securityOracle Cloud VMware Solution; and compliance, monitor applicationVMware Cloud Verified Providers. Available from VMware and cloudreseller partners, VMware Cloud Universal is a flexible subscription that simplifies the purchase and consumption of VMware multi-cloud infrastructure and automatemanagement services across the deployment, management and migration of applications and data across vSphere, non-vSphere, hybrid andcenters, public clouds. clouds or edge.
•VMware Cloud Services enable our customerson AWS—an integrated hybrid cloud solution that extends on-premises vSphere environments to run, manage, connecta VMware Software-Defined Data Center (“SDDC”) running on Amazon Elastic Compute Cloud (“Amazon EC2”). Jointly engineered by VMware and better secure their applications across hybrid and public clouds, including Amazon Web Services (“AWS”), Microsoft Azure (“Azure”)this on-demand service enables IT teams to seamlessly extend, migrate and manage their cloud-based resources with familiar VMware tools, minimizing the difficulty of learning new skills or utilizing new tools. VMware Cloud on AWS integrates VMware’s flagship compute, storage and network virtualization products (vSphere, vSAN and NSX), Google Cloud Platform (“Google Cloud”) and IBM Cloud,along with vCenter Server management as well as all devicesrobust disaster protection and optimizes them to run on dedicated, elastic, Amazon EC2 bare-metal infrastructure that is fully integrated with AWS Cloud. VMware, AWS and the AWS partner networks sell VMware Cloud on AWS, which is available in 20 global AWS regions, while VMware and our partner community deliver and support the service.
•VMware Cloud on other major hyperscalers—includesAzure VMware Solution, an infrastructure-as-a-service private cloud offering built on VMware Cloud Foundation that runs on dedicated bare-metal servers in Azure regions. It is a service sold and supported by Microsoft, backed and cloud verified by VMware. VMware Cloud on other major hyperscalers also includes Google Cloud VMware Engine, an integrated first-party offering that is built, sold and supported directly by Google Cloud and delivers a fully managed VMware Cloud Foundation stack along with VMware HCX for cloud migration in a common operatingdedicated environment regardless whetheron Google Cloud.
•VMware Cloud Providers—a key component of our strategic priority to support multi-cloud, this global ecosystem of more than 4,500 cloud providers in over 120 countries provides VMware-based cloud services. VMware Cloud Provider offerings are directed at traditional hosting partners, regional cloud providers and local and global managed service providers. VMware Cloud Providers give organizations the underlyingflexibility of running applications in virtual machines, in containers or both on their own private clouds inside their data center and on public clouds by providing multi-cloud managed services. IBM was our first cloud provider partner to offer VMware Cloud Foundation as-a-service, enabling their customers to leverage our technologies on IBM Cloud in their worldwide cloud data centers.
•VMware Cloud on Dell EMC—a fully managed on-premises, local cloud-as-a-service offering providing customers with a hybrid cloud experience that combines the simplicity and agility of the public cloud with the security and control of on-premises infrastructure.
Networking
We offer a complete portfolio of Layer 2-7 virtual networking and security solutions that deliver innovative software-based capabilities for switching, routing, firewalling, intrusion prevention and intrusion detection systems, network detection and response, load balancing, service mesh and SD-WAN for enterprise and Telco environments. These networking solutions enable customers to connect and protect all workloads running on bare metal, in containers, on virtual machines and across data
centers, multi-cloud environments and the distributed edge. Adoption of VMware networking solutions is driven by customers who are replacing legacy, hardware-based network and security infrastructure, is VMware-based.such as physical firewalls and load balancers and expensive dedicated wide-area network links.
Key products in the cloud management productwithin our Networking portfolio include:
vRealize Operations—provides performance, capacity and configuration management for virtual or physical infrastructure as well as transparency and control over the costs and quality of IT services.
vRealize Automation—enables customers to rapidly deploy and provision cloud services.
Wavefront by VMware—provides a Software-as-a-Service (“SaaS”) based metrics monitoring and analytics platform for modern cloud-native applications.
CloudHealth by •VMware (“CloudHealth”)NSX—acquired during fiscal 2019 to further enhance our cloud management portfolio, CloudHealth delivers a consistent cloud operations platform across AWS, Azure and Google Cloud, enabling customers to analyze and manage cloud cost, usage, security and performance centrally for native public clouds.
Networking and Security
VMware networking and security products and services enable our customers to connect, better secure and operate their network consistently within and across the data center, the cloud and network edges. Our offerings also provide networking and security capabilities to virtual machines, containers and public cloud workloads.
Our network virtualization solution, VMware NSX (“NSX”),platform that abstracts physical networks andto greatly simplifies thesimplify customers’ provisioning and consumption of networking and security resources. NSX can be layered into any environment, integrates with many automation, security and container solutions and is an integrala foundational part of our key offerings, includingsuch as VMware Cloud Foundation,Foundation.
•NSX Distributed and Gateway Firewalls—a zone firewall and a software-defined Layer 7 firewall that are purpose-built to help secure multi-cloud traffic across virtualized workloads. They provide stateful firewalling with intrusion detection and prevention, sandboxing, network traffic analysis and network detection and response to provide complete visibility into applications and workload flows with policy automation that are linked to workload lifecycles.
•NSX Network Detection and Response—an AI-based threat correlation and forensics engine, delivered as either standalone or integrated tightly within NSX, that helps network security and security operations teams efficiently detect malicious activity and block lateral movement of sophisticated threats.
•NSX Advanced Load Balancer (Avi)—provides consistent, multi-cloud load balancing, web application firewall and application insights across data centers and public clouds for virtual machines, container and bare-metal workloads.
•Tanzu Service Mesh—provides end-to-end operational visibility, control and security for distributed cloud-native applications, across end-users, applications and data, on any platform or cloud.
Our offerings also include VMware SASE, a cloud-native platform that converges cloud networking and cloud security into one holistic solution. Regardless of the location of users and applications, VMware SASE provides unified secure access from a single management platform. Organizations use VMware SASE to provide their users with more reliable, optimal and secure access to any application in on-premises, public cloud and edge environments. The VMware SASE platform includesVMware SD-WAN, which delivers high-performance, reliable and more secure access to cloud services, private data centers and SaaS-based enterprise applications for remote workers and branch locations; VMware Secure Access, a cloud-hosted solution that secures and optimizes corporate network and application access for remote and mobile users based on a Zero Trust Network Access framework; and VMware Cloud on AWSWeb Security, a cloud-hosted service that protects users and PKS.infrastructure accessing SaaS and Internet applications from evolving threats, offers visibility into and control over internet and SaaS application usage and enables compliance with administered security access rights. These services can be sold individually or together for the full VMware SASE solution.
AppDefense and Network Insight further broaden our networking and security portfolio by adding zero-trustSecurity
Today’s modern, distributed enterprise requires security that is both built-in and built differently. We leverage the unique power of virtualization to put security everywhere, helping our customers to secure any cloud, any application and anywhere workspaces. VMware Carbon Black Cloud, a SaaS-delivered cloud native endpoint, workload and container protection platform, is at the center of the VMware security portfolio.
Key products within our Security portfolio include:
•Carbon Black Endpoint—consolidates multiple endpoint security capabilities using one lightweight agent and cloud console to ease analysis of complex attacks, simplify the automation of detection and response workflows and identify attackers’ changing behavior patterns to better detect, respond to and prevent emerging and continuing attacks. This endpoint protection platform includes next-generation antivirus, endpoint detection and response; managed detection, audit and remediation; and threat hunting and containment.
•Carbon Black Workload—delivers advanced protection purpose-built for better securing modern workloads, reducing the attack surface and strengthening security postures. The solution combines prioritized vulnerability reporting and foundational workload hardening with prevention, detection and response capabilities to protect applicationsworkloads running in virtualized private and hybrid cloud environments. Network Insight delivers intelligent operationsVMware Carbon Black Workload is also tightly integrated with vSphere to provide built-in security that alleviates installation and planningmanagement overhead and consolidates the collection or telemetry for software defined networkingmultiple workload security use cases.
•Carbon Black Container—enables enterprise-grade container security to reduce risk, enhance visibility, maintain compliance and simplify security across virtual, physicalfor Kubernetes environments, from development to production. VMware Carbon Black Container empowers cross-functional teams to secure the complete lifecycle of Kubernetes applications, detect and fix vulnerabilities and misconfigurations before production deployment, meet compliance standards and achieve simple, secure multi-cloud environments.and hybrid cloud Kubernetes environments at scale.
Anywhere Workspace
VMware SD-WAN by VeloCloud, available asAnywhere Workspace is a service and as an on-premises software solution enables simple, agile and more secure branch connectivity. Our SD-WAN solution serves as a platform for deploying virtual network services that integrate with local edge compute to manage and control application traffic from users and Internet-connected devices.
Storage and Availability
We provide many storage and availability products to offer cost-effective, holistic data storage and protection options to all applications running on the vSphere platform. These products are applicable to hyperconverged infrastructure as well as
traditional infrastructure solutionsis designed to enable customersdeliver secure and seamless experiences for distributed workforces while reducing costs and operational overhead for organizations. It combines the key elements of unified endpoint management (“UEM”), desktop and application virtualization, secure access service edge and endpoint security technologies to deploy a broad range of hardware solutions. Key solutions include:
VMware vSAN (“vSAN”)—clusters server disks to create simple, shared storage designed for virtual machines in hyperconverged infrastructure.
VxRail—a hyperconverged infrastructure solution comprised of a fully integrated and pre-configured Dell EMC Appliance powered by vSAN and vSphere software.
Software-Defined Data Center Suites
Our SDDC products are available separately or our compute and management products may be acquired as part of a broader offering. The VMware vCloud Suite and VMware vRealize Suite are packaged solutions for building and managing a complete cloud infrastructure optimized for use with the vSphere platform:
VMware vCloud Suite—an integrated offering that brings together our vSphere hypervisor and our vRealize Suite multi-vendor hybrid cloud management platform.
VMware vRealize Suite—an enterprise-ready cloud management platform that enables customers to manage heterogeneous, hybrid cloud environments.
Software-Defined Data Center Platform—On Premises
VMware Cloud Foundation is a unified platform that combines our compute, storage and networking technologies with cloud management into an integrated stack that delivers enterprise-ready cloud infrastructure for private and public clouds. The offering includes lifecycle management capabilities to span the full stack. SDDC products can also be delivered through our VMware vCloud NFV, which is a fully integrated, modular, multi-tenant network functions virtualization (“NFV”) platform. It provides the compute, storage, networking and operations management and service assurance capabilities to enable operators to provide virtualized network services and drive NFV deployments with an architecture that will support 5G and Internet of Things (“IoT”) services in the future.
During fiscal 2019, we continued to develop our VMware Pulse IoT Center (“Pulse IoT Center”) offering. Pulse IoT Center is an IoT device management and monitoring solution that helps both IT and Operational Technology (“OT”) organizations to onboard, manage, monitor and secure their IoT use cases from the edge to the cloud. This new solution has been built to meet the needs of IoT for both ITtoday’s distributed workforce. Specifically, VMware Anywhere Workspace brings together the benefits of our three innovative solutions: Workspace ONE, Carbon Black Cloud and OT teams, while supporting a broad range of edge systems and their connected devices. VMware SASE.
Hybrid CloudAs our End User Computing
Our hybrid cloud offering is based on consistent infrastructure and consistent operations across the data center, public cloud and edge environment. This allows customers to benefit from a single deployment model with consistent security policies, visibility and governance for all applications, running on-premises and off-premises. It builds on our private and hybrid cloud capabilities by offering customers the freedom to innovate in multiple clouds and is delivered through business drives VMware Cloud Foundation, the VMware vRealize cloud management platform and a new set of VMware Cloud Services thatAnywhere Workspace forward, we are developing. Our overarching cloud strategy contains three key components: (i) continue to expand beyond compute virtualization in the private cloud, (ii) extend the private cloud into the public cloud and (iii) connect and secure endpoints across a range of public clouds. Our cloud strategy is designed to provide organizations with solutions that work across all clouds and devices.
VMware Cloud Provider Program Services
We currently enableoffer our customers to utilize vSphere-based hybrid cloud computing capacity through our VMware Cloud Provider Program (“VCPP”) offerings. Our VCPP partners represent a key component of our strategic priority to support hybrid cloud and are a global ecosystem of over 4,000 cloud providers in more than 100 countries providing VMware-based cloud services. Our VCPP offering is directed at hosting and cloud computing providers, enabling organizations to choose between running applications in virtual machines on their own private clouds inside their data center or on public clouds hosted and managed by a VMware cloud provider.
Software-Defined Data Center Platform—Hybrid Cloud
VMware Cloud Foundation can be used for on-premises private clouds and also can be extended to hybrid cloud environments using VMware Cloud on AWS or VCPP. VMware Cloud on AWS is an on-demand service that enables customers to run applications across vSphere-based cloud environments and provides access to a broad range of AWS services. This hybrid offering, a strategic alliance with AWS, integrates vSphere, vSAN and NSX along with VMware vCenter management and is optimized to run on dedicated, elastic, bare-metal AWS infrastructure. VMware Cloud on AWS is currently available in certain geographies, and we expect to continue expanding into additional regions in fiscal 2020. Beginning in late fiscal 2019, VMware Cloud on AWS has been available to our VCPP and System Integrators and System Outsourcers partners through our
VMware Cloud Provider – Managed Services Provider offering, which enables our partners to make VMware Cloud on AWS available to their end customers without having to create a similar service in their own data centers.
VMware Cloud Foundation is also offered as a service platform through a select number of our VCPP partners. For example, IBM, OVH US LLC (“OVH”) and Rackspace are VCPP partners who leverage our SDDC technologies to create cloud services addressing the needs of customers globally. IBM was our first VCPP partner to offer VMware Cloud Foundation as a service, which enables their customers to leverage our SDDC technologies on IBM Cloud in their worldwide cloud data centers.
VMware Cloud Services
VMware Cloud Services are new SaaS offerings that optimize cloud usage and cost, improve cloud security and compliance, monitor application and cloud infrastructure, and automate the deployment, management and migration of applications and data across vSphere, non-vSphere, hybrid and public clouds. VMware Cloud Services enable our customers to run, manage, connect and better secure their applications across hybrid and public clouds, including AWS, Azure, Google Cloud Platform and IBM Cloud, as well as all devices in a common operating environment, regardless whether the underlying infrastructure is VMware-based.
End-User Computing
Our EUC portfolio offers a digital workspace to enable our customers to more securely deliver access to applications and data for their end users from any device of the user’s choice and from any location. Our EUC solutions are designed to optimize simplicity and choice for end users, while providing more security and control to corporate IT organizations. IT organizations can enhance their enterprise security for corporate applications, data and endpoints utilizing our EUC solutions.
Our complete EUC solution, consists of VMware Workspace ONE. Workspace ONE (“Workspace ONE”), our digital workspaceis a platform that more securely delivers and manages any application on any device by integrating multi-platform endpoint management, access control and application management and multi-platform endpoint management. Workspace ONE is powered by Unified Endpoint Management (formerly known as AirWatch) and VMware Horizon (“Horizon”) application and desktop virtualization, tiedThe platform brings the following offerings together with a common access control and analytics layer:
Unified Endpoint Management—•Workspace ONE UEM—a platformsolution built to manage and help secure endpointsmobile devices, laptops and other devices across all major operating systems from a single management console enablingand includes a suite of productivity applications that enable customers to more effectively manage and secure both corporate and benefitpersonal devices.
•Workspace ONE Access—a cloud service that enables customers to continuously track device state, user details and authentication context to determine user and device risk, allow or deny access and require multi-factor authentication or a remediation for access.
•Workspace ONE Intelligent Hub—a solution that empowers employees to more securely access corporate applications and resources “from hire to retire.” IT can grant single-sign-on access to any application from “bring your own device” programs.
a unified catalog, send informational and actionable notifications and enable one-click contextual workflows with SaaS and backend applications on-the-go.•Horizon—a virtual platform that provides a streamlined approach to delivering, protecting and managing virtual desktops and applications from one digital workspace, while containing costs and allowing end users to work anytime, anywhere and across any device.
While Unified Endpoint Management and Horizon are also offered separately, together this solution provides customers with a complete digital workspace solution that combines identity, mobile management, and application and desktop virtualization solutions. Through the continued expansion of our virtual desktop portfolio, we offer customers the opportunity to runcan deliver virtual desktops as-a-service through multipleand applications to users in many ways, from customer-managed solutions that run on any on-premises or VMware Cloud certified environments, including the Azure platform, VMware Cloud on AWS, Google Cloud VMware Engine, IBM Cloud, Oracle Cloud VMware Solution, Azure VMware Solution and IBM Cloud.more, to a fully-managed Desktop as a Service solution delivered natively from Microsoft Azure.
Technology Alliances
We have more than 1,3001,100 technology partners with whom we bring joint offerings to the marketplace and over 4,0004,500 active cloud, hyperscaler and managed service provider partners. We classify our partners as follows:
Independent Hardware Vendors (“IHVs”)—we have established relationships with large system vendors, including Apple, Cisco, Fujitsu, Hitachi, HPE, IBM, Lenovo and Hitachi VantaraSamsung, for joint certification and co-development and we continue to work closely with Dell. We also work closely withDell, Intel, NvidiaNVIDIA and other IHVstechnology vendors to provide input on product development to enable them to deliver hardware advancements that benefit virtualizationmulti-cloud and modern applications users. We coordinate with the leading storage and networkingtechnology platform vendors to ensure joint interoperability and enable our softwaresolutions to access their differentiated functionality.
Independent Software Vendors (“ISVs”)—we partner with leading systems management, infrastructure software and application software vendors-includingvendors, including healthcare, telecom, finance and retail leaders, to deliver value-added products that integrate with our products.
VMware Cloud Providers—we have established partnerships with over 4,0004,500 active cloud, hyperscaler and managed service providers, including CenturyLink, Fujitsu,Microsoft, Google, Oracle, Lumen, IBM, KPN, NTT,AUCloud, OVH, Rackspace, Softbank,NxtGen, Telefonica, TietoTietoEvry and Virtustream, to enable themUKCloud, that support our multi-cloud strategy. These partners leverage our cloud technologies to host and deliver enterprise-class hybrid clouds as a waycloud services for enterprises to extend their data centers to external clouds, while preserving security, compliance and quality of service.
In addition to our base of active partnerships with cloud provider partnerships,providers, we have a strategic alliance with AWS to build and deliver an integrated hybrid offering, VMware Cloud on AWS, that enables customers to run applications across vSphere-based private, public and hybrid cloudmulti-cloud environments.
Our Technology Alliance Partner (“TAP”) program facilitates jointcollaborative solution creation and coordinated go-to-market activities for our greaterecosystem of more than 1,3001,100 technology partner ecosystem.partners. Created exclusively for IHV and ISV partners, the TAP program gives technology partners the ability to test, integrate and package application software, infrastructure and hardware products with our products and services across the SDDC, EUC and Hybrid Cloud Computing areas—offerings—on premises or in the cloud.
Our ISVs and other alliance partners, developers and additional VMware community members continue to distribute software applications as virtual appliances. We invest significant capital in testing and certificationcertifications of infrastructure to rigorously ensure our software is compatible with major hardware and software products.
Research and Development
We have made, and expect to continue to make, significant investments in research and development (“R&D”). We have assembled an experienced group of developers with compute, storage,expertise within application modernization, cloud management, hybrid and public cloud infrastructure, networking, and security, traditional, cloud native and SaaS applications, digital workspace and mobility, container andanywhere workspaces, software-as-a-service, open source software expertise.and edge solutions. We also have strong ties to leading academic institutions around the world and we invest in joint research with academia.
We prioritize our product development efforts through a combination of engineering-driven innovation and customer- and market-driven feedback. Our R&D culture places a high value on innovation, quality and open collaboration with our partners. We currently participate in numerous standards groups and our employees hold a variety of leadership positions with standards organization leadership positions.organizations.
We continue to invest in our key growth areas including NSX, vSAN, VMware Cloud on AWS and cloud-delivered services, while also investing in areas that we expect to be significant growth drivers in future periods.
Sales and Marketing
We have a highly leveragedOur go-to-market strategy that includesefforts include a direct sales force, including a specialized sales force for our key growth products,offerings, and our channel and cloud partners.
We have establishedwell-established, ongoing business relationships with our distributors. Our distributors purchase software licenses and software support from us for resale to end-user customers via resellers.These resellers are part of our VMware Partner Network,Connect, a program which offers resellers pricing incentives, rebates, sales and product trainingenablement through the VMware Partner Central WebConnect web portal and access to the worldwide network of VMware distributors. In addition, our channel partner network includes certain systems integrators and resellers trained and certified to deliver consulting services and solutions leveraging our products. Our channel network also includes partners that host our products and deliver them as-a-service to customers.
We generally do not have long-term contracts or minimum-purchase commitments with our distributors, resellers, system vendors and systems integrators and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours.
End users can purchase the full breadth of our offeringssubscription, SaaS, license and services portfolio through discrete purchases to meet their immediate needs or through the adoption of enterprise agreements (“EAs”)., both of which provide access to a range of flexible purchasing programs. EAs are comprehensive volumesold to our direct customers and through channel partners and can include our license, offerings that provide for multi-year maintenance and support, at negotiated prices.subscription and SaaS offerings. EAs enable us to build long-term relationships with our customers as they commit to our virtual infrastructure solutions. Our sales cycle can vary greatlyvaries depending on numerous factors, including the size and complexity of the proposed offering and a customer’s infrastructure footprint.
In establishing list prices for our products,solutions, we take into account, among other numerous factors, the value our products and solutions deliver and the cost of alternative virtualization, end-user computing, hardware and hardwaresecurity solutions.
Our marketing efforts focus on communicating the benefits of our solutions and educating our customers and users, distributors, resellers, system vendors, systems integrators, the media and analysts about the advantages of our innovative virtualization technology, cloud services and digital workspace solutions.offerings. We raise awareness of our company and brands, market our products and generate sales leads through VMware and industry events, public relations efforts, marketing materials, advertising, direct marketing, social media initiatives, free downloads and trials and our website. We have invested in multiple online communities that enable customers and partners to share and discuss sales and development resources, best practices implementation and industry trends among other topics. Our annual user conference,conferences, VMworld, is held in both the United States (“U.S.”)vForum and Europe, while our vForum eventsSpringOne are held in the Asia Pacific and Japan region.global events. We also offer management presentations, seminars and webinars on our products of virtualization, EUCsolutions and cloud services. We believe the combination of these activities strengthens our brand and enhances our leading positionsleadership in the industries in which we compete.
On November 1, 2021, in connection with the Spin-Off, we and Dell entered into the Commercial Framework Agreement to provide a framework under which we and Dell will continue our industry.
We continue joint marketing, sales, brandingstrategic commercial relationship, particularly with respect to projects mutually agreed by the parties as having the potential to accelerate the growth of an industry, product, service or platform that may provide the parties with a strategic market opportunity. The Commercial Framework Agreement has an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and product development efforts with Dell and other Dell companies to enhance the collective value we deliver to our mutual customers. Our collective business with Dell continued to create synergies that benefited our sales during fiscal 2019, and, since Dell’s acquisition of EMC, bookingsconditions. Bookings through Dell sales channels have grown more rapidly than through non-Dell resellers and distributors. in aggregate comprise the largest route-to-market for our sales.
We also have strategic partnerships with AWS, Google, IBM and IBMMicrosoft to jointly provide the expertise, solutions and go-to-market capabilities to help our customers efficiently and more securely extend their proven software-defined solutions into public clouds, utilizing the tools and processes with which our customers are already familiar.
Our business is subject to seasonality inand the salesales of our products and services.services are subject to seasonality. For example, our fourth quarter revenue is affected by a number of seasonal factors, including year-end spending trends, whichthat impact the timing of renewals of our EAs and support and maintenance contracts.
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.
As of January 28, 2022, the aggregate transaction price allocated to remaining performance obligations was $12.0 billion, of which approximately 57% is expected to be recognized as revenue over the next twelve months and the remainder thereafter.
As of January 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.3 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2022 and the remainder thereafter.
Backlog
Backlog is comprised of unfulfilled purchase orders or unfulfilled executed agreements at the end of a given period and is net of related estimated rebates and marketing development funds. Backlog consists of licenses, subscription and SaaS and services. As of February 1, 2019,January 28, 2022, our total backlog was approximately $449 million. Backlog primarily consists of licenses, maintenance$88 million and services. Ourour backlog related to licenses was approximately $147 million, which$14 million. For our backlog related to licenses, we generally expect to deliver and recognize as revenue during the following quarter. Backlog totaling $36 million as of January 28, 2022 was excluded from the remaining performance obligations because such contracts are subject to cancellation until the performance obligation is fulfilled.
As of February 2, 2018,January 29, 2021, our total backlog was approximately $285$93 million and our backlog related to licenses was approximately $99$23 million. Backlog totaling $18 million as of January 29, 2021 was excluded from the remaining performance obligations because such contracts were subject to cancellation until the performance obligation is fulfilled.
The amount and composition of backlog will fluctuate period to period and backlog is managed based upon multiple considerations, including product and geography. We do not believe that the amount of backlog is indicative of future sales or revenue or that the mix of backlog at the end of any given period correlates with actual sales performance of a particular geography or particular products or services.
Customers
Our product offerings allow customers to manage IT resources across private clouds and complex multi-cloud, multi-device environments. Customer deployments range in size from a single virtualized server for small businesses to thousands of virtual machines and managed devices for our largest enterprise customers.
During fiscal 2019, two distributors, who purchased software licenses2022, revenue from Dell, including purchases of products and software supportservices directly from us, for resale to end-user customers directly or via resellers, eachas well as through our channel partners, accounted for over38% of our consolidated revenue. These purchases included Dell selling joint solutions as an OEM, which accounted for 13% of total revenue from Dell, or 5% of our consolidated revenue. The remaining revenue from Dell consisted of Dell acting as a distributor to other non-Dell resellers, reselling products and services as a reseller or purchasing products and services for its own internal use. On certain transactions, Dell Financial Services also provided financing to our end users at our end users’ discretion.
Other than Dell, none of our distributors accounted for more than 10% of our consolidated revenue. Arrow Electronics, Inc. and Tech Data Corporation accounted for 14% and 13%, respectively, of our consolidated revenue induring fiscal 2019.2022. Our distribution agreements are typically terminable at will by either party upon 30 to 90 days’ prior written notice to the other party and neither party has any obligation to purchase or sell any products under the agreement.
During fiscal 2019, revenue from Dell, including purchases of products and services directly from us, as well as through our channel partners, accounted for 25% of our consolidated revenue.
Competition
We face intense competition across all markets for our products and services. We believe that the key factors in our ability to successfully compete include the level of reliability, interoperability and new functionality of our product and service offerings; the ability of our product offerings to support multiple hardware platforms, operating systems, applications frameworks and public cloud platforms; our ability to anticipate customer needs in rapidly evolving markets for IT resources; the pricing of our product and service offerings; the ability to integrate open source technologies that are critical in private and public cloud computing architectures; the ability to attract and retain key employees; and the ability to maintain and expand our ecosystem of technology partners, service providers and sales channel partners. While we believe that we are a technology leader in virtualization and cloud infrastructure solutions and have a strong, favorable image with our customers, many of our
current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Additionally, the adoption of public cloud, micro-services, containers and open source technologies has the potential to erode our profitability.
We face competition from, among others:
Providers of public cloud infrastructure and SaaS-based multi-cloud offerings. As businesses increasingly utilize public cloud and SaaS-based offerings, they are building more of their new compute workloads off-premises and may also shift some of their existing workloads.workloads, off-premises. A significant percentage of new application development is happening in the public cloud, with providers such as AWS, Microsoft Azure (“Azure”) or Google Cloud, or in a distributed fashion and these new applications are often deployed on public cloud or multi-cloud infrastructure. As a result, the demand for on-premises ITinformation technology (“IT”) resources is expected to slow and our products and services will need to increasingly compete for customers’ IT workloads with off-premises public cloud and SaaS-based offerings.multi-cloud offerings, such as those offered by Datadog in monitoring and IT telemetry and ServiceNow in the automation space. If our private, hybrid and public cloud products and serviceswe fail to address evolving customer priorities or requirements, the demand for our virtualizationVMware’s products and services may decline and we could experience lowerslower than expected or no growth. Additionally, VCPPVMware Cloud Provider Program (“VCPP”) offerings from our partners may compete directly with infrastructure-as-a-service (“IaaS”) offerings from various public cloud providers, such as AWS and Microsoft. Many of these cloud providerswhich are partneringincreasingly integrated with on-premises hardware vendors to deliver their cloud
platform as an on-premise solution, including Microsoft Azure Stack (“Azure Stack”) and AWS Outposts.solutions. In fiscal 2018, we made VMware Cloud on AWS,entered into a strategic alliance with AWS to deliver a vSphere-based cloud service, VMware Cloud on AWS, running in AWS data centers available in certain geographies. Our strategic alliancegeographies and, in fiscal 2019, we extended our collaboration with AWS to include AWS Outposts. In fiscal 2020, we also announced partnerships with Microsoft (Azure VMware Solution by CloudSimple), Google (Google Cloud VMware Solution by CloudSimple) and Oracle (Oracle Cloud VMware Solution) under the framework of our VCPP that enable customers to run native VMware-based workloads on each of Azure, Google Cloud and Oracle Cloud. Our partnerships with AWS and other public cloud providers may also be seen as competitive with VCPP offeringseach other and adversely affect our relationship with other VCPP partners, while some VCPP partners may elect to include solutions such as VMware Cloud on AWS as part of their managed services provider offerings. In addition, in November 2018, when AWS announced AWS Outposts, we extended our collaborationmany of these public cloud providers are delivering hybrid cloud hardware solutions with AWS by previewing offerings that will run on AWS Outposts.their distributed cloud management. For example, many public cloud infrastructure providers have also entered into strategic partnerships with mobile telecommunications network providers to jointly embed distributed cloud infrastructure and management tools into 5G mobile networks. To the extent customers and partners, including service providers, choose to operate native AWScloud environments (or similar non-VMware environments, such as Azure Stack)Stack or AWS Wavelength) in their data centers in lieu of purchasing ourVMware’s on-premises and hybrid cloudand multi-cloud products, our operating results could be materially adversely affected.
Providers of application modernization and open source developer platform services. Many public cloud infrastructure and multi-cloud SaaS competitors also offer standalone or embedded application development, or Platform-as-a-Service (“PaaS”), services. In the case of AWS, Azure and Google Cloud, these PaaS services are often bundled with consumption-based IaaS offerings. These IaaS providers and other developer solution partners, such as Red Hat, a subsidiary of IBM, and HashiCorp, offer tools and services based on containers and DevSecOps (or development security and operations) practices. Open source technologies for containerization and cloud platforms, such as Xen, KVM, Docker, rkt, OpenShift, Mesos, Kubernetes and OpenStack, and other open source software-based products, solutions and services may reduce the demand for our solutions, put pricing pressure on our offerings and enable competing vendors to leverage open source technologies to compete directly with us. New platform technologies and standards based on open source software are consistently being developed and can gain popularity quickly. Improvements in open source software could cause customers to replace software purchased from us with open source software. In step with these trends, we deliver a comprehensive container, Kubernetes and Cloud Native Application technologies portfolio with VMware Tanzu and have increased our level of commitment to open source projects and communities, such as the Cloud Native Computing Foundation, that are designed to increase the rate at which customers adopt micro-services architectures. The adoption of distributed micro-service application architectures, and their alignment with container technologies, represents an emerging area of competition. As we continue to invest in these areas, we will experience increasing competitive overlap with other cloud native vendors, such as Red Hat, and the large providers of public cloud infrastructure. Such competitive pressure or the availability of new open source software may cause us to experience reduced sales, increased pricing pressure, increased sales and marketing expenses and reduced operating margins, any one of which may adversely affect our operating results.
Providers of enterprise security offerings. With our acquisition of Carbon Black Inc. (“Carbon Black”) in 2019, we launched a new set of enterprise security solutions that includes the Carbon Black endpoint security platform and the intrinsic security elements of our existing NSX virtual networking, Workspace ONE end user and our compute offerings. The cybersecurity market is large, highly competitive, fragmented and subject to rapidly evolving technology, shifting customer needs and frequent introductions of new solutions. Competitors in the end point security space range from established solution providers such as Microsoft and Trend Micro to next-generation endpoint security providers such as CrowdStrike and SentinelOne. While we believe that the intrinsic security elements in our existing offerings coupled with our Carbon Black endpoint security offerings and new combined offerings we expect to develop and introduce in the future will enable us to
provide an integrated security offering with significant advantages over our competitors’ current offerings, our ability to gain traction and market share as a new entrant into this well-established market segment is uncertain. Additionally, new trends, such as Extended Threat Detection (XDR), Secure Access Service Edge (SASE) and Zero Trust Network Access, represent the coalescence of formerly distinct markets, such as identity management, secure web gateway, SD-WAN, network firewall and cloud access security brokers. These new trends may bring existing partners, such as Fortinet, Zscaler and Okta into a more competitive position with our Carbon Black, VeloCloud and other distributed network security offerings. If we are unable to successfully adapt our product and service offerings to meet these opportunities and rapidly evolving trends our operating results could be adversely affected.
Large, diversified enterprise software and hardware companies.companies. These competitors supply a wide variety of products and services to, and have well-established relationships with, our current and prospective end users. For example, small- to medium-sized businesses and companies in emerging markets that are evaluating the adoption of virtualization-based technologies and solutions may be inclined to consider Microsoft solutions because of their existing use of Windows and Office products. Some of these competitors have in the past and may in the future take advantage of their existing relationships to engage in business practices that make our products and services less attractive or more expensive to our end users. For example, in 2019, Microsoft modified its on-premises licensing terms to require end users who wish to deploy Microsoft software on certain dedicated hosted cloud services other than Microsoft’s Azure cloud service, including VMware Cloud on AWS, to purchase additional rights from Microsoft. Other competitors have limited or denied support for their applications running in VMware virtualization environments. In addition, these competitors could integrate competitive capabilities into their existing products and services and make them available without additional charge. For example, Oracle provides free server virtualization software intended to support Oracle and non-Oracle applications, Microsoft offers its own server, network and storage virtualization software packaged with its Windows Server product as well as built-in virtualization in the client version of Windows and Cisco includes network virtualization technology in many of theirits data center networking platforms. As a result, our existing and prospective VMware customers may elect to use products that are perceived to be “free” or “very low cost” instead of purchasing ourVMware products and services for certain applications where they do not believe that more advanced and robust capabilities are required.
Companies offering competing platforms based on open source technologies. Open source technologies for virtualization, containerization and cloud platforms such as Xen, KVM, Docker, rkt, OpenShift, Mesos, Kubernetes and OpenStack appear to provide pricing competition and enable competing vendors to leverage these open source technologies to compete directly with our SDDC initiative. A number of enterprise IT vendors have released solutions based on open source technologies that are targeting data center virtualization and private cloud, including Red Hat, which was recently acquired by IBM, and Nutanix. We are delivering container technologies such as PKS and Cloud Native Application technologies that are designed to help customers adopt micro-services architectures. The adoption of distributed micro-service application architectures, and their alignment with container technologies, represents an emerging area of competition.
Other industry alliances. alliances. Many of our competitors have entered into or extended partnerships or other strategic relationships to offer more comprehensive virtualization and cloud computing solutions than they individually had offered. We expect these trends to continue as companies attempt to strengthen or maintain their positions in the evolving virtualization infrastructure and enterprise IT solutions industry. For example, CrowdStrike has formed the CrowdXDR Alliance, an initiative competitive with VMware security offerings that includes VMware partners such as Zscaler and Google Cloud. These alliances may result in more compelling product and service offerings than those we offer.
Our partners and members of our developer and technology partner ecosystem.ecosystem. We face competition from our partners. For example, third parties currently selling our products and services could build and market their own competing products and services or market competing products and services of other vendors. Additionally, as formerly distinct sectors of enterprise IT such as software-based virtualization and hardware-based server, networking and storage solutions converge, we also increasingly compete with companies who are members of our developer and technology partner ecosystem. For example, in October 2018,2019, one of our important partners and customers, IBM, announced it had reached an agreement to acquireacquired Red Hat, one of our competitors in the cloud native applications space. Consequently, when such convergences occur, we may find it more difficult to continue to work togethercollaborate productively on other projects with these partners, and the advantages we derive from our ecosystem could diminish.
ThisThese various forms of competition could result in increased pricing pressure and sales and marketing expenses, thereby materially reducing our operating margins and could also prevent our new products and services from gaining market acceptance, thereby harming our ability to increase, or causing us to lose, market share.
Intellectual PropertyRisks Related to Owning Our Class A Common Stock
As of February 1, 2019,•The MSD Stockholders and the SLP Stockholders have significant influence over 2,300 patents of varying duration issued byus and their interests may conflict with our interests and the U.S. Patent and Trademark Office have been granted or assigned to us. We also have been granted or assigned patents from other countries. These patents cover various aspectsinterests of our server virtualization and other technologies. We also have numerous pending U.S. provisional and non-provisional patent applications, and numerous pending foreign and international patent applications, that cover other aspectsstockholders.
•The price of our virtualizationClass A common stock has fluctuated significantly in recent years and other technologies.
We have federal trademark registrationsmay fluctuate significantly in the U.S. for “VMWARE,” “VMWORLD,” “VSPHERE,” “VCLOUD,” “VCENTER SERVER,” “VMOTION,” “HORIZON,” “AIRWATCH,” “VREALIZE,” “VFABRIC,” “VCLOUD,”future.
“WORKSPACE ONE,” “ESX,” “VMWARE NSX,” “VMWARE CLOUD FOUNDATION,” “VELOCLOUD,” and numerous other trademarks. We have also registered trademarks•Anti-takeover provisions in several foreign countries.
We rely on a combination of patent, trademark, copyright and trade secret laws in the U.S. and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property rightsDelaware law and our brand.charter documents could discourage takeover attempts.
•Our bylaws provide for an exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
General Risks
•We enforceare exposed to foreign exchange risks.
•If our intellectual property rightsgoodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
•Changes in the U.S.accounting principles and several foreign countries. Despiteguidance could result in unfavorable accounting charges or effects.
•Natural disasters, catastrophic events or geo-political conditions could disrupt our efforts, the steps webusiness.
•Climate change may have taken to protecta long-term negative impact on our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights,business.
•Social and ethical issues, including our ability to police such misappropriation or infringementmake progress on our ESG goals and commitments, may result in reputational harm and liability.
PART I
ITEM 1. BUSINESS
Overview
VMware, Inc. (“VMware”) originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware, and then evolved to become the private cloud and mobility management leader. Building upon that leadership, VMware is uncertain, particularly in countries outside offocused on becoming the United States. U.S. patent filingsmulti-cloud leader. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. Organizations’ IT departments and corporate divisions are intendedworking at an accelerated pace to provideharness new technologies, platforms and cloud models, ultimately guiding businesses and their product teams through a digital transformation. To take on these challenges, we are helping customers drive their multi-cloud strategy by providing the holder with a right to exclude others from making, using, offering to sell, selling or importing into the U.S. products covered by the claims of granted patents.multi-cloud platform for all applications, enabling digital innovation and enterprise control.
Our granted U.S. patents,multi-cloud portfolio, spanning application modernization, cloud management, cloud infrastructure, networking, security and any future patents (toanywhere workspaces, forms a flexible, consistent digital foundation on which customers can build, run, manage, connect and protect their mission-critical workloads.
We incorporated in Delaware in 1998 and were acquired by EMC Corporation (“EMC”) in 2004. In August 2007, we conducted an initial public offering of our Class A common stock (“Class A Stock”), but remained majority-owned by EMC, the extent they are issued), may be contested, circumvented or invalidated in the future. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages,sole stockholder of our Class B common stock (“Class B Stock”). In September 2016, Dell Technologies Inc. (“Dell”) acquired EMC and we may not be able to prevent third parties from infringing these patents. Therefore, the exact effect of our patents and the other steps we have taken to protect our intellectual property cannot be predicted with certainty.
Employees
As of February 1, 2019, we had approximately 24,200 employees in 125 offices worldwide, less than 5% of which were contracted through Dell. None of our employees are represented by labor unions, and we consider current employee relations to be good.
We contract with Dell subsidiaries for support from Dell personnel who are managed by us onbecame a full-time basis. These individuals are located in countries in which we do not currently have an operating subsidiary and are predominantly dedicated to our sales and marketing efforts. We use contractors from time to time for temporary assignments and in locations in which we do not currently have operating subsidiaries. In the event that these contractor resources were not available, we do not believe that this would have a material adverse effect on our operations.
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 discuss 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. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names of our executive officers and their ages as of March 19, 2019, are as follows:
|
| | | | |
Name | | Age | | Position(s) |
Patrick Gelsinger | | 58 | | Chief Executive Officer and Director |
Zane Rowe | | 48 | | Chief Financial Officer and Executive Vice President |
Maurizio Carli | | 60 | | Executive Vice President, Worldwide Sales and Services |
Amy Fliegelman Olli | | 55 | | Senior Vice President, General Counsel and Secretary |
Sanjay Poonen | | 49 | | Chief Operating Officer, Customer Operations |
Rangarajan (Raghu) Raghuram | | 56 | | Chief Operating Officer, Products and Cloud Services |
Rajiv Ramaswami | | 53 | | Chief Operating Officer, Products and Cloud Services |
Patrick Gelsinger has served as Chief Executive Officer and a director of VMware since September 2012. Prior to joining VMware, he served as President and Chief Operating Officer, EMC Information Infrastructure Products at EMC from September 2009 to August 2012. Mr. Gelsinger joined EMC from Intel Corporation, where he served as Senior Vice President and Co-General Manager of Intel Corporation’s Digital Enterprise Group from 2005 to September 2009 and served as Intel’s Senior Vice President, Chief Technology Officer from 2002 to 2005. Prior to that, Mr. Gelsinger led Intel’s Desktop Products Group.
Zane Rowe has served as VMware’s Chief Financial Officer and Executive Vice President since March 2016. Prior to joining VMware, he was EMC’s Executive Vice President and Chief Financial Officer from October 2014 until February 2016. Prior to joining EMC, Mr. Rowe was Vice President of North American Sales of Apple Inc., a technology company that designs, develops, and sells consumer electronics, computer software, online services, and personal computers, from May 2012 until May 2014. He was Executive Vice President and Chief Financial Officer of United Continental Holdings, Inc., an airline holdings company, from October 2010 until April 2012 and was Executive Vice President and Chief Financial Officer of Continental Airlines from August 2008 to September 2010. Mr. Rowe joined Continental Airlines in 1993. Mr. Rowe currently serves on the boards of Sabre Corporation and Pivotal, an indirect majority-owned subsidiary of VMware’s parentDell. On November 1, 2021, our spin-off from Dell was completed, each share of Class B Stock converted into one fully paid and non-assessable share of Class A Stock and we became a standalone company Dell,(the “Spin-Off”). In connection with the Spin-Off, we paid an $11.5 billion cash dividend, pro rata, to each of the holders of our Class A Stock and Class B Stock as of the close of business on October 29, 2021 (the “Special Dividend”).
Our fiscal year is the 52 or 53 weeks ending on the Friday nearest to January 31 of each year. We refer to our fiscal year ending February 3, 2023 and fiscal years ended January 28, 2022 and January 29, 2021 as “fiscal 2023,” “fiscal 2022,” and “fiscal 2021,” respectively. Fiscal 2023 is a 53-week fiscal year, while fiscal 2022 and fiscal 2021 were each 52-week fiscal years.
Total revenue in which VMware has an ownership interest.
Maurizio Carli has served as VMware’s Executive Vice President, Worldwide Salesfiscal 2022 increased 9% to $12.9 billion. Total revenue is comprised of license revenue of $3.1 billion, subscription and Services since February 2017. Mr. Carli previously served as VMware’s Executive Vice President, Worldwide Sales since April 2016, Corporate Senior Vice President and General Manager, Americas from April 2015 to March 2016, and as Senior Vice President and General Manager, EMEA from December 2008 to April 2015. Before joining VMware, Mr. Carli held executive sales management positions at Google Inc., where he served as Managing Director, Enterprise Business, EMEA from June 2008 to November 2008; Business Objects S.A., where he served as Senior Vice President & General Manager, EMEA, from December 2002 to December 2007; and at IBM Corporation, where he spent 19 years, from 1984 to 2002, serving in a varietysoftware-as-a-service (“SaaS”) revenue of sales, marketing and leadership positions, including Vice President Software Group from 2000 to 2002 and General Manager and Vice President Tivoli EMEA from 1998 to 2000.
Amy Fliegelman Olli joined VMware as Senior Vice President and General Counsel in August 2017, and was appointed as Secretary in October 2017. Prior to joining VMware, Ms. Fliegelman Olli served as Senior Vice President and General Counsel of Avaya, Inc., a provider of contact center, unified communications and networking products, from June 2014 through August 2017. Previously, she was the General Counsel of CA, Inc., a provider of software solutions, from September 2006 to June 2014 where her responsibilities covered all legal, governance, compliance, internal audit, security, risk management and controls matters. Ms. Fliegelman Olli also spent 18 years with IBM Corporation, ultimately serving as Vice President and General Counsel for the Americas and Europe.
Sanjay Poonen has served as VMware’s Chief Operating Officer, Customer Operations since October 2016. Prior to that he served as Executive Vice President and General Manager, End-User Computing, Head of Global Marketing from April 2016 to October 2016. He joined VMware as Executive Vice President and General Manager, End-User Computing in August 2013. Prior to joining VMware, he spent more than seven years at SAP AG, an enterprise application software$3.2 billion and services company, serving as Presidentrevenue of $6.5 billion. As customers shift from our on-premises offerings to our subscription and Corporate OfficerSaaS offerings, license revenue and software maintenance revenue may be lower and subject to greater fluctuation in the future, resulting from a higher proportion of Platform Solutionsour sales occurring through our subscription and the Mobile Division from April 2012 to July 2013, prior to that as President of Global Solutions from November 2010 to March 2012, as Executive Vice President of Performance Optimization Apps from June 2008 to September 2009SaaS offerings.
Our corporate headquarters are located at 3401 Hillview Avenue, Palo Alto, California and Senior Vice President of Analytics from April 2006 to May 2008. Mr. Poonen's over 20 years of technology industry experience also included executive-level positions with Symantec and Veritas, and product management and engineering positions with Alphablox Corporation, Apple, Inc. and Microsoft Corporation.we have 111 offices worldwide.
Rangarajan (Raghu) Raghuram has served as VMware's Chief Operating Officer, Products and Cloud Services since October 2016. Prior to that he served as Executive Vice President, Software-Defined Data Center Division from April 2012 to October 2016. Mr. Raghuram joined VMware in 2003 and has held multiple product management and marketing roles. Mr. Raghuram served as Senior Vice President and General Manager, Cloud Infrastructure and Management, Virtualization and Cloud Platforms, and Enterprise Products, from December 2009 through March 2012. Mr. Raghuram previously served as Vice President of VMware's Server Business Unit and of Product andTechnology Solutions Marketing from September 2003 through December 2009. Prior to VMware, Mr. Raghuram held product management and marketing roles at Netscape Communications Corporation and Bang Networks, Inc.
Rajiv Ramaswami has served as VMware’s Chief Operating Officer, Products and Cloud Services since October 2016. Mr. Ramaswami joined VMware in April 2016 and served as VMware’s Executive Vice President and General Manager of its Networking and Security business. Prior to joining VMware he was Executive Vice President and General Manager of the Infrastructure & Networking Group of Broadcom Corporation, a semiconductor company, from 2010. Prior to that he was Vice President and General Manager of the Cloud Services and Switching Technology Group at Cisco Systems, Inc., where he also served as Vice President and General Manager for a variety of business units in Optical, Switching and Storage Networking. Prior to joining Cisco, he served in various technical and leadership positions at Xros, Tellabs Inc. and IBM’s Thomas J. Watson Research Center. Mr. Ramaswami is a member of the board of directors of NeoPhotonics Corporation.
The risk factors that appear below could materially affect our business, financial condition and operating results. The risks and uncertainties described below are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies. Specific risk factors related to our status as a controlled subsidiary of Dell overlapping business opportunities, Dell’s ability to control certain transactions and resource allocations and related persons transactions with Dell and its other affiliated companies are set forth below under the heading “Risks Related to Our Relationship with Dell.”
Risks Related to Our Business
Our success depends increasingly on customer acceptanceportfolio supports and addresses our customers’ key priorities, including modernizing their applications, managing multi-cloud environments, accelerating their cloud journey, modernizing the network using commodity hardware, embracing zero-trust security and empowering anywhere workspaces. We enable digital transformation of our newer productscustomers’ applications, infrastructure and services.operations for their constantly evolving business and employee needs.
OurApplication Modernization
VMware Tanzu, a portfolio of products and services for modernizing applications and infrastructure, enables customers to deliver better software to production, continuously. The portfolio enables customers to build, run and manage modern applications on any cloud and simplifies the use of Kubernetes, an open-source platform for managing containers, in a multi-cloud environment. The modern or cloud-native applications allow businesses to bring new ideas to market faster and respond sooner to customer demands. Tanzu uses cloud native patterns to build applications with microservices and application programming interfaces and uses Kubernetes to simplify how these applications are primarilydeployed, observed and managed across on-premises, public clouds and edge environments. Tanzu includes technologies acquired as part of our Pivotal, Bitnami, Heptio and Wavefront acquisitions.
Key products within our Application Modernization portfolio include:
•Tanzu Application Platform—a modular, application-aware platform that provides a rich set of developer tooling and a prepared path to production to build and deploy software quickly and more securely on any compliant public cloud or on-premises Kubernetes cluster.
•Tanzu Operations Platform—a platform thatsimplifies operating Kubernetes for multi-cloud deployment by centralizing management and governance for clusters and teams across on-premises, public clouds and edge environments.
•Tanzu Application Service—a platform that allows enterprises to accelerate cloud-native software development with managed access to native cloud services and portability to run across any cloud.
•Tanzu Observability— an enterprise-grade monitoring and observability platform, with out-of-the-box integration with Tanzu, that Development and IT operations (“DevOps”) and Site Reliability Engineering teams use to troubleshoot and optimize the performance of their multi-cloud applications operating at massive, cloud-native scale.
•Tanzu Community Edition—afull-featured, easy-to-manage Kubernetes platform for learners and users. It is a freely available, community-supported, open-source distribution of VMware Tanzu that can be installed and configured in minutes on local workstations or any cloud.
•Tanzu Labs—a service that provides guidance and support to help customers modernize existing applications or build new, modern applications with agile development practices.
Cloud Management
Our cloud management productshelp customers manage multi-cloud environments running a range of workloads, including virtual machines and containers. VMware Cloud Management offerings optimize cloud usage and costs; automate the deployment, management and migration of applications and data; improve cloud security and compliance; and monitor application and cloud infrastructure.
Key products within our Cloud Management portfolio include:
•vRealize Cloud Management—offers cloud management products, available as a service or as an on-premises offering, that are integrated together, delivering consistent operations from the data centers to the cloud and to the edge, including:
•vRealize Automation—a modern infrastructure automation platform, enabling customers to accelerate their multi-cloud infrastructure transformations based on server virtualizationDevOps, open source and related compute technologies usedself-service automation.
•vRealize Operations—enables self-driving operations with unified application-to-infrastructure visibility, capacity and cost management, workloads optimization and configuration and compliance management to better optimize, plan and scale private-, hybrid- and multi-cloud environments.
•vRealize Log Insight—manages data at scale with centralized log management, deep operational visibility and intelligent analytics for virtualizingtroubleshooting and auditing across private-, hybrid- and multi-cloud environments.
•vRealize Network Insight—provides end-to-end network visibility to help customers monitor and build an optimized, highly available and more secure network infrastructure across clouds.
Our vRealize Cloud Universal combines SaaS and on-premises data center servers, which form the foundationvRealize Cloud Management products into a single offering with a single license, providing customers with a consistent hybrid and multi-cloud management experience.
•vCloud Suite—an enterprise-grade cloud infrastructure and management solution combining vRealize Cloud Management with vSphere.
•CloudHealth by VMware Suite—available as a service offering, enables organizations to simplify financial management, streamline operations and strengthen security and compliance for privatepublic cloud computing. As the market for server virtualization continues to mature, the rate of growth in license sales of vSphere has declined. We are increasingly directing our product development and marketing efforts towardmulti-cloud environments.
•CloudHealth —a robust multi-cloud management platform that helps organizations optimize and control spend and improve cross-organizational collaboration.
•CloudHealth Secure State —an intelligent multi-cloud security and compliance monitoring platform that helps organizations reduce risk and protect cloud resources.
Cloud Infrastructure
Our Cloud Infrastructure solutions include infrastructure products and services that enable businessescustomers to utilize virtualization asconnect to multiple clouds and create a common operating environment, based on VMware Cloud Foundation, extending from on-premises data centers to the foundationcloud and to the edge.
Key products within our Cloud Infrastructure portfolio include:
•vSphere—our flagship data center infrastructure offering, utilizes our hypervisor software, which resides between the operating system and system hardware, to provide the fundamental compute layer for private, publiccustomer environments, enabling virtualization. We continue to build on vSphere with VMware Tanzu solutions, which provide a simple way for vSphere customers around the world to get started with Kubernetes and hybrid cloud-based computingto modernize their workloads running on vSphere. Additionally, we are partnering to deliver an AI-Ready Enterprise platform that combines vSphere with the NVIDIA AI Enterprise suite to enable customers to rapidly deploy, manage and mobile computing, including our vSphere-based SDDCscale AI in production with confidence.
•vSAN and VxRail—offer cost-effective, holistic data storage and protection options for all applications running on vSphere. These products such as our vRealize management and automation offerings, vSAN storage virtualization offerings, and NSX offerings,are applicable to hyperconverged infrastructure as well as traditional infrastructure solutions and enable customers to deploy on a broad range of hardware solutions. Our vSAN offering creates simple, shared storage designed for virtual machines. VxRail is a hyperconverged infrastructure solution comprised of a fully integrated and pre-configured Dell EMC appliance powered by vSAN and vSphere software.
•VMware Cloud Foundation—a cloud platform that combines our Horizon clientvSphere, vSAN and NSX, or network virtualization, offerings with vRealize Cloud Management into an integrated stack that delivers developer-ready infrastructure for public and private clouds. VMware AirWatch (“AirWatch”) mobile device management offerings and ourCloud Foundation extends to multi-cloud through these main routes: VMware Cloud on AWS offering. We haveand VMware Cloud on Dell EMC offerings; hyperscaler public cloud services, including Azure VMware Solution, Google Cloud VMware Engine, IBM Cloud for VMware Solutions and Oracle Cloud VMware Solution; and VMware Cloud Verified Providers. Available from VMware and reseller partners, VMware Cloud Universal is a flexible subscription that simplifies the purchase and consumption of VMware multi-cloud infrastructure and management services across the data centers, public clouds or edge.
•VMware Cloud on AWS—an integrated hybrid cloud solution that extends on-premises vSphere environments to a VMware Software-Defined Data Center (“SDDC”) running on Amazon Elastic Compute Cloud (“Amazon EC2”). Jointly engineered by VMware and Amazon Web Services (“AWS”), this on-demand service enables IT teams to seamlessly extend, migrate and manage their cloud-based resources with familiar VMware tools, minimizing the difficulty of learning new skills or utilizing new tools. VMware Cloud on AWS integrates VMware’s flagship compute, storage and network virtualization products (vSphere, vSAN and NSX), along with vCenter Server management as well as robust disaster protection and optimizes them to run on dedicated, elastic, Amazon EC2 bare-metal infrastructure that is fully integrated with AWS Cloud. VMware, AWS and the AWS partner networks sell VMware Cloud on AWS, which is available in 20 global AWS regions, while VMware and our partner community deliver and support the service.
•VMware Cloud on other major hyperscalers—includesAzure VMware Solution, an infrastructure-as-a-service private cloud offering built on VMware Cloud Foundation that runs on dedicated bare-metal servers in Azure regions. It is a service sold and supported by Microsoft, backed and cloud verified by VMware. VMware Cloud on other major hyperscalers also been introducing SaaS versionsincludes Google Cloud VMware Engine, an integrated first-party offering that is built, sold and supported directly by Google Cloud and delivers a fully managed VMware Cloud Foundation stack along with VMware HCX for cloud migration in a dedicated environment on Google Cloud.
•VMware Cloud Providers—a key component of our strategic priority to support multi-cloud, this global ecosystem of more than 4,500 cloud providers in over 120 countries provides VMware-based cloud services. VMware Cloud Provider offerings are directed at traditional hosting partners, regional cloud providers and local and global managed service providers. VMware Cloud Providers give organizations the flexibility of running applications in virtual machines, in containers or both on their own private clouds inside their data center and on public clouds by providing multi-cloud managed services. IBM was our first cloud provider partner to offer VMware Cloud Foundation as-a-service, enabling their customers to leverage our technologies on IBM Cloud in their worldwide cloud data centers.
•VMware Cloud on Dell EMC—a fully managed on-premises, products, including VMware Horizon Suitelocal cloud-as-a-service offering providing customers with a hybrid cloud experience that combines the simplicity and certain AirWatch offerings, and are working to extend our SDDC and NSX offerings and management software intoagility of the public cloud with the security and control of on-premises infrastructure.
Networking
We offer a complete portfolio of Layer 2-7 virtual networking and security solutions that deliver innovative software-based capabilities for switching, routing, firewalling, intrusion prevention and intrusion detection systems, network detection and response, load balancing, service mesh and SD-WAN for enterprise and Telco environments. These networking solutions enable customers to introduceconnect and protect all workloads running on bare metal, in containers, on virtual machines and across data
centers, multi-cloud environments and the distributed edge. Adoption of VMware networking solutions is driven by customers who are replacing legacy, hardware-based network and security infrastructure, such as physical firewalls and load balancers and expensive dedicated wide-area network links.
Key products within our Networking portfolio include:
•VMware NSX—our network virtualization platform that abstracts physical networks to greatly simplify customers’ provisioning and consumption of networking and security resources. NSX can be layered into any environment, integrates with many automation, security and container solutions and is a foundational part of our key offerings, such as VMware Cloud Foundation.
•NSX Distributed and Gateway Firewalls—a zone firewall and a software-defined Layer 7 firewall that are purpose-built to help secure multi-cloud traffic across virtualized workloads. They provide stateful firewalling with intrusion detection and prevention, sandboxing, network traffic analysis and network detection and response to provide complete visibility into applications and workload flows with policy automation that are linked to workload lifecycles.
•NSX Network Detection and Response—an AI-based threat correlation and forensics engine, delivered as either standalone or integrated tightly within NSX, that helps network security and security operations teams efficiently detect malicious activity and block lateral movement of sophisticated threats.
•NSX Advanced Load Balancer (Avi)—provides consistent, multi-cloud load balancing, web application firewall and application insights across data centers and public clouds for virtual machines, container and bare-metal workloads.
•Tanzu Service Mesh—provides end-to-end operational visibility, control and security for distributed cloud-native applications, across end-users, applications and data, on any platform or cloud.
Our offerings also include VMware SASE, a cloud-native platform that converges cloud productsnetworking and services by investingcloud security into one holistic solution. Regardless of the location of users and applications, VMware SASE provides unified secure access from a single management platform. Organizations use VMware SASE to provide their users with more reliable, optimal and secure access to any application in on-premises, public cloud and SaaS initiativesedge environments. The VMware SASE platform includesVMware SD-WAN, which delivers high-performance, reliable and partnering with publicmore secure access to cloud providers such as AWSservices, private data centers and IBM. Recently,SaaS-based enterprise applications for remote workers and branch locations; VMware has begun to build, invest in,Secure Access, a cloud-hosted solution that secures and acquireoptimizes corporate network and application access for remote and mobile users based on a range ofZero Trust Network Access framework; and VMware Cloud Web Security, a cloud-hosted service that protects users and infrastructure accessing SaaS and cloud-native technologiesInternet applications from evolving threats, offers visibility into and control over internet and SaaS application usage and enables compliance with administered security access rights. These services can be sold individually or together for the full VMware SASE solution.
Security
Today’s modern, distributed enterprise requires security that is both built-in and built differently. We leverage the unique power of virtualization to put security everywhere, helping our customers to secure any cloud, any application and anywhere workspaces. VMware Carbon Black Cloud, a SaaS-delivered cloud native endpoint, workload and container protection platform, is at the center of the VMware security portfolio.
Key products including those acquired throughwithin our Heptio, CloudHealth Technologies, Inc.,Security portfolio include:
•Carbon Black Endpoint—consolidates multiple endpoint security capabilities using one lightweight agent and VeloCloud Networks, Inc. (“VeloCloud”) acquisitions. These initiatives present newcloud console to ease analysis of complex attacks, simplify the automation of detection and difficult technologicalresponse workflows and compliance challenges,identify attackers’ changing behavior patterns to better detect, respond to and significant investments continueprevent emerging and continuing attacks. This endpoint protection platform includes next-generation antivirus, endpoint detection and response; managed detection, audit and remediation; and threat hunting and containment.
•Carbon Black Workload—delivers advanced protection purpose-built for better securing modern workloads, reducing the attack surface and strengthening security postures. The solution combines prioritized vulnerability reporting and foundational workload hardening with prevention, detection and response capabilities to be required to develop or acquire solutions to address those challenges. Our success depends on our current and future customers perceiving technological and operational benefits and cost savings associated with adopting ourprotect workloads running in virtualized private and hybrid cloud environments. VMware Carbon Black Workload is also tightly integrated with vSphere to provide built-in security that alleviates installation and management overhead and consolidates the collection or telemetry for multiple workload security use cases.
•Carbon Black Container—enables enterprise-grade container security to reduce risk, enhance visibility, maintain compliance and simplify security for Kubernetes environments, from development to production. VMware Carbon Black Container empowers cross-functional teams to secure the complete lifecycle of Kubernetes applications, detect and fix vulnerabilities and misconfigurations before production deployment, meet compliance standards and achieve simple, secure multi-cloud and hybrid cloud Kubernetes environments at scale.
Anywhere Workspace
VMware Anywhere Workspace is a software solution that is designed to deliver secure and seamless experiences for distributed workforces while reducing costs and operational overhead for organizations. It combines the key elements of unified endpoint management (“UEM”), desktop and application virtualization, secure access service edge and endpoint security technologies to fully meet the needs of today’s distributed workforce. Specifically, VMware Anywhere Workspace brings together the benefits of our three innovative solutions: Workspace ONE, Carbon Black Cloud and VMware SASE.
As our End User Computing business drives VMware Anywhere Workspace forward, we continue to offer our digital workspace solution, Workspace ONE. Workspace ONE is a platform that more securely delivers and manages any application on any device by integrating multi-platform endpoint management, access control and application management. The platform brings the following offerings together with a common access control and analytics layer:
•Workspace ONE UEM—a solution built to manage and help secure mobile devices, laptops and other devices across all major operating systems from a single management console and includes a suite of productivity applications that enable customers to more effectively manage and secure both corporate and personal devices.
•Workspace ONE Access—a cloud service that enables customers to continuously track device state, user details and authentication context to determine user and device risk, allow or deny access and require multi-factor authentication or a remediation for access.
•Workspace ONE Intelligent Hub—a solution that empowers employees to more securely access corporate applications and resources “from hire to retire.” IT can grant single-sign-on access to any application from a unified catalog, send informational and actionable notifications and enable one-click contextual workflows with SaaS and backend applications on-the-go.
•Horizon—a platform that provides a streamlined approach to delivering, protecting and managing virtual desktops and applications from one digital workspace, while containing costs and allowing end users to work anytime, anywhere and across any device.
Through the continued expansion of our portfolio, customers can deliver virtual desktops and applications to users in many ways, from customer-managed solutions that run on any on-premises or VMware Cloud certified environments, including VMware Cloud on AWS, Google Cloud VMware Engine, IBM Cloud, Oracle Cloud VMware Solution, Azure VMware Solution and more, to a fully-managed Desktop as a Service solution delivered natively from Microsoft Azure.
Technology Alliances
We have more than 1,100 technology partners with whom we bring offerings to the marketplace and over 4,500 active cloud, hyperscaler and managed service provider partners. We classify our partners as follows:
Independent Hardware Vendors (“IHVs”)—we have established relationships with large system vendors, including Apple, Cisco, Fujitsu, Hitachi, HPE, IBM, Lenovo and Samsung, for certification and co-development and we continue to work closely with Dell, Intel, NVIDIA and other technology vendors to provide input on product development to enable them to deliver advancements that benefit multi-cloud and modern applications users. We coordinate with the leading technology platform vendors to ensure interoperability and enable our solutions to access their differentiated functionality.
Independent Software Vendors (“ISVs”)—we partner with leading systems management, infrastructure software and application software vendors, including healthcare, telecom, finance and retail leaders, to deliver value-added products that integrate with our products.
VMware Cloud Providers—we have established partnerships with over 4,500 active cloud, hyperscaler and managed service providers, including Microsoft, Google, Oracle, Lumen, IBM, AUCloud, OVH, Rackspace, NxtGen, Telefonica, TietoEvry and UKCloud, that support our multi-cloud strategy. These partners leverage our cloud technologies to host and deliver enterprise-class cloud services for enterprises to extend their data centers to external clouds, while preserving security, compliance and quality of service.
In addition to our base of active partnerships with cloud providers, we have a strategic alliance with AWS to build and deliver an integrated hybrid offering, VMware Cloud on AWS, that enables customers to run applications across vSphere-based private, public and multi-cloud environments.
Our Technology Alliance Partner (“TAP”) program facilitates collaborative solution creation and coordinated go-to-market activities for our ecosystem of more than 1,100 technology partners. Created exclusively for IHV and ISV partners, the TAP program gives technology partners the ability to test, integrate and package application software, infrastructure and hardware products with our products and services offerings—on premises or in the cloud.
Our ISVs and other alliance partners, developers and additional VMware community members continue to distribute software applications as virtual appliances. We invest significant capital in testing and certifications of infrastructure to rigorously ensure our software is compatible with major hardware and software products.
Research and Development
We have made, and expect to continue to make, significant investments in research and development (“R&D”). We have assembled an experienced group of developers with expertise within application modernization, cloud management, cloud infrastructure, networking, security, anywhere workspaces, software-as-a-service, open source and edge solutions. We also have strong ties to leading academic institutions around the world and we invest in joint research with academia.
We prioritize our product development efforts through a combination of engineering-driven innovation and customer- and market-driven feedback. Our R&D culture places a high value on innovation, quality and open collaboration with our partners. We currently participate in numerous standards groups and our employees hold a variety of leadership positions with standards organizations.
We continue to invest in our key growth areas while also investing in areas that we expect to be significant growth drivers in future periods.
Sales and Marketing
Our go-to-market efforts include a direct sales force, including a specialized sales force for our key growth offerings, and our channel and cloud partners.
We have well-established, ongoing business relationships with our distributors. Our distributors purchase software licenses and software support from us for resale to end-user customers via resellers.These resellers are part of VMware Partner Connect, a program which offers resellers pricing incentives, rebates, sales and product enablement through the VMware Partner Connect web portal and access to the worldwide network of VMware distributors. In addition, our channel partner network includes certain systems integrators and resellers trained and certified to deliver consulting services and solutions leveraging our products. Our channel network also includes partners that host our products and deliver them as-a-service to customers.
We generally do not have long-term contracts or minimum-purchase commitments with our distributors, resellers, system vendors and systems integrators and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours.
End users can purchase the full breadth of our subscription, SaaS, license and services portfolio through discrete purchases or through enterprise agreements (“EAs”), both of which provide access to a range of flexible purchasing programs. EAs are sold to our direct customers and through channel partners and can include our license, multi-year maintenance and support, subscription and SaaS offerings. EAs enable us to build long-term relationships with our customers as they commit to our virtual infrastructure solutions. Our sales cycle varies depending on numerous factors, including the size and complexity of the proposed offering and a customer’s infrastructure footprint.
In establishing list prices for our solutions, we take into account, among other numerous factors, the value our solutions deliver and the cost of alternative virtualization, end-user computing, hardware and security solutions.
Our marketing efforts focus on communicating the benefits of our solutions and educating our client virtualizationcustomers and mobile deviceusers, distributors, resellers, system vendors, systems integrators, the media and analysts about the advantages of our innovative offerings. We raise awareness of our company and brands, market our products and generate sales leads through VMware and industry events, public relations efforts, marketing materials, advertising, direct marketing, social media initiatives, free downloads and trials and our website. We have invested in multiple online communities that enable customers and partners to share and discuss sales and development resources, best practices implementation and industry trends among other topics. Our annual user conferences, VMworld, vForum and SpringOne are global events. We also offer management solutions. Aspresentations, seminars and webinars on our solutions and services. We believe the combination of these activities strengthens our brand and enhances our leadership in the industries in which we compete.
On November 1, 2021, in connection with the Spin-Off, we and Dell entered into the Commercial Framework Agreement to provide a framework under which we and Dell will continue our strategic commercial relationship, particularly with respect to projects mutually agreed by the parties as having the potential to accelerate the growth of an industry, product, service or platform that may provide the parties with a strategic market opportunity. The Commercial Framework Agreement has an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and conditions. Bookings through Dell sales channels in aggregate comprise the largest route-to-market for our server virtualization products continuessales.
We also have strategic partnerships with AWS, Google, IBM and Microsoft to mature,jointly provide the expertise, solutions and go-to-market capabilities to help our customers efficiently and more securely extend their proven software-defined solutions into public clouds, utilizing the tools and processes with which our customers are already familiar.
Our business and the scalesales of our business continues to increase, our rate of revenue growth increasingly depends upon the success of our newer product and service offerings. To the extent that our newer products and services are adopted more slowly thansubject to seasonality. For example, our fourth quarter revenue growthis affected by a number of seasonal factors, including year-end spending trends, that impact the timing of renewals of our EAs and support and maintenance contracts.
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.
As of January 28, 2022, the aggregate transaction price allocated to remaining performance obligations was $12.0 billion, of which approximately 57% is expected to be recognized as revenue over the next twelve months and the remainder thereafter.
As of January 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.3 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2022 and the remainder thereafter.
Backlog
Backlog is comprised of unfulfilled purchase orders or unfulfilled executed agreements at the end of a given period and is net of related estimated rebates and marketing development funds. Backlog consists of licenses, subscription and SaaS and services. As of January 28, 2022, our established server virtualization offerings declines, our revenue growth rates may slow materially or our revenue may decline substantially, we may fail to realize returns on our investments in new initiativestotal backlog was $88 million and our operating results could be materially adversely affected.backlog related to licenses was $14 million. For our backlog related to licenses, we generally expect to deliver and recognize revenue during the following quarter. Backlog totaling $36 million as of January 28, 2022 was excluded from the remaining performance obligations because such contracts are subject to cancellation until the performance obligation is fulfilled.
A significant decreaseAs of January 29, 2021, our total backlog was $93 million and our backlog related to licenses was $23 million. Backlog totaling $18 million as of January 29, 2021 was excluded from the remaining performance obligations because such contracts were subject to cancellation until the performance obligation is fulfilled.
The amount and composition of backlog will fluctuate period to period and backlog is managed based upon multiple considerations, including product and geography. We do not believe that the amount of backlog is indicative of future sales or revenue or that the mix of backlog at the end of any given period correlates with actual sales performance of a particular geography or particular products or services.
Customers
Our product offerings allow customers to manage IT resources across private clouds and complex multi-cloud, multi-device environments. Customer deployments range in demandsize from a single virtualized server for small businesses to thousands of virtual machines and managed devices for our server virtualizationlargest enterprise customers.
During fiscal 2022, revenue from Dell, including purchases of products would adversely affectand services directly from us, as well as through our operating results.
A significant portionchannel partners, accounted for 38% of our consolidated revenue. These purchases included Dell selling joint solutions as an OEM, which accounted for 13% of total revenue is derived, and will for the foreseeable future continue to be derived, from Dell, or 5% of our server virtualization products. As more businesses achieve high levelsconsolidated revenue. The remaining revenue from Dell consisted of virtualization in their data centers, the market for our vSphere product continues to mature. Additionally, as businesses increasingly utilize public cloud and SaaS-based offerings, they are building more of their new compute workloads off-premises and are increasingly shifting some of their existing and many of their new workloads to public cloud providers, thereby limiting growth, and potentially reducing, the market for on-premises deployments of vSphere. Although sales of vSphere have declinedDell acting as a portiondistributor to other non-Dell resellers, reselling products and services as a reseller or purchasing products and services for its own internal use. On certain transactions, Dell Financial Services also provided financing to our end users at our end users’ discretion.
Other than Dell, none of our overall business, and we expect
this trenddistributors accounted for more than 10% of our consolidated revenue during fiscal 2022. Our distribution agreements are typically terminable at will by either party upon 30 to continue, vSphere remains key to our future growth, as it serves as the foundation for our newer SDDC, network virtualization and our newer hybrid cloud and SaaS offerings. Although we have launched, and are continuing to develop products to extend our vSphere-based SDDC offerings90 days’ prior written notice to the public cloud, dueother party and neither party has any obligation to our product concentration a significant decrease in demand for our server virtualizationpurchase or sell any products would adversely affect our operating results.under the agreement.
Competition
We face intense competition that could adversely affect our operating results.
The virtualization, cloud computing, end-user computing and software-defined data center industries are interrelated and rapidly evolving, and we face intense competition across all the markets for our products and services. ManyWe believe that the key factors in our ability to successfully compete include the level of reliability, interoperability and new functionality of our product and service offerings; the ability of our product offerings to support multiple hardware platforms, operating systems, applications frameworks and public cloud platforms; our ability to anticipate customer needs in rapidly evolving markets for IT resources; the pricing of our product and service offerings; the ability to integrate open source technologies that are critical in private and public cloud computing architectures; the ability to attract and retain key employees; and the ability to maintain and expand our ecosystem of technology partners, service providers and sales channel partners. While we believe that we are a technology leader in virtualization and cloud infrastructure solutions and have a strong, favorable image with our customers, many of our
current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Additionally, the adoption of public cloud, micro-services, containers and open source technologies has the potential to erode our profitability.
We face competition from, among others:
Providers of public cloud infrastructure and SaaS-based multi-cloud offerings. As businesses increasingly utilize public cloud and SaaS-based offerings, they are building more of their new compute workloads off-premises and may also shift some of their existing workloads.workloads, off-premises. A significant percentage of new application development is happening in the public cloud, with providers such as AWS, Microsoft Azure (“Azure”) or Google Cloud, or in a distributed fashion and these new applications are often deployed on public cloud or multi-cloud infrastructure. As a result, the demand for on-premises ITinformation technology (“IT”) resources is expected to slow and our products and services will need to increasingly compete for customers’ IT workloads with off-premises public cloud and SaaS-based offerings.multi-cloud offerings, such as those offered by Datadog in monitoring and IT telemetry and ServiceNow in the automation space. If our private, hybrid and public cloud products and serviceswe fail to address evolving customer priorities or requirements, the demand for VMware’s virtualization products and services may decline and we could experience lowerslower than expected or no growth. Additionally, VCPPVMware Cloud Provider Program (“VCPP”) offerings from our partners may compete directly with IaaSinfrastructure-as-a-service (“IaaS”) offerings from various public cloud providers, such as AWS and Microsoft. Many of these cloud providerswhich are partneringincreasingly integrated with on-premises hardware vendors to deliver their cloud platform as an on-premises solution, including Azure Stack and AWS Outposts.solutions. In fiscal 2018, we made VMware Cloud on AWS,entered into a strategic alliance with AWS to deliver a vSphere-based cloud service, VMware Cloud on AWS, running in AWS data centers available in certain geographies. Our strategic alliancegeographies and, in fiscal 2019, we extended our collaboration with AWS to include AWS Outposts. In fiscal 2020, we also announced partnerships with Microsoft (Azure VMware Solution by CloudSimple), Google (Google Cloud VMware Solution by CloudSimple) and Oracle (Oracle Cloud VMware Solution) under the framework of our VCPP that enable customers to run native VMware-based workloads on each of Azure, Google Cloud and Oracle Cloud. Our partnerships with AWS and other public cloud providers may also be seen as competitive with VCPP offeringseach other and adversely affect our relationship with other VCPP partners, while some VCPP partners may elect to include solutions such as VMware Cloud on AWS as part of their managed services provider offerings. In addition, in November 2018, when AWS announced AWS Outposts we extended our collaborationmany of these public cloud providers are delivering hybrid cloud hardware solutions with AWS by previewing offerings that will run on AWS Outposts.their distributed cloud management. For example, many public cloud infrastructure providers have also entered into strategic partnerships with mobile telecommunications network providers to jointly embed distributed cloud infrastructure and management tools into 5G mobile networks. To the extent customers and partners, including service providers, choose to operate native AWScloud environments (or similar non-VMware environments, such as Azure Stack)Stack or AWS Wavelength) in their data centers in lieu of purchasing VMware’s on-premises and hybrid cloudand multi-cloud products, our operating results could be materially adversely affected.
Providers of application modernization and open source developer platform services. Many public cloud infrastructure and multi-cloud SaaS competitors also offer standalone or embedded application development, or Platform-as-a-Service (“PaaS”), services. In the case of AWS, Azure and Google Cloud, these PaaS services are often bundled with consumption-based IaaS offerings. These IaaS providers and other developer solution partners, such as Red Hat, a subsidiary of IBM, and HashiCorp, offer tools and services based on containers and DevSecOps (or development security and operations) practices. Open source technologies for containerization and cloud platforms, such as Xen, KVM, Docker, rkt, OpenShift, Mesos, Kubernetes and OpenStack, and other open source software-based products, solutions and services may reduce the demand for our solutions, put pricing pressure on our offerings and enable competing vendors to leverage open source technologies to compete directly with us. New platform technologies and standards based on open source software are consistently being developed and can gain popularity quickly. Improvements in open source software could cause customers to replace software purchased from us with open source software. In step with these trends, we deliver a comprehensive container, Kubernetes and Cloud Native Application technologies portfolio with VMware Tanzu and have increased our level of commitment to open source projects and communities, such as the Cloud Native Computing Foundation, that are designed to increase the rate at which customers adopt micro-services architectures. The adoption of distributed micro-service application architectures, and their alignment with container technologies, represents an emerging area of competition. As we continue to invest in these areas, we will experience increasing competitive overlap with other cloud native vendors, such as Red Hat, and the large providers of public cloud infrastructure. Such competitive pressure or the availability of new open source software may cause us to experience reduced sales, increased pricing pressure, increased sales and marketing expenses and reduced operating margins, any one of which may adversely affect our operating results.
Providers of enterprise security offerings. With our acquisition of Carbon Black Inc. (“Carbon Black”) in 2019, we launched a new set of enterprise security solutions that includes the Carbon Black endpoint security platform and the intrinsic security elements of our existing NSX virtual networking, Workspace ONE end user and our compute offerings. The cybersecurity market is large, highly competitive, fragmented and subject to rapidly evolving technology, shifting customer needs and frequent introductions of new solutions. Competitors in the end point security space range from established solution providers such as Microsoft and Trend Micro to next-generation endpoint security providers such as CrowdStrike and SentinelOne. While we believe that the intrinsic security elements in our existing offerings coupled with our Carbon Black endpoint security offerings and new combined offerings we expect to develop and introduce in the future will enable us to
provide an integrated security offering with significant advantages over our competitors’ current offerings, our ability to gain traction and market share as a new entrant into this well-established market segment is uncertain. Additionally, new trends, such as Extended Threat Detection (XDR), Secure Access Service Edge (SASE) and Zero Trust Network Access, represent the coalescence of formerly distinct markets, such as identity management, secure web gateway, SD-WAN, network firewall and cloud access security brokers. These new trends may bring existing partners, such as Fortinet, Zscaler and Okta into a more competitive position with our Carbon Black, VeloCloud and other distributed network security offerings. If we are unable to successfully adapt our product and service offerings to meet these opportunities and rapidly evolving trends our operating results could be adversely affected.
Large, diversified enterprise software and hardware companies. These competitors supply a wide variety of products and services to, and have well-established relationships with, our current and prospective end users. For example, small- to medium-sized businesses and companies in emerging markets that are evaluating the adoption of virtualization-based technologies and solutions may be inclined to consider Microsoft solutions because of their existing use of Windows and Office products. Some of these competitors have in the past and may in the future take advantage of their existing relationships to engage in business practices that make our products and services less attractive or more expensive to our end users. For example, in 2019, Microsoft modified its on-premises licensing terms to require end users who wish to deploy Microsoft software on certain dedicated hosted cloud services other than Microsoft’s Azure cloud service, including VMware Cloud on AWS, to purchase additional rights from Microsoft. Other competitors have limited or denied support for their applications running in VMware virtualization environments. In addition, these competitors could integrate competitive capabilities into their existing products and services and make them available without additional charge. For example, Oracle provides free server virtualization software intended to support Oracle and non-Oracle applications, Microsoft offers its own server, network and storage virtualization software packaged with its Windows Server product as well as built-in virtualization in the client version of Windows and Cisco includes network virtualization technology in many of theirits data center networking platforms. As a result, existing and prospective VMware customers may elect to use products that are perceived to be “free” or “very low cost” instead of purchasing VMware products and services for certain applications where they do not believe that more advanced and robust capabilities are required.
Companies offering competing platforms based on open source technologies. Open source technologies for virtualization, containerization and cloud platforms such as Xen, KVM, Docker, rkt, OpenShift, Mesos, Kubernetes and OpenStack appear to provide pricing competition and enable competing vendors to leverage these open source technologies to compete directly with our SDDC initiative. A number of enterprise IT vendors have released solutions based on open source technologies that are targeting data center virtualization and private cloud, including Red Hat, which was recently acquired by IBM, and Nutanix. VMware is delivering container technologies such as PKS, and Cloud Native Application technologies that are designed to help customers adopt micro-services architectures. The adoption of distributed micro-service application architectures, and their alignment with container technologies, represents an emerging area of competition.
Other industry alliances. Many of our competitors have entered into or extended partnerships or other strategic relationships to offer more comprehensive virtualization and cloud computing solutions than they individually had offered. We expect these trends to continue as companies attempt to strengthen or maintain their positions in the evolving virtualization infrastructure and enterprise IT solutions industry. For example, CrowdStrike has formed the CrowdXDR Alliance, an initiative competitive with VMware security offerings that includes VMware partners such as Zscaler and Google Cloud. These alliances may result in more compelling product and service offerings than those we offer.
Our partners and members of our developer and technology partner ecosystem. We face competition from our partners. For example, third parties currently selling our products and services could build and market their own competing products and services or market competing products and services of other vendors. Additionally, as formerly distinct sectors of enterprise IT such as software-based virtualization and hardware-based server, networking and storage solutions converge, we also increasingly compete with companies who are members of our developer and technology partner ecosystem. For example, in October 2018,2019, one of our important partners and customers, IBM, announced it had reached an agreement to acquireacquired Red Hat, one of our competitors in the cloud native applications space. Consequently, when such convergences occur, we may find it more difficult to continue to work togethercollaborate productively on other projects with these partners, and the advantages we derive from our ecosystem could diminish.
ThisThese various forms of competition could result in increased pricing pressure and sales and marketing expenses, thereby materially reducing our operating margins and could also prevent our new products and services from gaining market acceptance, thereby harming our ability to increase, or causing us to lose, market share.
Competition for our target employees is intense and costly, and we may not be able to attract and retain highly skilled employees.
To execute on our strategy, we must continue to attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior sales executives and engineers with significant experience designing and developing software and cloud offerings. We may not be successful in attracting and retaining qualified personnel. We have in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. Research and development personnel are also aggressively recruited by startup and emerging growth companies, which are especially active in many of the technical areas and geographic regions in which we conduct product and service development. Competition for our key personnel results in increased costs in the form of cash and stock-based compensation and can have a dilutive impact on our stock. Additionally, changes in immigration and work permit laws and regulations or the administration or interpretation of such laws or regulations could impair our ability to attract and retain highly qualified employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could suffer.
Adverse economic conditions may harm our business.
Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. The purchase of our products and services is often discretionary and may involve a significant commitment of capital and other resources. Weak economic conditions or significant uncertainty regarding the stability of financial markets, including as a result of volatility in the stock market or recent changes in tariffs and trade agreements, could adversely impact our business, financial condition and operating results in a number of ways, including by lengthening sales cycles, affecting the size of EAs that customers will commit to, reducing the level of our non-EA transactional sales, lowering prices for our products and services, reducing unit sales and reducing the rate of adoption of our products and services by new customers and the willingness of current customers to purchase upgrades to our existing products and services. For example, a recurrence of the sovereign debt crisis in Europe, repercussions from the United Kingdom’s (“U.K.”) planned exit from the European Union (“EU”) (“Brexit”) or that region’s failure to sustain its recovery from recession would threaten to suppress demand and our customers’ access to credit in that region which is an important market for our products and services. In addition, political and economic instability created by Brexit has caused and may continue to cause significant volatility in global financial markets. In response to sustained economic uncertainty, many national and local governments that are current or prospective customers for our products and services, including the U.S. federal government, have made, or threatened to make, significant spending cutbacks which could reduce the amount of government spending on IT and the potential demand for our products and services from the government sector.
Regional economic uncertainty can also result in general and ongoing tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy and significant volatility in the credit, equity and fixed income markets. Changes in governmental fiscal, monetary and tax policies may also impact interest rates on credit and debt, which have been at relatively low levels for several years. As a result, current or potential customers may be unable to fund software purchases, which could cause them to delay, decrease or cancel purchases of our products and services. Increases in our cost of borrowing could also impact our ability to access capital markets should we wish to raise additional funding for business investments, which could adversely affect our ability to repay or refinance our outstanding indebtedness, fund future product development and acquisitions or conduct stock buybacks.
The loss of key management personnel could harm our business.
We depend on the continued services of key management personnel. We generally do not have employment or non-compete agreements with our employees, and, therefore, they could terminate their employment with us at any time without penalty and could pursue employment opportunities with any of our competitors. In addition, we do not maintain any key-person life insurance policies. The loss of key management personnel could harm our business.
We may not be able to respond to rapid technological changes with new solutions and services offerings.
The software-defined date center, hybrid cloud computing and end-user computing industries are characterized by rapid technological change, changing customer needs, frequent new software product introductions and evolving industry standards. The introduction of third-party solutions embodying new technologies and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable. Cloud computing has proven to be a disruptive technology that is altering the way that businesses consume, manage and provide physical IT resources, applications, data and IT services. We may not be able to establish or sustain our thought leadership in the cloud computing and enterprise software fields, and our customers may not view our products and services as cost effective, innovative and best-of-breed, which could result in a reduction in market share and our inability to command a pricing premium over competitor products and services. We may not be able to develop updated products and services that keep pace with technological developments and emerging industry standards, that address the increasingly sophisticated needs of our customers or that interoperate with new or updated operating systems and hardware devices. We may also fail to adequately anticipate and prepare for the commercialization of emerging technologies such as blockchain and the development of new markets and applications for our technology such as the IoT and “edge” computing and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.
Our ability to react quickly to new technology trends and customer requirements is negatively impacted by the length of our development cycle for new products and services and product and service enhancements, which has frequently been longer than we originally anticipated. This is due in part to the increasing complexity of our product offerings as we increase their interoperability, and enable and maintain their compatibility with multiple IT resources such as public clouds utilized by our customers, which can significantly increase the development time and effort necessary to achieve the interoperability of our offerings while maintaining product quality. When we release significant new versions of our existing offerings, the complexity of our products may require existing customers to remove and replace prior versions in order to take full advantage of substantial new features and capabilities, which may subdue initial demand for the new versions or, conversely, depress demand for existing versions until the customer is ready to purchase and install the newest release. If we are unable to evolve our solutions and offerings in time to respond to and remain ahead of new technological developments, our ability to retain or increase market share and revenue in the software-defined data center, hybrid cloud computing and end-user computing industries could be materially adversely affected. With respect to our SDDC products, if we fail to introduce compelling new features in future upgrades to our vSphere product line, manage the transition to hybrid cloud platforms, develop new or tightly integrate existing applications for our virtualization technology that address customer requirements for integration, automation and management of their IT systems with public cloud resources, overall demand for products and services based on vSphere may decline. Additionally, if we fail to realize returns on investments in our newer NSX virtual networking, hyperconverged infrastructure, hybrid cloud and SaaS, and edge computing initiatives, our operating margins and results of operations will be adversely impacted.
Breaches of our cybersecurity systems or the systems of our vendors, partners and suppliers could seriously harm our business.
We increasingly depend upon our IT systems and the IT systems of key SaaS providers to conduct virtually all of our business operations, ranging from our internal operations and product development activities to our marketing and sales efforts and communications with our customers and business partners. Unauthorized parties (which may have included nation states and individuals sponsored by them) have penetrated our network security and our website in the past and such unauthorized parties may do so in the future. Employees or contractors have introduced vulnerabilities in, and enabled the exploitation of, our IT environments in the past and may do so in the future. These cyber-attacks, which are increasing in number and technical sophistication, threaten to misappropriate our proprietary information, cause interruptions of our IT services and commit fraud. Because the techniques used by unauthorized persons to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these tactics. Further, if unauthorized access or sabotage remains undetected for an extended period of time, the effects of such breach could be exacerbated. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our systems and processes. Our exposure to cybersecurity threats and negative consequences of cybersecurity breaches will likely increase as our customers conduct more purchase and service transactions online, and as we store increasing amounts of customer data and host or manage parts of customers’ businesses in cloud-based IT environments. Additionally, as we increasingly market the security features in our products, our products may be targeted by computer hackers seeking to compromise product security.
We have also outsourced a number of our business functions to third parties, and we rely upon distributors, resellers, system vendors and systems integrators to sell our products and services. Accordingly, if our cybersecurity systems and those of our contractors, partners and vendors fail to protect against breaches, our ability to conduct our business could be damaged in a number of ways, including:
sensitive data regarding our business, including intellectual property and other proprietary data, could be stolen;
our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct our business operations could be seriously damaged until such systems can be restored and secured;
our ability to process customer orders and electronically deliver products and services could be degraded, and our distribution channels could be disrupted, resulting in delays in revenue recognition;
defects and security vulnerabilities could be exploited or introduced into our software products or our hybrid cloud and SaaS offerings and impair or disrupt their availability, thereby damaging the reputation and perceived reliability and security of our products and services and potentially making the data systems of our customers vulnerable to further data loss and cyber incidents; and
personally identifiable or confidential data of our customers, employees and business partners could be stolen or lost.
Should any of the above events occur, or are perceived to have occurred, we could be subject to significant claims for liability from our customers, we could face regulatory actions and sanctions from governmental agencies under privacy, data protection or other laws, our ability to protect our intellectual property rights could be compromised, our reputation and competitive position could be materially harmed, we could face material losses as the result of successful financial cyber-fraud schemes and we could incur significant costs in order to upgrade our cybersecurity systems and remediate damages. Consequently, our business, financial condition and operating results could be materially adversely affected.
Our operating results may fluctuate significantly.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and our past results should not be relied upon as an indication of our future performance. In addition, a significant portion of our quarterly sales typically occurs during the last two weeks of the quarter, which generally reflects customer buying patterns for enterprise technology. As a result, our quarterly operating results are difficult to predict even in the near term. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our Class A common stock would likely decline substantially.
Factors that may cause fluctuations in our operating results include, among others, the factors described elsewhere in this risk factors section and the following:
fluctuations in demand, adoption rates, sales cycles and pricing levels for our products and services;
changes in customers’ budgets for information technology purchases and in the timing of their purchasing decisions;
the timing of announcements or releases of new or upgraded products and services by us or by our competitors;
the timing and size of business realignment plans and restructuring charges;
our ability to maintain scalable internal systems for reporting, order processing, license fulfillment, product delivery, purchasing, billing and general accounting, among other functions;
our ability to control costs, including our operating expenses;
the credit risks associated with our distributors, who account for a significant portion of our product revenue and accounts receivable, and our customers;
the timing of when sales orders are processed, which can cause fluctuations in our backlog and impact our bookings and timing of revenue recognition;
seasonal factors such as the end of fiscal period budget expenditures by our customers and the timing of holiday and vacation periods;
renewal rates and the amounts of the renewals for EAs as original EA terms expire;
the timing and amount of internally developed software development costs that may be capitalized;
unplanned events that could affect market perception of the quality or cost-effectiveness of our products and solutions;
fluctuations in the fair value of our investment in Pivotal, which is primarily based on Pivotal’s closing stock price on the last trading day of each fiscal quarter;
the impact of new accounting pronouncements, for example, the adoption of Accounting Standards Update (“ASU”) 2016-16, which could result in increased volatility in the provision for income taxes in periods in which transfers of intellectual property between our legal entities occur; and
our ability to accurately predict the degree to which customers will elect to purchase our subscription-based offerings in place of licenses to our on-premises offerings.
We are exposed to foreign exchange risks.
Because we conduct business in currencies other than the U.S. dollar but report our operating results in U.S. dollars, we face exposure to fluctuations in currency exchange rates. For example, political and economic instability created by Brexit has resulted in significant volatility in the value of the British pound and other currencies, including the euro. During the twelve months ended February 1, 2019, approximately 30% of our sales were invoiced and collected in non-U.S. dollar denominated currencies. The realized gain or loss on foreign currency transactions is dependent upon the types of foreign currency transactions that we enter into, the exchange rates associated with these transactions and changes in those rates, the net realized gain or loss on our foreign currency forward contracts, and other factors. Although we hedge a portion of our foreign currency exposure, a significant fluctuation in exchange rates between the U.S. dollar and foreign currencies may adversely affect our operating results. For example, we experienced a measurable negative impact to our revenue in 2015 due to exchange rate fluctuations. Any future weakening of foreign currency exchange rates against the U.S. dollar would likely result in additional adverse impact on our revenue.
Our $11 billion special dividend could limit our ability to fund significant future stock repurchases and strategic investments.
On December 28, 2018, we paid a special dividend of $11 billion (the “Special Dividend”) to our stockholders. With payment of the Special Dividend, our cash, cash equivalents and short-term investments have declined significantly. While we believe our remaining cash balances and cash generated by our business operations will be sufficient to fund our operations and pursue our existing stock repurchase program and strategic plans, if our business operations do not generate the cash flows we expect, then our ability to fund future stock repurchases, invest in our business and pursue strategic alternatives, including business acquisitions, will be reduced, which could reduce our ability to manage dilution of our stock and limit our future growth.
We operate a global business that exposes us to additional risks.
Our international activities account for a substantial portion of our revenue and profits, a substantial portion of our employees work in non-U.S locations, and we plan to further expand internationally. In addition, our investment portfolio includes investments in non-U.S. financial instruments and holdings in non-U.S. financial institutions, including European institutions. In addition to the risks described elsewhere in these risk factors, our international operations subject us to a variety of risks, including:
difficulties in enforcing contracts and collecting accounts receivable and longer payment cycles, especially in emerging markets;
difficulties in delivering support, training and documentation in certain foreign markets;
tariffs and trade barriers, which could increase due to the current geopolitical climate, and other regulatory or contractual limitations on our ability to sell or develop our products and services in certain foreign markets;
changes and instability in government policies and international trade arrangements that could adversely affect the ability of U.S.-based companies to conduct business in non-U.S. markets;
economic or political instability and security concerns in countries that are important to our international sales and operations;
difficulties in transferring funds from certain countries;
increased compliance risks, particularly in emerging markets; and
difficulties in maintaining appropriate controls relating to revenue recognition practices.
For example, we currently comply with a number of EU regulations that govern our sales, facilities and employees located in the U.K. There is considerable regulatory uncertainty regarding the impact of Brexit on the laws and regulations that we will need to comply with in the U.K. post-Brexit.
Another example is the ongoing efforts of the Chinese government to more closely regulate network security. In that respect, a Cyber Security Law came into effect on June 1, 2017. The Cyber Security Law promotes utilization of “secure and reliable” network products and services, requires the sale of certain key network equipment and network security products to be
subject to security certification, and imposes data localization measures and various network security measures relevant to a vaguely defined scope of “critical information infrastructure.” Among those network security measures is a requirement that certain network products and services procured by operators of “critical information infrastructure” undergo a formal security assessment in order to evaluate their “security” and “controllability.” The specific technical requirements of the security assessment have still not been fully defined.
Also, in December 2015, China enacted an Anti-Terrorism Law that gives local public security and state security authorities the broad discretionary authority to require companies to provide access to their equipment and decryption support in particular cases. Failure to comply with such requests can result in fines and imprisonment. In addition, a broad range of businesses will be required to verify the identities of customers and are prohibited from providing services to customers whose identities are unclear or who refuse to cooperate in the verification process. If we are not able to, or choose not to, comply with these and other information and network security standards that the Chinese government might implement in the future, our business in China may suffer.
There is also significant uncertainty about the future relationship between the U.S. and various other countries, most significantly China, with respect to trade policies, treaties, government regulations and tariffs. The current U.S. presidential administration has called for substantial changes to U.S. foreign trade policy with respect to China and other countries, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the U.S. Given the relatively fluid regulatory environment in China and the United States and uncertainty regarding how the U.S. or foreign governments will act with respect to tariffs, international trade agreements and policies, a trade war, further governmental action related to tariffs or international trade policies, or additional tax or other regulatory changes in the future could occur and could directly and adversely impact our financial results and results of operations.
Furthermore, if we fail to comply with legal and regulatory requirements covering the foreign activities of U.S. corporations, such as export control requirements and the Foreign Corrupt Practices Act, as well as with local regulatory requirements in non-U.S. jurisdictions, we may be exposed to significant fines and penalties and reputational harm. These risks will increase as we expand our operations in locations with a higher incidence of corruption and fraudulent business practices.
In addition, potential fallout from past disclosures related to the U.S. Internet and communications surveillance and possible efforts to enable increased surveillance could make foreign customers reluctant to purchase products and services from U.S.-based technology companies and impair our growth rate in foreign markets.
Our failure to manage any of these risks successfully could negatively affect our reputation and adversely affect our operating results.
We have outstanding indebtedness in the form of unsecured notes and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
We have $4,000 million in unsecured notes outstanding as well as an additional unsecured promissory note with an outstanding principal amount of $270 million owed to Dell. We also have a $1,000 million unsecured revolving credit facility (“Credit Facility”) that is currently undrawn. Our current and any future debt may adversely affect our financial condition and future financial results by, among other things:
requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and
limiting our flexibility in planning for, or reacting to, changes in our business and our industry.
The terms of our unsecured notes and Credit Facility impose restrictions on us and require us to maintain compliance with specified and customary covenants. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. If we breach any of the covenants and do not obtain a waiver from the lenders or note holders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable.
In addition, any actual or anticipated changes to our credit ratings, including any announcement that our credit ratings are under review, by any rating agency may negatively impact the value and liquidity of both our debt and equity securities. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us and the cost of borrowing under our Credit Facility could increase. Downgrades in our credit ratings could also affect the terms of and restrict our ability to obtain additional financing in the future. In addition, upon the occurrence of certain downgrades of the ratings of our unsecured notes, we may be required to repurchase our unsecured notes at a repurchase price equal to 101% of the aggregate principal plus any accrued and unpaid interest on the date of purchase.
Additionally, our parent company, Dell, currently has a significant level of debt financing. Accordingly, negative changes to Dell’s credit rating could also negatively impact our credit rating and the value and liquidity of any future debt we might
raise. Refer to “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K for more information on our outstanding indebtedness.
Our current research and development efforts may not produce significant revenue for several years, if at all.
Developing our products and services is expensive. In particular, developing and launching disruptive technologies in new areas, as we are continuing to do with our NSX virtual networking, hyperconverged infrastructure, hybrid cloud and SaaS, and edge computing initiatives, requires significant investments of resources and often entails greater risk than incremental investments in existing products and services. Our investment in research and development may not result in marketable products or services or may result in products and services that generate less revenue than we anticipate. Our research and development expenses were approximately 22% of our total revenue during the twelve months ended February 1, 2019. Our future plans include significant investments in software research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not receive significant revenue from these investments for several years, if at all.
We are involved in litigation, investigations and regulatory inquiries and proceedings that could negatively affect us.
From time to time, we are involved in various legal, administrative and regulatory proceedings, claims, demands and investigations relating to our business, which may include claims with respect to commercial, product liability, intellectual property, cybersecurity, privacy, data protection, antitrust, breach of contract, employment, class action, whistleblower and other matters. In the ordinary course of business, we also receive inquiries from and have discussions with government entities regarding the compliance of our contracting and sales practices with laws and regulations.
We have been, and expect to continue to be, subject to intellectual property infringement claims, including claims by entities that do not have operating businesses of their own and therefore may limit our ability to seek counterclaims for damages and injunctive relief. In addition to monetary judgments, a judgment could also include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Third parties may also assert infringement claims against our customers and channel partners, which could require us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because we generally indemnify our customers and channel partners from claims of infringement of proprietary rights of third parties in connection with the use of our products. These matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Allegations made in the course of regulatory or legal proceedings may also harm our reputation, regardless of whether there is merit to such claims. Furthermore, because litigation and the outcome of regulatory proceedings are inherently unpredictable, our business, financial condition or operating results could be materially affected by an unfavorable resolution of one or more of these proceedings, claims, demands or investigations.
Refer to Note L to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a description of certain claims and litigation.
We may not be able to adequately protect our intellectual property rights.
We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. As such, despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the U.S. In addition, we rely on confidentiality or license agreements with third parties in connection with their use of our products and technology. There is no guarantee that such parties will abide by the terms of such agreements or that we will be able to adequately enforce our rights, in part because we rely on “click-wrap” and “shrink-wrap” licenses in some instances.
Detecting and protecting against the unauthorized use of our products, technology proprietary rights and intellectual property rights is expensive, difficult and, in some cases, impossible. Litigation is necessary from time to time to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property, which could result in a substantial loss of our market share.
Our use of “open source” software in our products could negatively affect our ability to sell our products and subject us to litigation.
Many of our products and services incorporate so-called “open source” software, and we may incorporate open source software into other products and services in the future. Open source software is generally licensed by its authors or other third
parties under open source licenses. Open source licensors generally do not provide warranties or assurance of title or controls on origin of the software, which exposes us to potential liability if the software fails to work or infringes the intellectual property of a third party.
We monitor our use of open source software in an effort to avoid subjecting our products to conditions we do not intend and avoid exposing us to unacceptable financial risk. However, the processes we follow to monitor our use of open source software could fail to achieve their intended result. In addition, although we believe that we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of terms in most of these licenses, which increases the risk that a court could interpret the license differently than we do.
From time to time, we receive inquiries or claims from authors or distributors of open source software included in our products regarding our compliance with the conditions of one or more open source licenses. An adverse outcome to a claim could require us to:
pay significant damages;
stop distributing our products that contain the open source software;
revise or modify our product code to remove alleged infringing code;
release the source code of our proprietary software; or
take other steps to avoid or remedy an alleged infringement.
In March 2015, a software developer who alleges that software code he wrote is used in a component of our vSphere product filed a lawsuit against us in Germany alleging copyright infringement for failing to comply with the terms of the open source General Public License v.2 (“GPL v.2”) and seeking an order requiring us to comply with the GPL v.2 or cease distribution of any affected code within Germany. On July 8, 2016, the German court issued a written decision dismissing the lawsuit. Following Mr. Hellwig’s appeal of that decision, on February 28, 2019, the appellate court affirmed the regional court’s decision dismissing Mr. Hellwig’s lawsuit. The time for Mr. Hellwig to file a further appeal has not yet expired. The Company intends to continue vigorously defending itself against this lawsuit.
The evolution of our business requires more complex go-to-market strategies, which involve significant risk.
Our increasing focus on developing and marketing IT management and automation and IaaS (including software-defined networking, VCPP-integrated virtual desktop and mobile device, cloud and SaaS) offerings that enable customers to transform their IT systems requires a greater focus on marketing and selling product suites and more holistic solutions, rather than selling on a product-by-product basis. Consequently, we have developed, and must continue to develop, new strategies for marketing and selling our offerings. In addition, marketing and selling new technologies to enterprises requires significant investment of time and resources in order to educate customers on the benefits of our new product offerings. These investments can be costly and the additional effort required to educate both customers and our own sales force can distract from their efforts to sell existing products and services. Further, upon entering into new industry segments, we may choose to go to market with hardware appliances that are integrated with our software—as we did when we entered into the SD-WAN space through our acquisition of VeloCloud—which requires us to rapidly develop, deploy and scale new hardware procurement, supply chain and inventory management processes and product support services and integrate them into our ongoing business systems and controls.
Our success depends upon our ability to develop appropriate business and pricing models.
If we cannot adapt our business models to keep pace with industry trends, including the industry-wide transition to cloud-based computing, our revenue could be negatively impacted. Certain of our product initiatives, such as our VCPP and SaaS offerings, have a subscription model. As we increase our adoption of subscription-based pricing models for our products, we may fail to set pricing at levels appropriate to maintain our revenue streams or our customers may choose to deploy products from our competitors that they believe are priced more favorably. In addition, we may fail to accurately predict subscription renewal rates or their impact on operating results, and because revenue from subscriptions is recognized for our services over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our results. Additionally, as customers transition to our hybrid cloud and SaaS products and services, our revenue growth rate may be adversely impacted during the period of transition as we will recognize less revenue up front than we would otherwise recognize as part of the multi-year license contracts through which we typically sell our established offerings. Finally, as we offer more services that depend on converting users of free services to users of premium services and converting purchasers of our on-premises products to our SaaS offerings, and as such services grow in size, our ability to maintain or improve and to predict conversion rates will become more important.
Our products and services are highly technical and may contain or be subject to other suppliers’ errors, defects or security vulnerabilities.
Our products and services are highly technical and complex and, when deployed, have contained and may contain errors, defects or security vulnerabilities. Some errors in our products or services may only be discovered after a product or service has been installed and used by customers. Undiscovered vulnerabilities in our products or services could expose our customers to hackers or other unscrupulous third parties who develop and deploy viruses, worms and other malicious software programs that could attack our products or services. Further, our use of open-source software in our offerings can make our products and services vulnerable to additional security risks not posed by proprietary products. In the past, VMware has been made aware of public postings by hackers of portions of our source code. It is possible that the released source code could expose unknown security vulnerabilities in our products and services that could be exploited by hackers or others. VMware products and services are also subject to known and unknown security vulnerabilities resulting from integration with products or services of other companies (such as applications, operating systems or semi-conductors). For example, vulnerabilities in certain microprocessors were publicly announced in 2018 under the names Spectre, Meltdown and Foreshadow. Actual or perceived errors, defects or security vulnerabilities in our products or services could harm our reputation and lead some customers to return products or services, reduce or delay future purchases or use competitive products or services, all of which could negatively impact our business, operating results and stock price.
Failure to effectively manage our product and service lifecycles could harm our business.
As part of the natural lifecycle of our products and services, we periodically inform customers that products or services will be reaching their end of life or end of availability and will no longer be supported or receive updates and security patches. To the extent these products or services remain subject to a service contract with the customer, we offer to transition the customer to alternative products or services. Failure to effectively manage our product and service lifecycles could lead to customer dissatisfaction and contractual liabilities, which could adversely affect our business and operating results.
Our success depends on the interoperability of our products and services with those of other companies.
The success of our products depends upon the cooperation of hardware and software vendors to ensure interoperability with our products and offer compatible products and services to end users. In addition, we have begun to extend the functionality of various products to work with native public cloud applications, which may require the cooperation of public cloud vendors. To the extent that hardware, software and public cloud vendors perceive that their products and services compete with ours or those of our controlling stockholder, Dell, they may have an incentive to withhold their cooperation, decline to share access or sell to us their proprietary APIs, protocols or formats, or engage in practices to actively limit the functionality, compatibility and certification of our products. In addition, vendors may fail to certify or support or continue to certify or support our products for their systems. If any of the foregoing occurs, our product development efforts may be delayed or foreclosed and it may be difficult and more costly for us to achieve functionality and service levels that would make our services attractive to end users, any of which could negatively impact our business and operating results.
Disruptions to our distribution channels could harm our business.
Our future success is highly dependent on our relationships with distributors, resellers, system vendors and systems integrators, which account for a significant portion of our revenue. Recruiting and retaining qualified channel partners and training them in the use of our technology and product offerings requires significant time and resources. Our failure to maintain good relationships with channel partners would likely lead to a loss of end users of our products and services, which would adversely affect our revenue. We generally do not have long-term contracts or minimum purchase commitments with our distributors, resellers, system vendors and systems integrators, and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours.
Two of our distributors each accounted for 10% or more of our consolidated revenue during the twelve months ended February 1, 2019. Although we believe that we have in place, or would have in place by the date of any such termination, agreements with replacement distributors sufficient to maintain our revenue from distribution, if we were to lose the distribution services of a significant distributor, such loss could have a negative impact on our operating results until such time as we arrange to replace these distribution services with the services of existing or new distributors.
Our SaaS offerings, which constitute a growing portion of our business, involve various risks, including, among others, reliance on third-party providers for data center space and colocation services.
As we continue to develop and offer SaaS versions of our products, we will need to continue to evolve our processes to meet a number of regulatory, intellectual property, contractual and service compliance challenges. These challenges include compliance with licenses for open source and third-party software embedded in our SaaS offerings, maintaining compliance with export control and privacy regulations, including HIPAA, protecting our services from external threats, maintaining the continuous service levels and data security expected by our customers, preventing the inappropriate use of our services and adapting our go-to-market efforts. The expansion of our SaaS and related cloud offerings also requires significant investments,
and our operating margins, results of operations and operating cash flows may be adversely affected if our new offerings are not widely adopted by customers.
Additionally, our SaaS offerings rely upon third-party providers to supply data center space, equipment maintenance and other colocation services. Although we have entered into various agreements for the lease of data center space, equipment maintenance and other services, third parties could fail to live up to the contractual obligations under those agreements. The failure of a third-party provider to prevent service disruptions, data losses or security breaches may require us to issue credits or refunds or indemnify or otherwise be liable to customers or third parties for damages that may occur. Additionally, if these third-party providers fail to deliver on their obligations, our reputation could be damaged, our customers could lose confidence in us and our ability to maintain and expand our SaaS offerings would be impaired.
Joint ventures may not yield expected benefits and outcomes.
As we expand our offerings into new technologies such as the public cloud and seek more efficient methods of marketing our products and services in regions where local partners can operate more easily, we sometimes rely upon joint ventures with established providers of IT products and services in particular regions, for example as go-to-market and channel partners. Joint ventures are inherently risky and the requirements for close ongoing cooperation and commitments from the joint venture partners to devote adequate resources often present significant challenges. Joint ventures can also be difficult to manage, given the potentially different interests of joint venture partners. Accordingly, there can be no guarantee that our joint ventures will achieve their intended objectives. If we are unable to continue our strategic alignment with joint venture partners or obtain the cooperation and commitments we are relying upon, our ability to successfully expand our offerings globally and in certain regions may diminish.
Non-compliance or perceived non-compliance with existing and evolving international and domestic privacy and data protection laws, regulations and standards could result in liability and adversely impact our business.
Our business is subject to regulation by various federal, state and international governmental agencies responsible for monitoring and enforcing privacy and data protection laws. The regulatory framework for privacy issues worldwide is rapidly evolving, as many new laws, regulations and standards regarding the collection, location, use and disclosure of personal information are being adopted, and existing laws and regulations may be subject to new and changing interpretations, creating uncertainty and additional legal obligations for ourselves, our partners, vendors and customers for the foreseeable future. For example, the EU’s General Data Protection Regulation (the “GDPR”) came into force in May 2018 and established new requirements applicable to the handling of personal data; the California Consumer Privacy Act, which comes into effect in January 2020, broadly defines personal information and provides California consumers increased privacy rights and protections; and the EU’s proposed e-Privacy Regulation regulates the use of information for marketing purposes and the tracking of individuals’ online activities. Additionally, the application of law and regulations to our role as a provider of cloud-based compute infrastructure delivered by third party cloud providers is uncertain. We expect that there will continue to be new proposed laws, regulations and industry standards, including self-regulatory standards advocated by industry groups, concerning privacy, data protection and transfers, and information security in the U.S., EU and other jurisdictions globally, and we cannot yet determine the impacts such future laws, regulations and standards may have on our business or the businesses of our partners, vendors and customers.
We continue to make investments in and enhance our policies and controls across our business relating to how we and our business partners protect, collect and use customer and employee personal data, as U.S. and international regulatory frameworks evolve. Ongoing compliance efforts may increase the cost and complexity of our business relationships and the delivery of our products and services and may negatively impact our business, our ability to run promotions and effectively market our offerings, and the demand for our products and services.
Any failure or perceived failure by us or our business partners to comply with such federal, state or international privacy or data protection laws and regulations, the privacy commitments contained in our contracts or the privacy policies we have posted on our website could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal liability, penalties or injunctions. For example, failure to comply with the EU’s GDPR requirements may lead to fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. Additionally, as a technology provider, our customers expect that we can demonstrate compliance with current data privacy and data protection laws and regulations, and our inability or perceived inability to do so may adversely impact sales of our products and services, particularly to customers in highly-regulated industries. As a result, our reputation and brand may be harmed, we could incur significant costs, and financial and operating results could be materially adversely affected.
If we fail to comply with our customer contracts or government contracting regulations, our business could be adversely affected.
Contracts with many of our customers include unique and specialized performance requirements. In particular, our contracts with federal, state, local and non-U.S. governmental customers and our arrangements with distributors and resellers
who may sell directly to governmental customers are subject to various procurement regulations, contract provisions and other requirements relating to their formation, administration and performance. Any failure by us to comply with provisions in our customer contracts or any violation of government contracting regulations could result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments and, in the case of our government contracts, fines and suspension from future government contracting. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless of its accuracy, may damage our business and affect our ability to compete for new contracts. In the ordinary course of business, we also receive inquiries from and have ongoing discussions with government entities regarding the compliance of our contracting and sales practices with laws and regulations. A failure in the future to comply with federal and state governmental contracting requirements could result in the termination of customer contracts, our suspension from government work, the imposition of fines or other government sanctions or an inability to compete for new contracts, any of which could adversely affect our business, operating results or financial condition.
Acquisitions and divestitures could harm our business and operating results.
We have acquired in the past, and plan to acquire in the future, other businesses, products or technologies. We also from time to time sell or divest businesses, products and technologies. For instance, in May 2017, we sold the VMware vCloud Air business (“vCloud Air”) to OVH. Acquisitions and divestitures involve significant risks and uncertainties, which include:
disrupting our ongoing operations, diverting management from day-to-day responsibilities, increasing our expenses, and adversely impacting our business, financial condition and operating results;
failure of an acquired business to further our business strategy;
uncertainties in achieving the expected benefits of an acquisition or disposition, including enhanced revenue, technology, human resources, cost savings, operating efficiencies and other synergies;
reducing cash available for operations, stock repurchase programs and other uses and resulting in potentially dilutive issuances of equity securities or the incurrence of debt;
incurring amortization expense related to identifiable intangible assets acquired that could impact our operating results;
difficulty integrating the operations, systems, technologies, products and personnel of acquired businesses effectively;
the need to provide transition services in connection with a disposition, such as the sale of vCloud Air, which may result in the diversion of resources and focus;
difficulty achieving expected business results due to a lack of experience in new markets, products or technologies or the initial dependence on unfamiliar distribution partners or vendors;
retaining and motivating key personnel from acquired companies;
declining employee morale and retention issues affecting employees of businesses that we acquire or dispose of, which may result from changes in compensation, or changes in management, reporting relationships, future prospects or the direction of the acquired or disposed business;
assuming the liabilities of an acquired business, including acquired litigation-related liabilities and regulatory compliance issues, and potential litigation or regulatory action arising from a proposed or completed acquisition;
lawsuits resulting from an acquisition or disposition;
maintaining good relationships with customers or business partners of an acquired business or our own customers as a result of any integration of operations or the divestiture of a business upon which our customers rely, such as our recent divestiture of our vCloud Air business;
unidentified issues not discovered during the diligence process, including issues with the acquired or divested business’s intellectual property, product quality, security, privacy practices, accounting practices, regulatory compliance or legal contingencies;
maintaining or establishing acceptable standards, controls, procedures or policies with respect to an acquired business;
risks relating to the challenges and costs of closing a transaction; and
the need to later divest acquired assets at a loss if an acquisition does not meet our expectations.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
We may not realize all the economic benefit from our business acquisitions, which could result in an impairment of goodwill or intangibles. As of February 1, 2019, goodwill and amortizable intangible assets were $5,381 million and $541 million, respectively. We review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment at least annually. Factors that may lead to impairment include a substantial decline in stock price and market capitalization or cash flows, reduced future cash flow estimates related to the assets and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which would negatively impact our operating results.
Problems with our information systems could interfere with our business and could adversely impact our operations.
We rely on our information systems and those of third parties for processing customer orders, delivering products, providing services and support to our customers, billing and tracking our customer orders, fulfilling contractual obligations, performing accounting operations and otherwise running our business. If our systems fail, our disaster and data recovery planning and capacity may prove insufficient to enable timely recovery of important functions and business records. Any disruption in our information systems and those of the third parties upon whom we rely could have a significant impact on our business.
In addition, we continuously work to enhance our information systems, such as our enterprise resource planning software. The implementation of these types of enhancements is frequently disruptive to the underlying business of an enterprise, which may especially be the case for us due to the size and complexity of our business. Implementation may disrupt internal controls and business processes and could introduce unintended vulnerability to error.
Additionally, our information systems may not support new business models and initiatives and significant investments could be required in order to upgrade them. For example, in fiscal 2019 we implemented new revenue accounting software and during the first quarter of fiscal 2020 we implemented a new lease accounting software in order to facilitate the preparation of financial information related to the adoption of accounting standard updates.
We may have exposure to additional tax liabilities, and our operating results may be adversely impacted by higher than expected tax rates.
As a multinational corporation, we are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the U.S. and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. We are subject to income and indirect tax examinations. The Dell-owned EMC consolidated group is routinely under audit by the Internal Revenue Service (“IRS”). All U.S. federal income tax matters have been concluded for years through 2011, except for any matters under appeal. In addition, we are under corporate income tax audits in various states and non-U.S. jurisdictions. While we believe we have complied with all applicable income tax laws, a governing tax authority could have a different interpretation of the law and assess us with additional taxes. In addition, regulatory guidance is still forthcoming with respect to the 2017 Tax Cuts and Jobs Act and such guidance may impact our tax provision. Any assessment of additional taxes could materially affect our financial condition and operating results.
Our future effective tax rate may be affected by such factors as changes in tax laws, changes in our business or statutory rates, changing interpretation of existing laws or regulations, the impact of accounting for stock-based compensation and the recognition of excess tax benefits and tax deficiencies within the income tax provision in the period in which they occur, the impact of accounting for business combinations, shifts in the amount of earnings in the U.S. compared with other regions in the world and overall levels of income before tax, changes in our international organization, as well as the expiration of statute of limitations and settlements of audits.
In addition, in the ordinary course of our global business, there are many intercompany transactions, including the transfer of intellectual property, where the ultimate tax determination is uncertain. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes may differ from what is reflected in our historical income tax provisions and accruals.
Our effective tax rate in the future will depend upon the proportion of our income before provision for income taxes earned in the U.S. and in jurisdictions with a tax rate lower than the U.S. statutory rate. Our non-U.S. earnings are primarily earned by our subsidiaries organized in Ireland where the rate of taxation is lower than our U.S. tax rate, and as such, our annual effective tax rate can be significantly affected by the composition of our earnings in the U.S. and non-U.S. jurisdictions. During October 2014, Ireland announced revisions to its tax regulations that will require foreign earnings of our subsidiaries organized in Ireland to be taxed at higher rates. We will be impacted by the changes in tax laws in Ireland beginning in 2021. In addition, we
will be impacted by changes in tax laws in Bermuda and may be impacted by changes in other jurisdictions in 2019. We may proactively make structural changes in Ireland that may reduce the impact to our future tax rates. Currently, there are certain structural changes in Ireland that may be available to multi-national companies. However, due to the acquisition of EMC, VMware’s parent company, by Dell effective September 7, 2016 (the “Dell Acquisition”), we could be subject to higher tax obligations in the event we executed similar structural changes.
Any other significant changes to U.S. or international tax laws could have a material impact on our effective tax rate, financial condition, operating results and timing and amount of tax payments.
In addition, numerous other countries have recently enacted or are considering enacting changes to tax laws, administrative interpretations, decisions, policies and positions. These changes could adversely affect our effective tax rate or result in higher cash tax liabilities.
Catastrophic events or geo-political conditions could disrupt our business.
Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire, flood or other act of God, could have a material adverse impact on our business and operating results. Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, and disease pandemics could temporarily sideline a substantial part of our or our customers’ workforce at any particular time, any of which could disrupt our business. Furthermore, some of our new product initiatives and business functions are hosted and carried out by third parties that may be vulnerable to disruptions of these sorts, many of which may be beyond our control. Unanticipated disruptions in services provided through localized physical infrastructure, such as utility or telecommunication outages, can curtail the functioning of local offices as well as critical components of our information systems, and adversely affect our ability to process orders, provide services, respond to customer requests and maintain local and global business continuity. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment or availability of our products and services, our revenue would be adversely affected. Additionally, any such catastrophic event could cause us to incur significant costs to repair damages to our facilities, equipment and infrastructure.
Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. These principles are subject to interpretation by the Securities and Exchange Commission and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a material effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results. For example, during February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842). The updated standard requires the recognition of a liability for lease obligations and a corresponding right-of-use asset on the balance sheet, and disclosures of key information regarding leasing arrangements. The standard may be early adopted and is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption with the option of applying the requirements of the standard either (1) retrospectively to each prior comparative reporting period presented, or (2) retrospectively at the beginning of the period of adoption. We will adopt this standard beginning with our first quarter of fiscal 2020 and will apply it retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. We are continuing to evaluate the effect that the updated standard will have on our consolidated financial statements and related disclosures and preliminary assessments are subject to change.
Risks Related to Our Relationship with Dell
Our relationship with Dell may adversely impact our business and stock price.
As of February 1, 2019, Dell beneficially owned 30,679,000 shares of our Class A common stock and all 300,000,000 shares of our Class B common stock, representing 80.5% of the total outstanding shares of common stock or 97.4% of the voting power of outstanding common stock held by EMC, and we are considered a “controlled” company under the rules of the New York Stock Exchange (“NYSE”). Accordingly, strategic and business decisions made by Dell can impact our strategic and business decisions and relationships, and public speculation regarding Dell’s strategic direction and prospects, as well as our relationship with Dell, can cause our stock price to fluctuate.
For example, during 2018, Dell announced that it was reviewing its strategic opportunities, including a possible business combination with us, a review that led to Dell’s exchange of its Class V common stock designed to track our financial performance for its Class C common stock (the “Dell Share Exchange”) and our payment of the Special Dividend, both on December 28, 2018. Throughout the year, the stock price of our Class A common stock experienced periods of significant volatility related to public speculation regarding the outcome of Dell’s strategic review and the likelihood of its success. Additionally, with completion of the Dell Share Exchange, speculation regarding how our relationship with Dell might be affected by Dell’s status as a publicly traded company or additional strategic transactions involving Dell creates uncertainty for
our stockholders, customers, partners and employees, which could negatively impact sales, make it difficult to attract and retain employees and distract management’s focus from executing on other strategic initiatives.
A number of other factors relating to our relationship with Dell could adversely affect our business or our stock price in the future, including:
Dell is able to control matters requiring our stockholders’ approval, including the election of a majority of our directors as described in the risk factors below.
Dell could implement changes to our business, including changing our commercial relationship with Dell or taking other corporate actions, such as participating in business combinations, that our other stockholders may not view as beneficial.
We have arrangements with a number of companies that compete with Dell, and our relationship with Dell could adversely affect our relationships with these companies or other customers, suppliers and partners.
Since the Dell Acquisition, the portion of our bookings that are realized through Dell sales channels has grown more rapidly than our sales through non-Dell resellers and distributors, and we expect this trend to continue. To the extent that we find ourselves relying more heavily upon Dell for our channel sales, Dell’s leverage over our sales and marketing efforts may increase and our ability to negotiate favorable go-to-market arrangements with Dell and with other channel partners may decline.
Dell has a right to approve certain matters under our certificate of incorporation, including acquisitions or investments in excess of $100 million, and Dell may choose not to consent to matters that our board of directors believes are in the best interests of VMware.
Synergies and benefits that we expect from our relationship with Dell may not be realized.
Dell is highly leveraged and commits a substantial portion of its cash flows to servicing its indebtedness. Dell’s significant debt could create the perception that Dell may exercise its control over us to limit our growth in favor of its other businesses or cause us to transfer cash to Dell. In addition, if Dell defaults, or appears in danger of defaulting, on its indebtedness, uncertainty as to the impact of such a default on VMware could disrupt our business.
Investor perceptions of Dell’s performance, future plans and prospects could contribute to volatility in the price of our Class A common stock.
Some of our products compete directly with products sold or distributed by Dell, which could result in reduced sales.
Holders of our ClassA common stock have limited ability to influence matters requiring stockholder approval.
As of February 1, 2019, Dell controlled 80.5% of the total outstanding shares of common stock, including all of our outstanding Class B common stock, representing 97.4% of the voting power of our total outstanding common stock. Through its control of the Class B common stock, which is generally entitled to 10 votes per share, Dell controls the vote to elect all of our directors and to approve or disapprove all other matters submitted to a stockholder vote.
Prior to a distribution by Dell to its stockholders under Section 355 of the Internal Revenue Code of 1986, as amended (a “355 Distribution”), shares of Class B common stock transferred to any party other than a successor-in-interest or a subsidiary of EMC automatically convert into Class A common stock. Dell’s voting control over VMware will continue so long as the shares of Class B common stock it controls continue to represent at least 20% of our outstanding stock. If its ownership falls below 20% of the outstanding shares of our common stock, all outstanding shares of Class B common stock will automatically convert to Class A common stock. If Dell effects a 355 Distribution at a time when it holds shares of Class B common stock, its stockholders will receive Class B common stock. These shares will remain entitled to 10 votes per share, holders of these shares will remain entitled to elect 80% of the total number of directors on our board of directors and the holders of our Class A common stock will continue to have limited ability to influence matters requiring stockholder approval and have limited ability to elect members of our board of directors. Following a 355 Distribution, shares of Class B common stock may convert to Class A common stock if such conversion is approved by VMware stockholders after the 355 Distribution and we have obtained a private letter ruling from the IRS. In January 2014, the IRS announced in Revenue Procedure 2014-3 that, generally, it would no longer issue private letter rulings on 355 Distributions.
Dell has the ability to prevent us from taking actions that might be in our best interest.
Under our certificate of incorporation and the master transaction agreement we entered into with EMC, we must (subject to certain exceptions) obtain the consent of EMC (which is controlled by Dell) or its successor-in-interest, as the holder of our Class B common stock, prior to taking specified actions, such as acquiring other companies for consideration in excess of $100 million, issuing stock or other VMware securities, except pursuant to employee benefit plans (provided that we obtain Class B common stockholder approval of the aggregate annual number of shares to be granted under such plans), paying
dividends, entering into any exclusive or exclusionary arrangement with a third party involving, in whole or in part, products or services that are similar to EMC’s or amending certain provisions of our charter documents. In addition, we have agreed that for so long as EMC or its successor-in-interest continues to own greater than 50% of the voting control of our outstanding common stock, we will not knowingly take or fail to take any action that could reasonably be expected to preclude the ability of EMC or its successor-in-interest (including Dell) to undertake a tax-free spin-off. If Dell does not provide any requisite consent allowing us to conduct such activities when requested, we will not be able to conduct such activities. As a result, we may have to forgo capital raising or acquisition opportunities that would otherwise be available to us, and we may be precluded from pursuing certain growth initiatives.
By becoming a stockholder in our company, holders of our Class A common stock are deemed to have notice of and have consented to the provisions of our certificate of incorporation and the master transaction agreement with respect to the limitations that are described above.
Dell has the ability to prevent a change-in-control transaction and may sell control of VMware without benefiting other stockholders.
Dell’s voting control and its additional rights described above give Dell the ability to prevent transactions that would result in a change of control of VMware, including transactions in which holders of our Class A common stock might otherwise receive a premium for their shares over the then-current market price. In addition, Dell is not prohibited from selling a controlling interest in us to a third party and may do so without the approval of the holders of our Class A common stock and without providing for a purchase of any shares of Class A common stock held by persons other than Dell. Accordingly, shares of Class A common stock may be worth less than they would be if Dell did not maintain voting control over us or if Dell did not have the additional rights described above.
If Dell’s level of ownership significantly increases, Dell could unilaterally effect a merger of VMware into Dell without a vote of VMware stockholders or the VMware Board of Directors at a price per share that might not reflect a premium to then-current market prices.
As of February 1, 2019, Dell controlled 80.5% of VMware’s outstanding common stock, and Dell’s percentage ownership of VMware common stock could increase as a result of repurchases by VMware of its Class A common stock or purchases by Dell. Section 253 of the Delaware General Corporation Law permits a parent company, when it owns 90% or more of each class of a subsidiary’s stock that generally would be entitled to vote on a merger of that subsidiary with the parent, to unilaterally effect a merger of the subsidiary into the parent without a vote of the subsidiary’s board or stockholders. Accordingly, if Dell becomes the holder of at least 90% of VMware’s outstanding stock, neither VMware’s board of directors nor VMware’s stockholders would be entitled to vote on a merger of VMware into Dell (the “short-form merger”). Moreover, a short-form merger is not subject to the stringent “entire fairness” standard and the parent company is not required to negotiate with a special committee of disinterested directors that would serve to approximate arm’s length negotiations designed to ensure that a fair price is paid. Rather, a minority stockholder’s sole remedy in the context of a short-form merger is to exercise appraisal rights under Delaware law. In such a proceeding, petitioning stockholders may be awarded more or less than the merger price or the amount they would have received in a merger negotiated between the parent and a disinterested special committee advised by independent financial and legal advisors. Pursuant to a letter agreement entered into by VMware and Dell on July 1, 2018, until the ten-year anniversary of the agreement, Dell may not purchase or otherwise acquire any shares of common stock of VMware if such acquisition would cause the common stock of VMware to no longer be publicly traded on a U.S. securities exchange or VMware to no longer be required to file reports under Sections 13 and 15(d) of the Exchange Act, in each case, unless such transaction has been approved in advance by a special committee of the VMware Board of Directors comprised solely of independent and disinterested directors or such acquisition of VMware common stock is required in order for VMware to continue to be a member of the affiliated group of corporations filing a consolidated tax return with Dell.
We engage in related persons transactions with Dell that may divert our resources, create opportunity costs and prove to be unsuccessful.
We currently engage in a number of related persons transactions with Dell that include joint product development, go-to-market, branding, sales, customer service activities, real estate and various support services, and we expect to engage in additional related persons transactions with Dell to leverage the benefits of our strategic alignment. Additionally, we hold a significant ownership interest in Pivotal, which became publicly traded on April 20, 2018.
We believe that these related persons transactions provide us a unique opportunity to leverage the respective technical expertise, product strengths and market presence of Dell and its subsidiaries for the benefit of our customers and stockholders while enabling us to compete more effectively with competitors who are much larger than us. However, these transactions may prove not to be successful and may divert our resources or the attention of our management from other opportunities. Negotiating and implementing these arrangements can be time consuming and cause delays in the introduction of joint product and service offerings and disruptions to VMware’s business. We cannot predict whether our stockholders and industry or securities analysts who cover us will react positively to announcements of new related persons transactions with Dell, and such
announcements could have a negative impact on our stock price. Our participation in these transactions may also cause certain of our other vendors and ecosystem partners who compete with Dell and its subsidiaries to also view us as their competitors. Additionally, following Pivotal’s initial public offering, VMware held a 17% financial interest in the outstanding shares of capital stock in Pivotal, which was accounted for using the fair value option. The fair value of VMware’s investment is determined primarily using the quoted market price of Pivotal’s Class A common stock. Any volatility in Pivotal’s publicly traded Class A common stock therefore introduces a degree of variability to our consolidated balance sheets and statements of income (loss), over which we have little control so long as we maintain our ownership interest.
Our business and Dell’s businesses overlap, and Dell may compete with us, which could reduce our market share.
We and Dell are IT infrastructure companies providing products and services that overlap in various areas, including software-based storage, management, hyper-converged infrastructure and cloud computing. Dell competes with us in these areas now and may engage in increased competition with us in the future. In addition, the intellectual property agreement that we have entered into with EMC (which is controlled by Dell) provides EMC the ability to use our source code and intellectual property, which, subject to limitations, it may use to produce certain products that compete with ours. EMC’s rights in this regard extend to its majority-owned subsidiaries, which could include joint ventures where EMC holds a majority position and one or more of our competitors hold minority positions.
Dell could assert control over us in a manner that could impede our growth or our ability to enter new markets or otherwise adversely affect our business. Further, Dell could utilize its control over us to cause us to take or refrain from taking certain actions, including entering into relationships with channel, technology and other marketing partners, enforcing our intellectual property rights or pursuing business combinations, other corporate opportunities (which EMC is expressly permitted to pursue under the circumstances set forth in our certificate of incorporation) or product development initiatives that could adversely affect our competitive position, including our competitive position relative to that of Dell in markets where we compete with Dell. In addition, Dell maintains significant partnerships with certain of our competitors, including Microsoft.
Dell’s competition in certain markets may affect our ability to build and maintain partnerships.
Our existing and potential partner relationships may be negatively affected by our relationship with Dell. We partner with a number of companies that compete with Dell in certain markets in which Dell participates. Dell’s control of EMC’s majority ownership in us may affect our ability to effectively partner with these companies. These companies may favor our competitors because of our relationship with Dell.
Dell competes with certain of our significant channel, technology and other marketing partners, including IBM and Hewlett-Packard. Pursuant to our certificate of incorporation and other agreements that we have with EMC, EMC and Dell may have the ability to impact our relationship with those of our partners that compete with EMC or Dell, which could have a material adverse effect on our operating results and our ability to pursue opportunities which may otherwise be available to us.
We could be held liable for the tax liabilities of other members of Dell’s consolidated tax group, and compared to our historical results as a member of the EMC consolidated tax group, our tax liabilities may increase, fluctuate more widely and be less predictable.
We have historically been included in EMC’s consolidated group for U.S. federal income tax purposes, as well as in certain consolidated, combined or unitary groups that include EMC Corporation or certain of its subsidiaries for state and local income tax purposes, and since the Dell Acquisition, we have been included in Dell’s consolidated tax group. Effective as of the close of the Dell Acquisition, we amended our tax sharing agreement with EMC to include Dell. Although our tax sharing agreement provides that our tax liability is calculated primarily as though VMware were a separate taxpayer, certain tax attributes and transactions are assessed using consolidated tax return rules as applied to the Dell consolidated tax group and are subject to other specialized terms under the tax sharing agreement. Pursuant to our agreement, we and Dell generally will make payments to each other such that, with respect to tax returns for any taxable period in which we or any of our subsidiaries are included in Dell’s consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of Dell or its subsidiaries, the amount of taxes to be paid by us will be determined, subject to certain consolidated return adjustments, as if we and each of our subsidiaries included in such consolidated, combined or unitary group filed our own consolidated, combined or unitary tax return. Consequently, compared to our historical results as a member of the EMC consolidated tax group, the amount of our tax sharing payment compared to our separate return basis liability may increase, vary more widely from period to period and be less predictable. Additionally, the impact of the 2017 Tax Act upon consolidated groups is highly complex and uncertain and its impact must be further interpreted in the context of the tax sharing agreement to determine VMware’s tax sharing payment. VMware and Dell are reviewing the tax sharing agreement in connection with the enactment of the 2017 Tax Act.
When we become subject to federal income tax audits as a member of Dell’s consolidated group, the tax sharing agreement provides that Dell has authority to control the audit and represent Dell and our interests to the IRS. Accordingly, if we and Dell or its successor-in-interest differ on appropriate responses and positions to take with respect to tax questions that may arise in
the course of an audit, our ability to affect the outcome of such audits may be impaired. In addition, if Dell effects a 355 Distribution or other transaction that is subsequently determined to be taxable, we could be liable for all or a portion of the tax liability, which could have a material adverse effect on our operating results and financial condition.
We have been included in the EMC consolidated group for U.S. federal income tax purposes since our acquisition by EMC in 2004, and will continue to be included in Dell’s consolidated group for periods in which Dell or its successor-in-interest beneficially owns at least 80% of the total voting power and value of our outstanding stock. 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. Similarly, in some jurisdictions, each member of a consolidated, combined or unitary group for state, local or foreign income tax purposes is jointly and severally liable for the state, local or foreign income tax liability of each other member of the consolidated, combined or unitary group. Accordingly, for any period in which we are included in the Dell consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of Dell and its subsidiaries, we could be liable in the event that any income tax liability was incurred, but not discharged, by any other member of any such group.
Also, under the tax sharing agreement, if it is subsequently determined that the tracking stock issued in connection with the Dell Acquisition and which Dell subsequently eliminated through a share exchange constitutes a taxable distribution, we could be liable for all or a portion of the tax liability, which could have a material adverse effect on our operating results and financial condition.
We have limited ability to resolve favorably any disputes that arise between us and Dell.
Disputes may arise between Dell and us in a number of areas relating to our ongoing relationships, including our reseller, technology and other business agreements with Dell, areas of competitive overlap, strategic initiatives, requests for consent to activities specified in our certificate of incorporation and the terms of our intercompany agreements. We may not be able to resolve any potential conflicts with Dell, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.
While we are controlled by Dell, we may not have the leverage to negotiate renewals or amendments to these agreements, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party, if at all.
Some of our directors have potential conflicts of interest with Dell.
The Chairman of our Board of Directors, Michael Dell, is also Chairman and CEO of Dell and is a significant stockholder of Dell, and one of our directors, Egon Durbin, is member of the Dell board of directors and managing partner of Silver Lake Partners, which is a significant stockholder of Dell. Another of our directors also holds shares of Dell common stock. Dell, through its controlling voting interest in our outstanding common stock, is entitled to elect 7 of our 8 directors and possesses sufficient voting control to elect the remaining director. Ownership of Dell common stock by our directors and the presence of executive officers or directors of Dell on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and Dell that could have different implications for Dell than they do for us. Our Board has approved resolutions that address corporate opportunities that are presented to our directors that are also directors or officers of Dell. These provisions may not adequately address potential conflicts of interest or ensure that potential conflicts of interest will be resolved in our favor. As a result, we may not be able to take advantage of corporate opportunities presented to individuals who are directors of both us and Dell and we may be precluded from pursuing certain growth initiatives.
We are a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, are relying on exemptions from certain corporate governance requirements that provide protection to stockholders of companies that are not “controlled companies.”
Dell owns more than 50% of the total voting power of our common stock and, as a result, we are a “controlled company” under the NYSE corporate governance standards. As a controlled company, we are exempt under the NYSE standards from the obligation to comply with certain NYSE corporate governance requirements, including the requirements:
that a majority of our board of directors consists of independent directors;
that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
for an annual performance evaluation of the nominating and governance committee and compensation committee.
While we have voluntarily caused our Compensation and Corporate Governance Committee to currently be composed entirely of independent directors, reflecting the requirements of the NYSE, we are not required to maintain the independent composition of the committee. As a result of our use of the “controlled company” exemptions, holders of our Class A common
stock will not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
Dell’s ability to control our board of directors may make it difficult for us to recruit independent directors.
So long as Dell beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of outstanding voting stock, Dell can effectively control and direct our board of directors. Further, the interests of Dell and our other stockholders may diverge. Under these circumstances, it may become difficult for us to recruit independent directors.
Our historical financial information as a majority-owned subsidiary may not be representative of the results of a completely independent public company.
The financial information covering the periods included in this report does not necessarily reflect what our financial condition, operating results or cash flows would have been had we been a completely independent entity during those periods. In certain geographic regions where we do not have an established legal entity, we contract with Dell subsidiaries for support services and Dell personnel who are managed by us. The costs incurred by Dell 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 on our consolidated statements of income (loss). Additionally, we engage with Dell in intercompany transactions, including agreements regarding the use of Dell’s and our intellectual property and real estate, agreements regarding the sale of goods and services to one another and to Pivotal, and agreements for Dell to resell and distribute our products and services to third party customers. If Dell were to distribute its shares of our common stock to its stockholders or otherwise divest itself of all or a significant portion of its VMware shares, there would be numerous implications to us, including the fact that we could lose the benefit of these arrangements with Dell. There can be no assurance that we would be able to renegotiate these arrangements with Dell or replace them on the same or similar terms. Additionally, our business could face significant disruption and uncertainty as we transition from these arrangements with Dell. Moreover, our historical financial information is not necessarily indicative of what our financial condition, operating results or cash flows would be in the future if and when we contract at arm’s length with independent third parties for the services we have received and currently receive from Dell. During fiscal 2019, we recognized revenue of $2,211 million, and as of February 1, 2019, $2,388 million of sales were included in unearned revenue from such transactions with Dell. For additional information, refer to “Our Relationship with Dell” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and Note C to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Risks Related to Owning Our Class A Common Stock
•The MSD Stockholders and the SLP Stockholders have significant influence over us and their interests may conflict with our interests and the interests of our other stockholders.
•The price of our ClassA common stock has fluctuated significantly in recent years and may fluctuate significantly in the future.
•Anti-takeover provisions in Delaware law and our charter documents could discourage takeover attempts.
•Our bylaws provide for an exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
General Risks
•We are exposed to foreign exchange risks.
•If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
•Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.
•Natural disasters, catastrophic events or geo-political conditions could disrupt our business.
•Climate change may have a long-term negative impact on our business.
•Social and ethical issues, including our ability to make progress on our ESG goals and commitments, may result in reputational harm and liability.
PART I
ITEM 1. BUSINESS
Overview
VMware, Inc. (“VMware”) originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware, and then evolved to become the private cloud and mobility management leader. Building upon that leadership, VMware is focused on becoming the multi-cloud leader. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. Organizations’ IT departments and corporate divisions are working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses and their product teams through a digital transformation. To take on these challenges, we are helping customers drive their multi-cloud strategy by providing the multi-cloud platform for all applications, enabling digital innovation and enterprise control.
Our multi-cloud portfolio, spanning application modernization, cloud management, cloud infrastructure, networking, security and anywhere workspaces, forms a flexible, consistent digital foundation on which customers can build, run, manage, connect and protect their mission-critical workloads.
We incorporated in Delaware in 1998 and were acquired by EMC Corporation (“EMC”) in 2004. In August 2007, we conducted an initial public offering of our Class A common stock (“Class A Stock”), but remained majority-owned by EMC, the sole stockholder of our Class B common stock (“Class B Stock”). In September 2016, Dell Technologies Inc. (“Dell”) acquired EMC and we became a majority-owned subsidiary of Dell. On November 1, 2021, our spin-off from Dell was completed, each share of Class B Stock converted into one fully paid and non-assessable share of Class A Stock and we became a standalone company (the “Spin-Off”). In connection with the Spin-Off, we paid an $11.5 billion cash dividend, pro rata, to each of the holders of our Class A Stock and Class B Stock as of the close of business on October 29, 2021 (the “Special Dividend”).
Our fiscal year is the 52 or 53 weeks ending on the Friday nearest to January 31 of each year. We refer to our fiscal year ending February 3, 2023 and fiscal years ended January 28, 2022 and January 29, 2021 as “fiscal 2023,” “fiscal 2022,” and “fiscal 2021,” respectively. Fiscal 2023 is a 53-week fiscal year, while fiscal 2022 and fiscal 2021 were each 52-week fiscal years.
Total revenue in fiscal 2022 increased 9% to $12.9 billion. Total revenue is comprised of license revenue of $3.1 billion, subscription and software-as-a-service (“SaaS”) revenue of $3.2 billion and services revenue of $6.5 billion. As customers shift from our on-premises offerings to our subscription and SaaS offerings, license revenue and software maintenance revenue may be lower and subject to greater fluctuation in the future, resulting from a higher proportion of our sales occurring through our subscription and SaaS offerings.
Our corporate headquarters are located at 3401 Hillview Avenue, Palo Alto, California and we have 111 offices worldwide.
Products and Technology Solutions
Our portfolio supports and addresses our customers’ key priorities, including modernizing their applications, managing multi-cloud environments, accelerating their cloud journey, modernizing the network using commodity hardware, embracing zero-trust security and empowering anywhere workspaces. We enable digital transformation of customers’ applications, infrastructure and operations for their constantly evolving business and employee needs.
Application Modernization
VMware Tanzu, a portfolio of products and services for modernizing applications and infrastructure, enables customers to deliver better software to production, continuously. The portfolio enables customers to build, run and manage modern applications on any cloud and simplifies the use of Kubernetes, an open-source platform for managing containers, in a multi-cloud environment. The modern or cloud-native applications allow businesses to bring new ideas to market faster and respond sooner to customer demands. Tanzu uses cloud native patterns to build applications with microservices and application programming interfaces and uses Kubernetes to simplify how these applications are deployed, observed and managed across on-premises, public clouds and edge environments. Tanzu includes technologies acquired as part of our Pivotal, Bitnami, Heptio and Wavefront acquisitions.
Key products within our Application Modernization portfolio include:
•Tanzu Application Platform—a modular, application-aware platform that provides a rich set of developer tooling and a prepared path to production to build and deploy software quickly and more securely on any compliant public cloud or on-premises Kubernetes cluster.
•Tanzu Operations Platform—a platform thatsimplifies operating Kubernetes for multi-cloud deployment by centralizing management and governance for clusters and teams across on-premises, public clouds and edge environments.
•Tanzu Application Service—a platform that allows enterprises to accelerate cloud-native software development with managed access to native cloud services and portability to run across any cloud.
•Tanzu Observability— an enterprise-grade monitoring and observability platform, with out-of-the-box integration with Tanzu, that Development and IT operations (“DevOps”) and Site Reliability Engineering teams use to troubleshoot and optimize the performance of their multi-cloud applications operating at massive, cloud-native scale.
•Tanzu Community Edition—afull-featured, easy-to-manage Kubernetes platform for learners and users. It is a freely available, community-supported, open-source distribution of VMware Tanzu that can be installed and configured in minutes on local workstations or any cloud.
•Tanzu Labs—a service that provides guidance and support to help customers modernize existing applications or build new, modern applications with agile development practices.
Cloud Management
Our cloud management productshelp customers manage multi-cloud environments running a range of workloads, including virtual machines and containers. VMware Cloud Management offerings optimize cloud usage and costs; automate the deployment, management and migration of applications and data; improve cloud security and compliance; and monitor application and cloud infrastructure.
Key products within our Cloud Management portfolio include:
•vRealize Cloud Management—offers cloud management products, available as a service or as an on-premises offering, that are integrated together, delivering consistent operations from the data centers to the cloud and to the edge, including:
•vRealize Automation—a modern infrastructure automation platform, enabling customers to accelerate their multi-cloud infrastructure transformations based on DevOps, open source and self-service automation.
•vRealize Operations—enables self-driving operations with unified application-to-infrastructure visibility, capacity and cost management, workloads optimization and configuration and compliance management to better optimize, plan and scale private-, hybrid- and multi-cloud environments.
•vRealize Log Insight—manages data at scale with centralized log management, deep operational visibility and intelligent analytics for troubleshooting and auditing across private-, hybrid- and multi-cloud environments.
•vRealize Network Insight—provides end-to-end network visibility to help customers monitor and build an optimized, highly available and more secure network infrastructure across clouds.
Our vRealize Cloud Universal combines SaaS and on-premises vRealize Cloud Management products into a single offering with a single license, providing customers with a consistent hybrid and multi-cloud management experience.
•vCloud Suite—an enterprise-grade cloud infrastructure and management solution combining vRealize Cloud Management with vSphere.
•CloudHealth by VMware Suite—available as a service offering, enables organizations to simplify financial management, streamline operations and strengthen security and compliance for public cloud and multi-cloud environments.
•CloudHealth —a robust multi-cloud management platform that helps organizations optimize and control spend and improve cross-organizational collaboration.
•CloudHealth Secure State —an intelligent multi-cloud security and compliance monitoring platform that helps organizations reduce risk and protect cloud resources.
Cloud Infrastructure
Our Cloud Infrastructure solutions include infrastructure products and services that enable customers to connect to multiple clouds and create a common operating environment, based on VMware Cloud Foundation, extending from on-premises data centers to the cloud and to the edge.
Key products within our Cloud Infrastructure portfolio include:
•vSphere—our flagship data center infrastructure offering, utilizes our hypervisor software, which resides between the operating system and system hardware, to provide the fundamental compute layer for customer environments, enabling virtualization. We continue to build on vSphere with VMware Tanzu solutions, which provide a simple way for vSphere customers around the world to get started with Kubernetes and to modernize their workloads running on vSphere. Additionally, we are partnering to deliver an AI-Ready Enterprise platform that combines vSphere with the NVIDIA AI Enterprise suite to enable customers to rapidly deploy, manage and scale AI in production with confidence.
•vSAN and VxRail—offer cost-effective, holistic data storage and protection options for all applications running on vSphere. These products are applicable to hyperconverged infrastructure as well as traditional infrastructure solutions and enable customers to deploy on a broad range of hardware solutions. Our vSAN offering creates simple, shared storage designed for virtual machines. VxRail is a hyperconverged infrastructure solution comprised of a fully integrated and pre-configured Dell EMC appliance powered by vSAN and vSphere software.
•VMware Cloud Foundation—a cloud platform that combines our vSphere, vSAN and NSX, or network virtualization, offerings with vRealize Cloud Management into an integrated stack that delivers developer-ready infrastructure for public and private clouds. VMware Cloud Foundation extends to multi-cloud through these main routes: VMware Cloud on AWS and VMware Cloud on Dell EMC offerings; hyperscaler public cloud services, including Azure VMware Solution, Google Cloud VMware Engine, IBM Cloud for VMware Solutions and Oracle Cloud VMware Solution; and VMware Cloud Verified Providers. Available from VMware and reseller partners, VMware Cloud Universal is a flexible subscription that simplifies the purchase and consumption of VMware multi-cloud infrastructure and management services across the data centers, public clouds or edge.
•VMware Cloud on AWS—an integrated hybrid cloud solution that extends on-premises vSphere environments to a VMware Software-Defined Data Center (“SDDC”) running on Amazon Elastic Compute Cloud (“Amazon EC2”). Jointly engineered by VMware and Amazon Web Services (“AWS”), this on-demand service enables IT teams to seamlessly extend, migrate and manage their cloud-based resources with familiar VMware tools, minimizing the difficulty of learning new skills or utilizing new tools. VMware Cloud on AWS integrates VMware’s flagship compute, storage and network virtualization products (vSphere, vSAN and NSX), along with vCenter Server management as well as robust disaster protection and optimizes them to run on dedicated, elastic, Amazon EC2 bare-metal infrastructure that is fully integrated with AWS Cloud. VMware, AWS and the AWS partner networks sell VMware Cloud on AWS, which is available in 20 global AWS regions, while VMware and our partner community deliver and support the service.
•VMware Cloud on other major hyperscalers—includesAzure VMware Solution, an infrastructure-as-a-service private cloud offering built on VMware Cloud Foundation that runs on dedicated bare-metal servers in Azure regions. It is a service sold and supported by Microsoft, backed and cloud verified by VMware. VMware Cloud on other major hyperscalers also includes Google Cloud VMware Engine, an integrated first-party offering that is built, sold and supported directly by Google Cloud and delivers a fully managed VMware Cloud Foundation stack along with VMware HCX for cloud migration in a dedicated environment on Google Cloud.
•VMware Cloud Providers—a key component of our strategic priority to support multi-cloud, this global ecosystem of more than 4,500 cloud providers in over 120 countries provides VMware-based cloud services. VMware Cloud Provider offerings are directed at traditional hosting partners, regional cloud providers and local and global managed service providers. VMware Cloud Providers give organizations the flexibility of running applications in virtual machines, in containers or both on their own private clouds inside their data center and on public clouds by providing multi-cloud managed services. IBM was our first cloud provider partner to offer VMware Cloud Foundation as-a-service, enabling their customers to leverage our technologies on IBM Cloud in their worldwide cloud data centers.
•VMware Cloud on Dell EMC—a fully managed on-premises, local cloud-as-a-service offering providing customers with a hybrid cloud experience that combines the simplicity and agility of the public cloud with the security and control of on-premises infrastructure.
Networking
We offer a complete portfolio of Layer 2-7 virtual networking and security solutions that deliver innovative software-based capabilities for switching, routing, firewalling, intrusion prevention and intrusion detection systems, network detection and response, load balancing, service mesh and SD-WAN for enterprise and Telco environments. These networking solutions enable customers to connect and protect all workloads running on bare metal, in containers, on virtual machines and across data
centers, multi-cloud environments and the distributed edge. Adoption of VMware networking solutions is driven by customers who are replacing legacy, hardware-based network and security infrastructure, such as physical firewalls and load balancers and expensive dedicated wide-area network links.
Key products within our Networking portfolio include:
•VMware NSX—our network virtualization platform that abstracts physical networks to greatly simplify customers’ provisioning and consumption of networking and security resources. NSX can be layered into any environment, integrates with many automation, security and container solutions and is a foundational part of our key offerings, such as VMware Cloud Foundation.
•NSX Distributed and Gateway Firewalls—a zone firewall and a software-defined Layer 7 firewall that are purpose-built to help secure multi-cloud traffic across virtualized workloads. They provide stateful firewalling with intrusion detection and prevention, sandboxing, network traffic analysis and network detection and response to provide complete visibility into applications and workload flows with policy automation that are linked to workload lifecycles.
•NSX Network Detection and Response—an AI-based threat correlation and forensics engine, delivered as either standalone or integrated tightly within NSX, that helps network security and security operations teams efficiently detect malicious activity and block lateral movement of sophisticated threats.
•NSX Advanced Load Balancer (Avi)—provides consistent, multi-cloud load balancing, web application firewall and application insights across data centers and public clouds for virtual machines, container and bare-metal workloads.
•Tanzu Service Mesh—provides end-to-end operational visibility, control and security for distributed cloud-native applications, across end-users, applications and data, on any platform or cloud.
Our offerings also include VMware SASE, a cloud-native platform that converges cloud networking and cloud security into one holistic solution. Regardless of the location of users and applications, VMware SASE provides unified secure access from a single management platform. Organizations use VMware SASE to provide their users with more reliable, optimal and secure access to any application in on-premises, public cloud and edge environments. The VMware SASE platform includesVMware SD-WAN, which delivers high-performance, reliable and more secure access to cloud services, private data centers and SaaS-based enterprise applications for remote workers and branch locations; VMware Secure Access, a cloud-hosted solution that secures and optimizes corporate network and application access for remote and mobile users based on a Zero Trust Network Access framework; and VMware Cloud Web Security, a cloud-hosted service that protects users and infrastructure accessing SaaS and Internet applications from evolving threats, offers visibility into and control over internet and SaaS application usage and enables compliance with administered security access rights. These services can be sold individually or together for the full VMware SASE solution.
Security
Today’s modern, distributed enterprise requires security that is both built-in and built differently. We leverage the unique power of virtualization to put security everywhere, helping our customers to secure any cloud, any application and anywhere workspaces. VMware Carbon Black Cloud, a SaaS-delivered cloud native endpoint, workload and container protection platform, is at the center of the VMware security portfolio.
Key products within our Security portfolio include:
•Carbon Black Endpoint—consolidates multiple endpoint security capabilities using one lightweight agent and cloud console to ease analysis of complex attacks, simplify the automation of detection and response workflows and identify attackers’ changing behavior patterns to better detect, respond to and prevent emerging and continuing attacks. This endpoint protection platform includes next-generation antivirus, endpoint detection and response; managed detection, audit and remediation; and threat hunting and containment.
•Carbon Black Workload—delivers advanced protection purpose-built for better securing modern workloads, reducing the attack surface and strengthening security postures. The solution combines prioritized vulnerability reporting and foundational workload hardening with prevention, detection and response capabilities to protect workloads running in virtualized private and hybrid cloud environments. VMware Carbon Black Workload is also tightly integrated with vSphere to provide built-in security that alleviates installation and management overhead and consolidates the collection or telemetry for multiple workload security use cases.
•Carbon Black Container—enables enterprise-grade container security to reduce risk, enhance visibility, maintain compliance and simplify security for Kubernetes environments, from development to production. VMware Carbon Black Container empowers cross-functional teams to secure the complete lifecycle of Kubernetes applications, detect and fix vulnerabilities and misconfigurations before production deployment, meet compliance standards and achieve simple, secure multi-cloud and hybrid cloud Kubernetes environments at scale.
Anywhere Workspace
VMware Anywhere Workspace is a software solution that is designed to deliver secure and seamless experiences for distributed workforces while reducing costs and operational overhead for organizations. It combines the key elements of unified endpoint management (“UEM”), desktop and application virtualization, secure access service edge and endpoint security technologies to fully meet the needs of today’s distributed workforce. Specifically, VMware Anywhere Workspace brings together the benefits of our three innovative solutions: Workspace ONE, Carbon Black Cloud and VMware SASE.
As our End User Computing business drives VMware Anywhere Workspace forward, we continue to offer our digital workspace solution, Workspace ONE. Workspace ONE is a platform that more securely delivers and manages any application on any device by integrating multi-platform endpoint management, access control and application management. The platform brings the following offerings together with a common access control and analytics layer:
•Workspace ONE UEM—a solution built to manage and help secure mobile devices, laptops and other devices across all major operating systems from a single management console and includes a suite of productivity applications that enable customers to more effectively manage and secure both corporate and personal devices.
•Workspace ONE Access—a cloud service that enables customers to continuously track device state, user details and authentication context to determine user and device risk, allow or deny access and require multi-factor authentication or a remediation for access.
•Workspace ONE Intelligent Hub—a solution that empowers employees to more securely access corporate applications and resources “from hire to retire.” IT can grant single-sign-on access to any application from a unified catalog, send informational and actionable notifications and enable one-click contextual workflows with SaaS and backend applications on-the-go.
•Horizon—a platform that provides a streamlined approach to delivering, protecting and managing virtual desktops and applications from one digital workspace, while containing costs and allowing end users to work anytime, anywhere and across any device.
Through the continued expansion of our portfolio, customers can deliver virtual desktops and applications to users in many ways, from customer-managed solutions that run on any on-premises or VMware Cloud certified environments, including VMware Cloud on AWS, Google Cloud VMware Engine, IBM Cloud, Oracle Cloud VMware Solution, Azure VMware Solution and more, to a fully-managed Desktop as a Service solution delivered natively from Microsoft Azure.
Technology Alliances
We have more than 1,100 technology partners with whom we bring offerings to the marketplace and over 4,500 active cloud, hyperscaler and managed service provider partners. We classify our partners as follows:
Independent Hardware Vendors (“IHVs”)—we have established relationships with large system vendors, including Apple, Cisco, Fujitsu, Hitachi, HPE, IBM, Lenovo and Samsung, for certification and co-development and we continue to work closely with Dell, Intel, NVIDIA and other technology vendors to provide input on product development to enable them to deliver advancements that benefit multi-cloud and modern applications users. We coordinate with the leading technology platform vendors to ensure interoperability and enable our solutions to access their differentiated functionality.
Independent Software Vendors (“ISVs”)—we partner with leading systems management, infrastructure software and application software vendors, including healthcare, telecom, finance and retail leaders, to deliver value-added products that integrate with our products.
VMware Cloud Providers—we have established partnerships with over 4,500 active cloud, hyperscaler and managed service providers, including Microsoft, Google, Oracle, Lumen, IBM, AUCloud, OVH, Rackspace, NxtGen, Telefonica, TietoEvry and UKCloud, that support our multi-cloud strategy. These partners leverage our cloud technologies to host and deliver enterprise-class cloud services for enterprises to extend their data centers to external clouds, while preserving security, compliance and quality of service.
In addition to our base of active partnerships with cloud providers, we have a strategic alliance with AWS to build and deliver an integrated hybrid offering, VMware Cloud on AWS, that enables customers to run applications across vSphere-based private, public and multi-cloud environments.
Our Technology Alliance Partner (“TAP”) program facilitates collaborative solution creation and coordinated go-to-market activities for our ecosystem of more than 1,100 technology partners. Created exclusively for IHV and ISV partners, the TAP program gives technology partners the ability to test, integrate and package application software, infrastructure and hardware products with our products and services offerings—on premises or in the cloud.
Our ISVs and other alliance partners, developers and additional VMware community members continue to distribute software applications as virtual appliances. We invest significant capital in testing and certifications of infrastructure to rigorously ensure our software is compatible with major hardware and software products.
Research and Development
We have made, and expect to continue to make, significant investments in research and development (“R&D”). We have assembled an experienced group of developers with expertise within application modernization, cloud management, cloud infrastructure, networking, security, anywhere workspaces, software-as-a-service, open source and edge solutions. We also have strong ties to leading academic institutions around the world and we invest in joint research with academia.
We prioritize our product development efforts through a combination of engineering-driven innovation and customer- and market-driven feedback. Our R&D culture places a high value on innovation, quality and open collaboration with our partners. We currently participate in numerous standards groups and our employees hold a variety of leadership positions with standards organizations.
We continue to invest in our key growth areas while also investing in areas that we expect to be significant growth drivers in future periods.
Sales and Marketing
Our go-to-market efforts include a direct sales force, including a specialized sales force for our key growth offerings, and our channel and cloud partners.
We have well-established, ongoing business relationships with our distributors. Our distributors purchase software licenses and software support from us for resale to end-user customers via resellers.These resellers are part of VMware Partner Connect, a program which offers resellers pricing incentives, rebates, sales and product enablement through the VMware Partner Connect web portal and access to the worldwide network of VMware distributors. In addition, our channel partner network includes certain systems integrators and resellers trained and certified to deliver consulting services and solutions leveraging our products. Our channel network also includes partners that host our products and deliver them as-a-service to customers.
We generally do not have long-term contracts or minimum-purchase commitments with our distributors, resellers, system vendors and systems integrators and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours.
End users can purchase the full breadth of our subscription, SaaS, license and services portfolio through discrete purchases or through enterprise agreements (“EAs”), both of which provide access to a range of flexible purchasing programs. EAs are sold to our direct customers and through channel partners and can include our license, multi-year maintenance and support, subscription and SaaS offerings. EAs enable us to build long-term relationships with our customers as they commit to our virtual infrastructure solutions. Our sales cycle varies depending on numerous factors, including the size and complexity of the proposed offering and a customer’s infrastructure footprint.
In establishing list prices for our solutions, we take into account, among other numerous factors, the value our solutions deliver and the cost of alternative virtualization, end-user computing, hardware and security solutions.
Our marketing efforts focus on communicating the benefits of our solutions and educating our customers and users, distributors, resellers, system vendors, systems integrators, the media and analysts about the advantages of our innovative offerings. We raise awareness of our company and brands, market our products and generate sales leads through VMware and industry events, public relations efforts, marketing materials, advertising, direct marketing, social media initiatives, free downloads and trials and our website. We have invested in multiple online communities that enable customers and partners to share and discuss sales and development resources, best practices implementation and industry trends among other topics. Our annual user conferences, VMworld, vForum and SpringOne are global events. We also offer management presentations, seminars and webinars on our solutions and services. We believe the combination of these activities strengthens our brand and enhances our leadership in the industries in which we compete.
On November 1, 2021, in connection with the Spin-Off, we and Dell entered into the Commercial Framework Agreement to provide a framework under which we and Dell will continue our strategic commercial relationship, particularly with respect to projects mutually agreed by the parties as having the potential to accelerate the growth of an industry, product, service or platform that may provide the parties with a strategic market opportunity. The Commercial Framework Agreement has an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and conditions. Bookings through Dell sales channels in aggregate comprise the largest route-to-market for our sales.
We also have strategic partnerships with AWS, Google, IBM and Microsoft to jointly provide the expertise, solutions and go-to-market capabilities to help our customers efficiently and more securely extend their proven software-defined solutions into public clouds, utilizing the tools and processes with which our customers are already familiar.
Our business and the sales of our products and services are subject to seasonality. For example, our fourth quarter revenue is affected by a number of seasonal factors, including year-end spending trends, that impact the timing of renewals of our EAs and support and maintenance contracts.
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.
As of January 28, 2022, the aggregate transaction price allocated to remaining performance obligations was $12.0 billion, of which approximately 57% is expected to be recognized as revenue over the next twelve months and the remainder thereafter.
As of January 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.3 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2022 and the remainder thereafter.
Backlog
Backlog is comprised of unfulfilled purchase orders or unfulfilled executed agreements at the end of a given period and is net of related estimated rebates and marketing development funds. Backlog consists of licenses, subscription and SaaS and services. As of January 28, 2022, our total backlog was $88 million and our backlog related to licenses was $14 million. For our backlog related to licenses, we generally expect to deliver and recognize revenue during the following quarter. Backlog totaling $36 million as of January 28, 2022 was excluded from the remaining performance obligations because such contracts are subject to cancellation until the performance obligation is fulfilled.
As of January 29, 2021, our total backlog was $93 million and our backlog related to licenses was $23 million. Backlog totaling $18 million as of January 29, 2021 was excluded from the remaining performance obligations because such contracts were subject to cancellation until the performance obligation is fulfilled.
The amount and composition of backlog will fluctuate period to period and backlog is managed based upon multiple considerations, including product and geography. We do not believe that the amount of backlog is indicative of future sales or revenue or that the mix of backlog at the end of any given period correlates with actual sales performance of a particular geography or particular products or services.
Customers
Our product offerings allow customers to manage IT resources across private clouds and complex multi-cloud, multi-device environments. Customer deployments range in size from a single virtualized server for small businesses to thousands of virtual machines and managed devices for our largest enterprise customers.
During fiscal 2022, revenue from Dell, including purchases of products and services directly from us, as well as through our channel partners, accounted for 38% of our consolidated revenue. These purchases included Dell selling joint solutions as an OEM, which accounted for 13% of total revenue from Dell, or 5% of our consolidated revenue. The remaining revenue from Dell consisted of Dell acting as a distributor to other non-Dell resellers, reselling products and services as a reseller or purchasing products and services for its own internal use. On certain transactions, Dell Financial Services also provided financing to our end users at our end users’ discretion.
Other than Dell, none of our distributors accounted for more than 10% of our consolidated revenue during fiscal 2022. Our distribution agreements are typically terminable at will by either party upon 30 to 90 days’ prior written notice to the other party and neither party has any obligation to purchase or sell any products under the agreement.
Competition
We face intense competition across all markets for our products and services. We believe that the key factors in our ability to successfully compete include the level of reliability, interoperability and new functionality of our product and service offerings; the ability of our product offerings to support multiple hardware platforms, operating systems, applications frameworks and public cloud platforms; our ability to anticipate customer needs in rapidly evolving markets for IT resources; the pricing of our product and service offerings; the ability to integrate open source technologies that are critical in private and public cloud computing architectures; the ability to attract and retain key employees; and the ability to maintain and expand our ecosystem of technology partners, service providers and sales channel partners. While we believe that we are a technology leader in virtualization and cloud infrastructure solutions and have a strong, favorable image with our customers, many of our
current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Additionally, the adoption of public cloud, micro-services, containers and open source technologies has the potential to erode our profitability.
We face competition from, among others:
Providers of public cloud infrastructure and SaaS-based multi-cloud offerings. As businesses increasingly utilize public cloud and SaaS-based offerings, they are building more of their new compute workloads and may also shift some of their existing workloads, off-premises. A significant percentage of new application development is happening in the public cloud, with providers such as AWS, Microsoft Azure (“Azure”) or Google Cloud, or in a distributed fashion and these new applications are often deployed on public cloud or multi-cloud infrastructure. As a result, the demand for on-premises information technology (“IT”) resources is expected to slow and our products and services will need to increasingly compete for customers’ IT workloads with off-premises public cloud and SaaS-based multi-cloud offerings, such as those offered by Datadog in monitoring and IT telemetry and ServiceNow in the automation space. If we fail to address evolving customer priorities or requirements, the demand for VMware’s products and services may decline and we could experience slower than expected or no growth. Additionally, VMware Cloud Provider Program (“VCPP”) offerings from our partners may compete directly with infrastructure-as-a-service (“IaaS”) offerings from various public cloud providers, which are increasingly integrated with on-premises solutions. In fiscal 2018, we entered into a strategic alliance with AWS to deliver a vSphere-based cloud service, VMware Cloud on AWS, running in AWS data centers available in certain geographies and, in fiscal 2019, we extended our collaboration with AWS to include AWS Outposts. In fiscal 2020, we also announced partnerships with Microsoft (Azure VMware Solution by CloudSimple), Google (Google Cloud VMware Solution by CloudSimple) and Oracle (Oracle Cloud VMware Solution) under the framework of our VCPP that enable customers to run native VMware-based workloads on each of Azure, Google Cloud and Oracle Cloud. Our partnerships with AWS and other public cloud providers may be seen as competitive with each other and with other VCPP partners, while some partners may elect to include solutions such as VMware Cloud on AWS as part of their managed services provider offerings. In addition, many of these public cloud providers are delivering hybrid cloud hardware solutions with their distributed cloud management. For example, many public cloud infrastructure providers have also entered into strategic partnerships with mobile telecommunications network providers to jointly embed distributed cloud infrastructure and management tools into 5G mobile networks. To the extent customers and partners, including service providers, choose to operate native cloud environments (or similar non-VMware environments, such as Azure Stack or AWS Wavelength) in their data centers in lieu of purchasing VMware’s on-premises and hybrid and multi-cloud products, our operating results could be materially adversely affected.
Providers of application modernization and open source developer platform services. Many public cloud infrastructure and multi-cloud SaaS competitors also offer standalone or embedded application development, or Platform-as-a-Service (“PaaS”), services. In the case of AWS, Azure and Google Cloud, these PaaS services are often bundled with consumption-based IaaS offerings. These IaaS providers and other developer solution partners, such as Red Hat, a subsidiary of IBM, and HashiCorp, offer tools and services based on containers and DevSecOps (or development security and operations) practices. Open source technologies for containerization and cloud platforms, such as Xen, KVM, Docker, rkt, OpenShift, Mesos, Kubernetes and OpenStack, and other open source software-based products, solutions and services may reduce the demand for our solutions, put pricing pressure on our offerings and enable competing vendors to leverage open source technologies to compete directly with us. New platform technologies and standards based on open source software are consistently being developed and can gain popularity quickly. Improvements in open source software could cause customers to replace software purchased from us with open source software. In step with these trends, we deliver a comprehensive container, Kubernetes and Cloud Native Application technologies portfolio with VMware Tanzu and have increased our level of commitment to open source projects and communities, such as the Cloud Native Computing Foundation, that are designed to increase the rate at which customers adopt micro-services architectures. The adoption of distributed micro-service application architectures, and their alignment with container technologies, represents an emerging area of competition. As we continue to invest in these areas, we will experience increasing competitive overlap with other cloud native vendors, such as Red Hat, and the large providers of public cloud infrastructure. Such competitive pressure or the availability of new open source software may cause us to experience reduced sales, increased pricing pressure, increased sales and marketing expenses and reduced operating margins, any one of which may adversely affect our operating results.
Providers of enterprise security offerings. With our acquisition of Carbon Black Inc. (“Carbon Black”) in 2019, we launched a new set of enterprise security solutions that includes the Carbon Black endpoint security platform and the intrinsic security elements of our existing NSX virtual networking, Workspace ONE end user and our compute offerings. The cybersecurity market is large, highly competitive, fragmented and subject to rapidly evolving technology, shifting customer needs and frequent introductions of new solutions. Competitors in the end point security space range from established solution providers such as Microsoft and Trend Micro to next-generation endpoint security providers such as CrowdStrike and SentinelOne. While we believe that the intrinsic security elements in our existing offerings coupled with our Carbon Black endpoint security offerings and new combined offerings we expect to develop and introduce in the future will enable us to
provide an integrated security offering with significant advantages over our competitors’ current offerings, our ability to gain traction and market share as a new entrant into this well-established market segment is uncertain. Additionally, new trends, such as Extended Threat Detection (XDR), Secure Access Service Edge (SASE) and Zero Trust Network Access, represent the coalescence of formerly distinct markets, such as identity management, secure web gateway, SD-WAN, network firewall and cloud access security brokers. These new trends may bring existing partners, such as Fortinet, Zscaler and Okta into a more competitive position with our Carbon Black, VeloCloud and other distributed network security offerings. If we are unable to successfully adapt our product and service offerings to meet these opportunities and rapidly evolving trends our operating results could be adversely affected.
Large, diversified enterprise software and hardware companies. These competitors supply a wide variety of products and services to, and have well-established relationships with, our current and prospective end users. For example, small- to medium-sized businesses and companies in emerging markets that are evaluating the adoption of virtualization-based technologies and solutions may be inclined to consider Microsoft solutions because of their existing use of Windows and Office products. Some of these competitors have in the past and may in the future take advantage of their existing relationships to engage in business practices that make our products and services less attractive or more expensive to our end users. For example, in 2019, Microsoft modified its on-premises licensing terms to require end users who wish to deploy Microsoft software on certain dedicated hosted cloud services other than Microsoft’s Azure cloud service, including VMware Cloud on AWS, to purchase additional rights from Microsoft. Other competitors have limited or denied support for their applications running in VMware virtualization environments. In addition, these competitors could integrate competitive capabilities into their existing products and services and make them available without additional charge. For example, Oracle provides free server virtualization software intended to support Oracle and non-Oracle applications, Microsoft offers its own server, network and storage virtualization software packaged with its Windows Server product as well as built-in virtualization in the client version of Windows and Cisco includes network virtualization technology in many of its data center networking platforms. As a result, existing and prospective VMware customers may elect to use products that are perceived to be “free” or “very low cost” instead of purchasing VMware products and services for certain applications where they do not believe that more advanced and robust capabilities are required.
Other industry alliances. Many of our competitors have entered into or extended partnerships or other strategic relationships to offer more comprehensive virtualization and cloud computing solutions than they individually had offered. We expect these trends to continue as companies attempt to strengthen or maintain their positions in the evolving virtualization infrastructure and enterprise IT solutions industry. For example, CrowdStrike has formed the CrowdXDR Alliance, an initiative competitive with VMware security offerings that includes VMware partners such as Zscaler and Google Cloud. These alliances may result in more compelling product and service offerings than those we offer.
Our partners and members of our developer and technology partner ecosystem. We face competition from our partners. For example, third parties currently selling our products and services could build and market their own competing products and services or market competing products and services of other vendors. Additionally, as formerly distinct sectors of enterprise IT such as software-based virtualization and hardware-based server, networking and storage solutions converge, we also increasingly compete with companies who are members of our developer and technology partner ecosystem. For example, in 2019, one of our important partners and customers, IBM, acquired Red Hat, one of our competitors in the cloud native applications space. Consequently, when such convergences occur, we may find it more difficult to continue to collaborate productively on other projects with these partners, and the advantages we derive from our ecosystem could diminish.
These various forms of competition could result in increased pricing pressure and sales and marketing expenses, thereby materially reducing our operating margins and could also prevent our new products and services from gaining market acceptance, thereby harming our ability to increase, or causing us to lose, market share.
Intellectual Property
As of January 28, 2022, over 5,000 patents of varying duration issued by the U.S. Patent and Trademark Office have been granted or assigned to us. We also have been granted or assigned patents from other countries. These patents cover various aspects of our server virtualization and other technologies. We also have numerous pending U.S. provisional and non-provisional patent applications, and numerous pending foreign and international patent applications, that cover other aspects of our virtualization and other technologies.
We have federal trademark registrations in the U.S. for “VMWARE,” “VMWORLD,” “VSPHERE,” “VCLOUD,” “VCENTER SERVER,” “VMOTION,” “HORIZON,” “AIRWATCH,” “VREALIZE,” “VCLOUD,” “WORKSPACE ONE,” “ESX,” “VMWARE NSX,” “VMWARE CLOUD FOUNDATION,” “VELOCLOUD,” “CARBON BLACK,” “BITNAMI” and “PIVOTAL” and numerous other trademarks. We also have trademarks registered in several foreign countries.
We rely on a combination of patent, trademark, copyright and trade secret laws in the U.S. and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property rights and our brand.
We enforce our intellectual property rights in the U.S. and several foreign countries. Despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the U.S. patent filings are intended to provide the holder with a right to exclude others from making, using, offering to sell, selling or importing into the U.S. products covered by the claims of granted patents.
Our granted U.S. patents, and any future patents (to the extent they are issued), may be contested, circumvented or invalidated in the future. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and we may not be able to prevent third parties from infringing these patents. Therefore, the exact effect of our patents and the other steps we have taken to protect our intellectual property cannot be predicted with certainty.
Environmental, Social and Governance (“ESG”)
At VMware, we believe technology can have a positive impact on society and the planet. In December 2020, we announced our 2030 Agenda, which represents our ESG strategy focused on three business outcomes: Sustainability, Equity and Trust. Our 2030 Agenda is designed for the benefit of all VMware stakeholders: shareholders, customers, employees, partners, suppliers and communities.
•Sustainability: We are committed to decarbonization for our customers, supply chain and operations through our focus on: net-zero emissions, radical efficiency, zero-carbon clouds, energy resilience for an “anywhere” workforce and investing in innovation.
•Equity: We are committed to building a future that is accessible, inclusive and just for all through our focus on: distributed workforce technology; human capital development; diversity, equity and inclusion; product accessibility; nonprofit digital transformation; and digital skills.
•Trust: We are committed to building and protecting trust with all stakeholders—our customers, partners, stockholders, people and communities through our focus on: security, privacy-by-design, digital ethics and transparent business practices.
To promote long-term stakeholder value creation, we created an ESG governance structure comprised of internal leadership and members of our executive staff to guide strategy, measure performance and engage with our Board of Directors to review ESG matters. The Nominating, Governance and Related Persons Transactions Committee of our Board of Directors meets with our ESG leadership team on a regular cadence throughout the year to review ESG objectives and their integration into VMware’s strategic objectives and to monitor progress against the goals set in our 2030 Agenda.
Environmental Sustainability
We are committed to creating products and services that support our customers in reducing the environmental impact of their digital infrastructure. In fiscal 2022, we launched VMware Zero Carbon Committed where we help connect customers who are looking for low-carbon solutions with a VMware Cloud Provider partner who can help customers achieve their sustainability goals. This zero-carbon cloud initiative is possible through renewable energy-powered operations and energy-efficient data centers and helps customers reduce the environmental impact of their digital infrastructure.
VMware is committed to achieving net zero carbon emissions for our operations and supply chain by 2030 as part of our ESG strategy. Our net zero goal builds on validated science-based targets as well as our achievements of continuing to operate as a certified CarbonNeutral company in accordance with the CarbonNeutral Protocol and procuring 100% renewable energy for our operations, in accordance with RE100’s technical guidance. In fiscal 2022, we launched our Responsible Sourcing program to drive sustainability, diversity and accessibility across our supply chain.
During fiscal 2022, we continued to utilize concepts from the Financial Stability Board’s Taskforce for Climate-Related Financial Disclosures (“TCFD”) framework and expanded our climate change risk assessment to model multiple climate change scenarios and their potential impacts on our global operations. We will use the risk assessment process to inform future risk mitigation strategies. In addition to TCFD, VMware’s ESG self-assessments and goals are informed by ESG frameworks including Sustainability Accounting Standards Board, Global Reporting Initiative and the United Nations’ Global Compact.
Our commitment to ESG was recognized for the second consecutive year by being included in the Dow Jones Sustainability Indices. More details on our ESG programs, goals and commitments can be found in our annual ESG Report on our website. Information on our website is not deemed to be incorporated by reference into this filing on Form 10-K.
Human Capital
General Demographics
As of January 28, 2022, we employed approximately 37,500 employees located in 60 countries, approximately 15,700 of which work in the U.S.
We use contractors from time to time for temporary assignments and in locations in which we do not currently have operating subsidiaries or branches. In the event that these contractor resources were not available, we do not believe that this would have a material adverse effect on our operations. None of our employees are represented by labor unions and we consider current employee relations to be good.
Wellbeing and Culture
The VMware culture is based on a set of shared values best expressed through the acronym EPIC2: Execution, Passion, Integrity, Customers and Community. Each year, we honor extraordinary employees through our EPIC2 Achievement Awards program. Individuals are recognized for their ability to regularly go above and beyond the Company’s high standards. We have quarterly EPIC2 days off and an EPIC2 shutdown at the end of the year, which enable our people to focus on their wellbeing and rejuvenate.
During fiscal 2022, we continued our programs initiated in response to the COVID-19 pandemic in order to address the safety of our employees while continuing to support the business continuity needs of our customers and partners. We have enabled employees to choose to work in the office or remotely consistent with local health regulations and operational requirements. We have continued to implement flexible work and customer outreach experiences that allow our teams to remain connected with each other and with our customers while maintaining and enhancing productivity, operational excellence and innovation. We continued additional benefits to employees including a wellbeing allowance, home equipment allowance for all new employees, coverage of COVID-19 testing and treatment, as well as additional personal paid time off days.
Future of Work
During fiscal 2022, we continued to build and expand a dynamic, global workforce of the future that empowers our people to work from any location, consistent with business requirements, that accelerates their productivity to deliver innovative solutions and operational excellence for our customers worldwide. We believe our approach to employee choice and flexibility is enabling the Company to successfully compete to hire and retain skilled and talented team members from many new locations globally and contribute to meeting our diversity, equity and inclusion goals. As our employees demonstrated throughout the pandemic, work location does not dictate success. The choice and flexibility that form the cornerstones of this new distributed workforce model mirror the choice and flexibility we provide to our customers when choosing their digital infrastructure.
Diversity, Equity and Inclusion (“DEI”)
DEI is a business priority at VMware. Our DEI initiative, VMinclusion, is a business-led effort to attract, develop and retain the multinational, multicultural talent critical to our globally connected business. We are committed to creating a flexible, inclusive environment where everyone is respected and has equal opportunity to succeed. Specifically, we are focused on driving a culture that is inclusive of all forms of diversity: from demographic factors such as race, ethnicity, national origin, gender identity, sexual orientation, disability, veteran status to other critical factors such as function, office location, personality, age and life experience. During fiscal 2022, all Senior Directors and above were assigned responsibility for achievement of company-wide DEI goals tied to bonus compensation. We are continuing to expand our programs and monitor the impact of our practices on the hiring and retention of talent from underrepresented communities including women, people with disabilities, veterans and those that self-identify as being part of LGBTQ+ communities.
We have been recognized for our achievements including Forbes 2021 The Best Employers for Diversity, Forbes 2021 The Best Employers for Women and the 2022 Human Rights Campaign Foundation Best Places to Work for LGBTQ Equality as well as 2021 DEI Best Places to Work for Disability Inclusion.
As of the end of fiscal 2022, women represented 29% of our global employees and underrepresented minorities represented 12% of our U.S. employees.
We are committed to equitable compensation. We know that leveraging the power of human difference starts with equal pay for equal work. We continually analyze compensation globally, accounting for multiple factors that influence pay such as job, grade, tenure, time in job, geographic location and performance. Our most recent data analysis as of October 2021 shows that at VMware, women, in the aggregate, adjusting for the factors identified above, earn 99% of their male counterparts' target cash compensation globally and underrepresented minorities earn 100% of their white counterparts in the U.S.
Compensation and Benefits
We tailor our compensation programs including base pay strategy, variable compensation programs and health, wellbeing and retirement programs to meet the needs of our employees. Equity awards are a key compensation component that enables us to recruit and retain top talent. The Compensation Committee of our Board of Directors oversees the utilization of stock-based compensation to appropriately balance competitive needs against the dilutive impact on our stockholders. These components of
total compensation are part of a broader framework of employee recognition, as well as our strategy to reinforce VMware’s culture and to attract, develop and retain a talented and diverse workforce.
Available Information
Our website is located at vmware.com and our investor relations website is located at 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 discuss 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;
•ESG (environmental, social and governance) information;
•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. The SEC also maintains a website at sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The names of our executive officers and their ages as of March 15, 2022, are as follows:
| | | | | | | | | | | | | | |
| Name | | Age | | Position(s) |
| Rangarajan (Raghu) Raghuram | | 59 | | Chief Executive Officer |
| Zane Rowe | | 51 | | Chief Financial Officer and Executive Vice President |
| Sumit Dhawan | | 47 | | President |
| Jean-Pierre Brulard | | 63 | | Executive Vice President, Worldwide Sales |
| Amy Fliegelman Olli | | 58 | | Executive Vice President, General Counsel and Secretary |
Rangarajan (Raghu) Raghuram has served as VMware's Chief Executive Officer and a director of VMware since June 2021. Prior to that Mr. Raghuram served as VMware’s Chief Operating Officer, Products and Cloud Services since October 2016, guiding VMware’s cloud and SaaS transformation efforts. Prior to that he served as Executive Vice President, Software-Defined Data Center division from February 2014 to October 2016 and Executive Vice President, Cloud Infrastructure and Management from April 2012 to February 2014. Mr. Raghuram joined VMware in 2003 and has held multiple product management and marketing roles. Mr. Raghuram served as Senior Vice President and General Manager, Cloud Infrastructure and Management, Virtualization and Cloud Platforms and Enterprise Products, from December 2009 through March 2012. Mr. Raghuram previously served as Vice President of VMware's Server business unit and of Product and Solutions Marketing through December 2009. Prior to VMware, Mr. Raghuram held product management and marketing roles at Netscape Communications Corporation and Bang Networks, Inc.
Zane Rowe has served as VMware’s Chief Financial Officer and Executive Vice President since March 2016. Mr. Rowe also served as VMware’s interim Chief Executive Officer from February 2021 through May 2021. Prior to joining VMware, he was EMC’s Executive Vice President and Chief Financial Officer from October 2014 until February 2016. Prior to joining
EMC, Mr. Rowe was Vice President of North American Sales of Apple Inc., a technology company that designs, develops and sells consumer electronics, computer software, online services and personal computers, from May 2012 until May 2014. He was Executive Vice President and Chief Financial Officer of United Continental Holdings, Inc., an airline holdings company, from October 2010 until April 2012 and was Executive Vice President and Chief Financial Officer of Continental Airlines from August 2008 to September 2010. Mr. Rowe joined Continental Airlines in 1993. Mr. Rowe currently serves on the board of Sabre Corporation.
Sumit Dhawan has served as VMware’s President since June 2021. Prior to that Mr. Dhawan served as VMware’s Chief Customer Experience Officer since February 2020. From May 2018 until February 2020, Mr. Dhawan served as CEO of Instart (formerly Instart Logic), a multinational cloud company focused on web and mobile application delivery, customer experience and security for enterprise customers. Mr. Dhawan initially joined VMware in 2013 and served in various roles with VMware’ End User Computing group, including as Senior Vice President and General Manager of VMware’s End User Computing group from November 2016 through May 2018.
Jean-Pierre Brulard has served as VMware’s Executive Vice President, Worldwide Sales since February 2020. Mr. Brulard previously served as VMware’s Senior Vice President and General Manager, EMEA from April 2015 to January 2020 and as Vice President, EMEA, Southern Region from April 2009 to April 2015. Prior to joining VMware, Mr. Brulard served in senior management positions of increasing responsibility for Business Objects, an enterprise software company, for seven years, most recently as its Senior Vice President and General Manager, EMEA.
Amy Fliegelman Olli has served as VMware’s Executive Vice President, General Counsel and Secretary since December 2020. She joined VMware as Senior Vice President and General Counsel in August 2017 and was appointed as Secretary in October 2017. Prior to joining VMware, Ms. Fliegelman Olli served as Senior Vice President and General Counsel of Avaya, Inc., a provider of contact center, unified communications and networking products, from June 2014 through August 2017. Previously, she was the General Counsel of CA, Inc., a provider of software solutions, from September 2006 to June 2014 where her responsibilities covered all legal, governance, compliance, internal audit, security, risk management and controls matters. Ms. Fliegelman Olli also spent 18 years with IBM Corporation, ultimately serving as Vice President and General Counsel for the Americas and Europe.
ITEM 1A. RISK FACTORS
The risk factors that appear below could materially affect our business, financial condition and operating results. The risks and uncertainties described below are not the only risks and uncertainties we face. Our business is also subject to general risks and uncertainties that affect many other companies.
Operation of Business and Strategic Risks
A significant decrease in demand for our data center virtualization products would adversely affect our operating results.
A significant portion of our revenue is derived, and will for the foreseeable future continue to be derived, from our data center virtualization products. As more businesses achieve high levels of virtualization in their data centers, the market for our vSphere product continues to mature. Additionally, as businesses increasingly utilize public cloud and SaaS-based offerings, they are building more of their new compute workloads off-premises and are increasingly shifting some of their existing and many of their new workloads to public cloud providers, thereby limiting growth and potentially reducing the market for on-premises deployments of vSphere. Although sales of vSphere have declined as a portion of our overall business and we expect this trend to continue, vSphere remains key to our future growth as it serves as the foundation for our newer SDDC, network virtualization and our newer subscription and SaaS offerings. Although we have launched, and are continuing to develop, products to extend our vSphere-based SDDC offerings to the public cloud, due to our product concentration, a significant decrease in demand for our server virtualization products would adversely affect our operating results.
Our subscription and SaaS offerings, which constitute a growing portion of our business, and our initiatives to extend our data center virtualization and container platforms into the public cloud involve various risks, including, among others, reliance on third-party providers for data center space and colocation services and on public cloud providers to prevent service disruptions.
As we continue to develop and offer subscription and SaaS versions of our products, we must continue to evolve our processes to meet various intellectual property, regulatory, contractual and service compliance challenges, including compliance with licenses for open source and third-party software embedded in our offerings, compliance with export control and privacy regulations, protecting our services from external threats or inappropriate use, maintaining the continuous service levels and data security expected by our customers and adapting our go-to-market efforts. The expansion of our subscription and SaaS offerings also requires significant investments, and our operating margins, results of operations and operating cash flows may be adversely affected if our new offerings are not widely adopted by customers.
Additionally, our subscription and SaaS offerings rely upon third-party providers to supply data center space, equipment maintenance and other colocation services and our initiatives to extend our virtualization and container platforms into the public cloud rely upon the ability of our public cloud and VCPP partners to maintain continuous service availability and protect customer data on their services. Although we have entered into various agreements for the lease of data center space, equipment maintenance and other services, third parties could fail to live up to their contractual obligations. The failure of a third-party provider to prevent service disruptions (including as a result of climate change), data losses or security breaches may require us to issue credits or refunds or indemnify or otherwise be liable to customers or third parties for damages that may occur, and contractual provisions with our third-party providers and public cloud partners may limit our recourse against the third-party provider or public cloud partner responsible for such failure. Additionally, if these third-party providers fail to deliver on their obligations, our reputation could be damaged, our customers could lose confidence in us, and our ability to maintain and expand our subscription and SaaS offerings would be impaired.
Our success depends upon our ability to adapt our business and pricing models to a subscription and SaaS model appropriately.
We continue to transition our portfolio from a perpetual license model to subscription and SaaS offerings. During this transition, we will recognize less revenue up front than we would otherwise recognize as part of the multi-year license contracts through which we typically sell our established offerings. Additionally, in order to provide customers flexibility, we offer one- and three-year term licenses for certain portions of our perpetual portfolio, which have certain characteristics that are similar to subscription products but are accounted for as License and Services revenue. Our transition to these term licenses and subscription and SaaS offerings involve various risks that may negatively affect our operating results, including:
•We may fail to set pricing for subscription and SaaS offerings at levels appropriate to maintain our revenue streams or our customers may choose to deploy products from our competitors that they believe are priced more favorably.
•We may fail to accurately predict subscription renewal rates or their impact on operating results, and because revenue from subscriptions is recognized for our services over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our results.
•As customers transition to our subscription and SaaS products and services, our revenue and license revenue growth rate may be adversely impacted during the period of transition when we recognize less revenue up front than we would otherwise recognize as part of the multi-year license contracts. For example, effective with the fourth quarter of fiscal 2020, we commenced reporting revenue from our subscription and SaaS as a separate revenue line item, breaking out components that had previously been included in our license revenue and services revenue and prior period amounts were reclassified to conform with this presentation. As a result, the rate of growth in our license revenue, which was previously viewed as a leading indicator of our business performance, as well as our software maintenance revenue and deferred revenue were negatively impacted. At the same time, growth in subscription and SaaS revenue may not appear as robust because such revenue is recognized ratably over time as customers consume our subscription-based products.
•The transition from selling support and maintenance with perpetual licenses to selling subscription and SaaS offerings may negatively affect our profitability, as the cost associated with software maintenance renewals is generally lower than the cost associated with selling new subscription and SaaS offerings.
•Term licenses are sold with shorter support and maintenance terms than perpetual licenses are, and customers may not renew such licenses at the end of their term or transition to subscription and SaaS offerings.
•As we offer more services that depend on converting users of free services to users of premium services and purchasers of our on-premises products to our SaaS offerings, our ability to maintain or improve and to predict conversion rates will become more important.
We face intense competition that could adversely affect our operating results.
The application platform, multi-cloud, digital workspace, networking and security product areas are interrelated and rapidly evolving, and we face intense competition across all the markets for our products and services. Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Additionally, the adoption of public and distributed cloud, micro-services, containers, and open source technologies has the potential to erode our profitability.
We face competition from, among others:
Providers of public cloud infrastructure and SaaS-based multi-cloud offerings. As businesses increasingly utilize public cloud and SaaS-based offerings, they are building more of their new compute workloads, and may also shift some of their existing workloads, off-premises. A significant percentage of new application development is happening in the public cloud,
with providers such as Amazon Web Services (“AWS”), Microsoft Azure (“Azure”) or Google Cloud, or in a distributed fashion, and these new applications are often deployed on public cloud or multi-cloud infrastructure. As a result, the demand for on-premises information technology (“IT”) resources is expected to slow, and our products and services will need to increasingly compete for customers’ IT workloads with off-premises public cloud and SaaS-based multi-cloud offerings, such as those offered by Datadog in monitoring and IT telemetry and ServiceNow in the automation space. If we fail to address evolving customer priorities or requirements, the demand for VMware’s products and services may decline, and we could experience slower than expected or no growth. Additionally, VMware Cloud Provider Program (“VCPP”) offerings from our partners may compete directly with infrastructure-as-a-service (“IaaS”) offerings from various public cloud providers, which are increasingly integrated with on-premises solutions. In fiscal 2018, we entered into a strategic alliance with AWS to deliver a vSphere-based cloud service, VMware Cloud on AWS, running in AWS data centers available in certain geographies, and, in fiscal 2019, we extended our collaboration with AWS to include AWS Outposts. In fiscal 2020, we also announced partnerships with Microsoft (Azure VMware Solution by CloudSimple), Google (Google Cloud VMware Solution by CloudSimple), and Oracle (Oracle Cloud VMware Solution) under the framework of our VCPP that enable customers to run native VMware-based workloads on each of Azure, Google Cloud, and Oracle Cloud. Our partnerships with AWS and other public cloud providers may be seen as competitive with each other and with other VCPP partners, while some partners may elect to include solutions such as VMware Cloud on AWS as part of their managed services provider offerings. In addition, many of these public cloud providers are delivering hybrid cloud hardware solutions with their distributed cloud management. For example, many public cloud infrastructure providers have also entered into strategic partnerships with mobile telecommunications network providers to jointly embed distributed cloud infrastructure and management tools into 5G mobile networks. To the extent customers and partners, including service providers, choose to operate native cloud environments (or similar non-VMware environments, such as Azure Stack or AWS Wavelength) in their data centers in lieu of purchasing VMware’s on-premises and hybrid and multi-cloud products, our operating results could be materially adversely affected.
Providers of application modernization and open source developer platform services. Many public cloud infrastructure and multi-cloud SaaS competitors also offer standalone or embedded application development, or Platform-as-a-Service (“PaaS”), services. In the case of AWS, Azure and Google Cloud, these PaaS services are often bundled with consumption-based IaaS offerings. These IaaS providers and other developer solution partners, such as Red Hat, a subsidiary of IBM, and HashiCorp, offer tools and services based on containers and DevSecOps (or development security and operations) practices. Open source technologies for containerization and cloud platforms, such as Xen, KVM, Docker, rkt, OpenShift, Mesos, Kubernetes and OpenStack, and other open source software-based products, solutions and services may reduce the demand for our solutions, put pricing pressure on our offerings and enable competing vendors to leverage open source technologies to compete directly with us. New platform technologies and standards based on open source software are consistently being developed and can gain popularity quickly. Improvements in open source software could cause customers to replace software purchased from us with open source software. In step with these trends, we deliver a comprehensive container, Kubernetes and Cloud Native Application technologies portfolio with VMware Tanzu and have increased our level of commitment to open source projects and communities, such as the Cloud Native Computing Foundation, that are designed to increase the rate at which customers adopt micro-services architectures. The adoption of distributed micro-service application architectures, and their alignment with container technologies, represents an emerging area of competition. As we continue to invest in these areas, we will experience increasing competitive overlap with other cloud native vendors, such as Red Hat, and the large providers of public cloud infrastructure. Such competitive pressure or the availability of new open source software may cause us to experience reduced sales, increased pricing pressure, increased sales and marketing expenses and reduced operating margins, any one of which may adversely affect our operating results.
Providers of enterprise security offerings. With our acquisition of Carbon Black Inc. (“Carbon Black”) in 2019, we launched a new set of enterprise security solutions that includes the Carbon Black endpoint security platform and the intrinsic security elements of our existing NSX virtual networking, Workspace ONE end user and our compute offerings. The cybersecurity market is large, highly competitive, fragmented and subject to rapidly evolving technology, shifting customer needs and frequent introductions of new solutions. Competitors in the end point security space range from established solution providers such as Microsoft and Trend Micro to next-generation endpoint security providers such as CrowdStrike and SentinelOne. While we believe that the intrinsic security elements in our existing offerings coupled with our Carbon Black endpoint security offerings and new combined offerings we expect to develop and introduce in the future will enable us to provide an integrated security offering with significant advantages over our competitors’ current offerings, our ability to gain traction and market share as a new entrant into this well-established market segment is uncertain. Additionally, new trends, such as Extended Threat Detection (XDR), Secure Access Service Edge (SASE) and Zero Trust Network Access, represent the coalescence of formerly distinct markets, such as identity management, secure web gateway, SD-WAN, network firewall and cloud access security brokers. These new trends may bring existing partners, such as Fortinet, Zscaler and Okta into a more competitive position with our Carbon Black, VeloCloud and other distributed network security offerings. If we are unable to successfully adapt our product and service offerings to meet these opportunities and rapidly evolving trends our operating results could be adversely affected.
Large, diversified enterprise software and hardware companies. These competitors supply a wide variety of products and services to, and have well-established relationships with, our current and prospective end users. For example, small- to medium-sized businesses and companies in emerging markets that are evaluating the adoption of virtualization-based technologies and solutions may be inclined to consider Microsoft solutions because of their existing use of Windows and Office products. Some of these competitors have in the past and may in the future take advantage of their existing relationships to engage in business practices that make our products and services less attractive or more expensive to our end users. For example, in 2019, Microsoft modified its on-premises licensing terms to require end users who wish to deploy Microsoft software on certain dedicated hosted cloud services other than Microsoft’s Azure cloud service, including VMware Cloud on AWS, to purchase additional rights from Microsoft. Other competitors have limited or denied support for their applications running in VMware virtualization environments. In addition, these competitors could integrate competitive capabilities into their existing products and services and make them available without additional charge. For example, Oracle provides free server virtualization software intended to support Oracle and non-Oracle applications, Microsoft offers its own server, network and storage virtualization software packaged with its Windows Server product as well as built-in virtualization in the client version of Windows and Cisco includes network virtualization technology in many of its data center networking platforms. As a result, existing and prospective VMware customers may elect to use products that are perceived to be “free” or “very low cost” instead of purchasing VMware products and services for certain applications where they do not believe that more advanced and robust capabilities are required.
Other industry alliances. Many of our competitors have entered into or extended partnerships or other strategic relationships to offer more comprehensive virtualization and cloud computing solutions than they individually had offered. We expect these trends to continue as companies attempt to strengthen or maintain their positions in the evolving virtualization infrastructure and enterprise IT solutions industry. For example, CrowdStrike has formed the CrowdXDR Alliance, an initiative competitive with VMware security offerings that includes VMware partners such as Zscaler and Google Cloud. These alliances may result in more compelling product and service offerings than those we offer.
Our partners and members of our developer and technology partner ecosystem. We face competition from our partners. For example, third parties currently selling our products and services could build and market their own competing products and services or market competing products and services of other vendors. Additionally, as formerly distinct sectors of enterprise IT such as software-based virtualization and hardware-based server, networking and storage solutions converge, we also increasingly compete with companies who are members of our developer and technology partner ecosystem. For example, in 2019, one of our important partners and customers, IBM, acquired Red Hat, one of our competitors in the cloud native applications space. Consequently, when such convergences occur, we may find it more difficult to continue to collaborate productively on other projects with these partners, and the advantages we derive from our ecosystem could diminish.
These various forms of competition could result in increased pricing pressure and sales and marketing expenses, thereby materially reducing our operating margins, and could also prevent our new products and services from gaining market acceptance, thereby harming our ability to increase, or causing us to lose, market share.
Our commercial relationship with Dell could adversely impact our business, stock price, market share and ability to build and maintain other strategic relationships.
Our commercial relationship with Dell is significant and complex. During the time in which we were a majority-owned subsidiary of Dell, the portion of our sales that were realized through the Dell sales channel grew more rapidly than our sales through non-Dell resellers and distributors. As a standalone company following the Spin-Off, we continue to transact a significant amount of business with Dell pursuant to the commercial framework agreement between us and Dell that became effective upon the Spin-Off, which involves various risks such as:
Reliance on our relationship with Dell. During the year ended January 28, 2022, revenue from Dell, including purchases of products and services directly from us, as well as through our channel partners, accounted for 38% of our consolidated revenue, which included revenue from Dell selling joint solutions as an OEM, acting as a distributor to other non-Dell resellers, reselling products and services as a reseller and purchasing products and services for its own internal use. On certain transactions, Dell Financial Services also provides financing to our end users and channel partners at our end users’ and channel partners’ discretion. Our reliance on the Dell sales channel could negatively impact our ability to negotiate favorable go-to-market arrangements with Dell and our relationships with other channel partners.
Dell’s arrangements with our competitors. Dell maintains significant partnerships with certain of our competitors, including Microsoft, and may enter into more such partnerships in the future. Further, Dell may choose to partner with our competitors instead of with us. These partnerships may adversely impact our relationship with Dell, impede our standalone competitive success and result in declines in our stock price or market share. Additionally, our potential strategic relationships may be negatively affected by our relationship with Dell, as companies may favor or choose to partner with our competitors because of those competitors’ relationship with Dell or due to our relationship with Dell.
Overlaps in areas in which we and Dell compete. We and Dell compete across the IT infrastructure industry providing products and services that overlap in various areas, including software-based storage, management, hyperconverged infrastructure and cloud computing. Dell competes with us in these areas now and may compete with us in new areas and engage in increased competition with us in the future. Some of our products compete directly with products sold or distributed by Dell, which could result in declines in VMware sales. Additionally, this competition could result in increased pricing pressure and sales and marketing expenses, thereby materially reducing our operating margins, and could also prevent our new products and services from gaining market acceptance, thereby harming our ability to increase, or causing us to lose, market share.
Our arrangements with Dell’s competitors. We partner and have arrangements with a number of companies that compete with Dell, including certain of our significant channel, technology and other marketing partners, such as IBM and Hewlett-Packard. Our relationship with Dell could adversely affect our relationships with these companies or other customers, suppliers and partners. Further, our relationships with these companies could adversely impact our relationship with Dell.
We believe that our commercial relationship with Dell provides us a unique opportunity to leverage the respective technical expertise, product strengths and market presence of Dell for the benefit of our customers and stockholders while enabling us to compete more effectively with our larger competitors. However, such transactions may prove not to be successful and may divert our resources or the attention of our management from other opportunities. Negotiating and implementing these arrangements can be time consuming and cause delays in the introduction of joint product and service offerings and disruptions to VMware’s business. Additionally, though we, as a standalone company, now have more flexibility in our strategic partnerships with cloud and on-premises infrastructure companies, for example, such companies may not choose to partner with us to the full extent or at all due to our historical and on-going commercial relationship with Dell. As a result, we may be unable to capitalize, either strategically or commercially, on our new flexibility, and our business, stock price, market share and relationships may suffer.
Our success depends increasingly on customer acceptance of our newer products and services.
Our products and services are primarily based on data center virtualization, application modernization and related multi-cloud technologies used to manage distributed computing architectures, which form the foundation for multi-cloud computing. As the market for server virtualization continues to mature, the rate of growth in license sales of VMware vSphere (“vSphere”) has declined. We are increasingly directing our product development and marketing and sales efforts toward products and services that enable businesses to modernize applications and efficiently implement their multi-cloud services. We have also been introducing SaaS versions of our on-premises products, including vRealize Cloud Universal, and investing in a range of SaaS and cloud-native technologies and products, including through acquisitions such as CloudHealth Technologies, Inc., Carbon Black and Pivotal Software, Inc. (“Pivotal”). These cloud and SaaS initiatives present new and difficult technological, operational and compliance challenges, and significant investments continue to be required to develop or acquire solutions to address those challenges. Our success depends on our current and future customers perceiving technological and operational benefits and cost savings associated with adopting our multi-cloud and application platform solutions. As the market for our data center virtualization products continues to mature, and the scale of our business continues to increase, our rate of revenue growth increasingly depends upon the success of our newer product and service offerings. To the extent that adoption rates for our newer products and services are not sufficient to offset declines in revenue growth for our established server virtualization offerings, our overall revenue growth rates may slow materially or our revenue may decline substantially. Additionally, we may fail to realize returns on our investments in new initiatives and our operating results could be materially adversely affected.
Competition for our highly skilled employees is intense and costly, and our business and growth prospects may suffer if we cannot attract and retain them.
We must continue to attract and retain highly qualified personnel, particularly software and cloud engineers and sales and customer experience personnel, for which competition, particularly against companies with greater resources, startups and emerging growth companies is intense. Research and development personnel are also aggressively recruited by startup and emerging growth companies, which are especially active in many of the technical areas and geographic regions in which we conduct product and service development. This competitive situation has become exacerbated by the increase in employee resignations currently taking place throughout the U.S., in part as a result of the COVID-19 pandemic, which is commonly referred to as the “great resignation.” This competition results in increased costs in the form of cash and stock-based compensation and can have a dilutive impact on our stock. We have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications, and, if we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could suffer.
The loss of key management personnel could harm our business.
We depend on the continued services of key management personnel. We generally do not have employment or non-compete agreements with our employees, and, therefore, they could terminate their employment with us at any time without
penalty and could pursue employment opportunities with any of our competitors. In addition, we do not maintain any key-person life insurance policies. The loss of key management personnel could harm our business.
Our current research and development efforts may not produce significant revenue for several years, if at all.
Developing our products and services is expensive, and developing and launching disruptive technologies requires significant investment often entailing greater risk than incremental investments in existing products and services. Our research and development expenses were approximately 24% of our total revenue during the year ended January 28, 2022. We plan to continue to significantly invest in our research and development efforts to maintain our competitive position. Our investments in research and development may result in products or services that generate less revenue than we anticipate or may not result in marketable products and services for several years or at all.
Acquisitions and divestitures could materially harm our business and operating results.
We have acquired in the past, and plan to acquire in the future, other businesses, products or technologies. We also sell or divest businesses, products and technologies from time-to-time. Acquisitions and divestitures involve significant risks and uncertainties, including:
•disruptions to our ongoing operations and diverting management from day-to-day responsibilities due to, for example, the need to provide transition services in connection with a disposition or difficulty integrating the operations, technologies, products, customers and personnel of acquired businesses effectively;
•adverse impacts to our business and financial results resulting from increases to our expenses due to, among other things, integrating business operations and on-boarding personnel and the incurrence of amortization expense related to identifiable intangible assets acquired and other accounting consequences of acquisitions;
•reductions to our cash available for operations, stock repurchase programs and other uses, potentially dilutive issuances of equity securities or the incurrence of additional debt;
•uncertainties in achieving the expected benefits of an acquisition or disposition, including with respect to our business strategy, revenue, technology, human resources, cost and operating efficiencies and other synergies, due to, among other things, a lack of experience in new markets, products or technologies; or an initial dependence on unfamiliar distribution partners or vendors;
•unidentified issues that were not discovered during the diligence process, including issues with the acquired or divested business’s intellectual property, product quality, security, privacy and accounting practices, regulatory compliance or legal contingencies;
•lawsuits resulting from an acquisition or disposition;
•maintenance or establishment of acceptable standards, controls, procedures or policies with respect to an acquired business; and
•the need to later divest acquired assets at a loss if an acquisition does not meet our expectations.
Disruptions to our distribution channels, including our various routes to market through Dell, could harm our business.
Our future success is highly dependent on our relationships with channel partners, including distributors, resellers, system vendors and systems integrators, which contribute to a significant portion of our revenue. Recruiting and retaining qualified channel partners and training them in the use of our technology and product offerings requires significant time and resources. Our failure to maintain good relationships with channel partners would likely lead to a loss of end users of our products and services, which would adversely affect our revenue. We generally do not have long-term contracts or minimum purchase commitments with our channel partners, and the contracts that we do have with these channel partners do not prohibit them from offering products or services that compete with ours.
Sales via our various route-to-market relationships with Dell accounted for 38% of our consolidated revenue during the year ended January 28, 2022 and transactions where Dell acted as an original equipment manufacturer (“OEM”) accounted for 13% of the revenue from Dell, or 5% of our consolidated revenue. Such routes to market include Dell selling joint solutions as an OEM, acting as a distributor to other non-Dell resellers, reselling products and services as a reseller or purchasing products and services for its own internal use. Although we and Dell entered into a commercial agreement effective upon the Spin-Off that is intended to preserve and enhance our strategic partnership, as a standalone company, our relationship with Dell is fundamentally different from the relationship that we had with Dell when we were its majority-owned subsidiary. Following the Spin-Off, Dell no longer consolidates VMware’s revenues, and Dell may not be sufficiently incentivized to drive VMware business through our various route-to-market relationships. If sales through Dell decline and VMware is unable to shift business to suitable alternative channel partners, our business and operating results will be negatively affected. Additionally, any disruption or significant change to our relationship with Dell or the terms upon which they sell and distribute our products and
services could have a negative impact on our operating results until such time as we arrange to replace these distribution services with the services of existing or new distributors.
Other than Dell, none of our distributors accounted for 10% or more of our consolidated revenue during the year ended January 28, 2022. Although we believe that we have in place, or would have in place by the date of any such termination, agreements with replacement distributors sufficient to maintain our revenue from distribution, if we were to lose the distribution services of a significant distributor, such loss could have a negative impact on our operating results until such time as we arrange to replace these distribution services with the services of existing or new distributors.
The evolution of our business requires more complex go-to-market strategies, which involve significant risk.
Our increasing focus on developing and marketing IT management and automation and IaaS offerings (including software-defined networking, VCPP-integrated virtual desktop and mobile device, cloud and SaaS) that enable customers to transform their IT systems requires a greater focus on marketing and selling product suites and more holistic solutions, rather than selling on a product-by-product basis. Consequently, we have developed, and must continue to develop, new strategies for marketing and selling our offerings. In addition, marketing and selling new technologies to enterprises requires us to invest significant time and resources to educate customers on the benefits of our offerings. These investments can be costly and educating our sales force can distract from their efforts to sell existing products and services. Additionally, from time to time, we reorganize our go-to-market teams to increase efficiencies and improve customer coverage, but these reorganizations can cause short-term disruptions that may negatively impact sales over one or more fiscal periods. Further, upon entering into new industry segments, we may choose to go to market with third-party manufactured hardware appliances that are integrated with our software—as we did when we entered into the SD-WAN space through our acquisitions of VeloCloud Networks, Inc. and Nyansa, Inc.—which requires us to rapidly develop, deploy and scale new hardware procurement, supply chain and inventory management processes and product support services and integrate them into our ongoing business systems and controls. Similarly, our launches of managed subscription services, such as VMware Cloud on AWS and VMware Cloud on Dell EMC, require us to implement new methods to deliver and monitor end user services and adjust our model for releasing product upgrades. As our customers increasingly shift from one-time purchases of perpetual software licenses to purchasing our software via more subscription and SaaS-based programs, our go-to-market teams will need to alter their outreach to customers to support ongoing consumption of our offerings, and we will need to appropriately adjust the variable compensation programs we use to incentivize our sales teams. If we fail to successfully adjust, develop and implement effective go-to-market strategies, our financial results may be materially adversely impacted.
We may not be able to respond to rapid technological changes with new solutions and services offerings.
The industries in which we compete are characterized by rapid, complex and disruptive changes in technology, customer demands and industry standards that could make it difficult for us to effectively compete and cause our existing and future software solutions to become obsolete and unmarketable. Our ability to react quickly to new technology trends—such as cloud computing, which is disrupting the ways businesses consume, manage and provide physical IT resources, applications, data and IT services—and customer requirements is negatively impacted by the length of our development cycle for new and enhanced products and services, which has frequently been longer than we originally anticipated. This is due in part to the increasing complexity of our product offerings as we increase their interoperability and maintain their compatibility with IT resources, such as public clouds, utilized by our customers while sustaining and enhancing product quality. When we release significant new versions of our existing offerings, the complexity of our products may require existing customers to remove and replace prior versions to take full advantage of substantial new capabilities, which may subdue initial demand for the new versions or depress demand for existing versions until the customer is ready to purchase and install the newest release. If we are unable to evolve our solutions and offerings in time to respond to and remain ahead of new technological developments—in applications, networking or security, for example—or in ways that are compelling to customers, our ability to retain or increase market share and revenue could be materially adversely affected. We may also fail to adequately anticipate the commercialization of emerging technologies, such as blockchain, and the development of new markets and applications for our technology, such as edge computing, and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.
We operate a global business that exposes us to additional risks.
A significant portion of our employees, customers, channel partners and third-party providers whom we rely upon to help deliver our subscription and SaaS services are located outside the U.S. Our international activities account for a substantial portion of our revenue and profits, and our investment portfolio includes investments in non-U.S. financial instruments and holdings in non-U.S. financial institutions. In addition to the risks described elsewhere in these risk factors, our international operations subject us to a variety of risks, including:
•difficulties in delivering support, training and documentation; enforcing contracts; collecting accounts receivable; transferring funds; maintaining appropriate controls relating to revenue recognition practices; and longer payment cycles in certain countries and especially in emerging markets;
•network security and privacy concerns, which could make foreign customers reluctant to purchase products and services from U.S.-based technology companies;
•tariffs and trade barriers, and other regulatory or contractual limitations on our ability to sell or develop our products and services in certain foreign markets, such as in China, whose government has adopted a range of laws and regulations relating to the procurement of key network equipment and security products and the storage and processing of data that might cause our business in China to suffer and expose us to civil and criminal penalties;
•localized impacts of the COVID-19 pandemic that persist or flare up in particular regions, such as in India where several of our global support services as well as research and development personnel are located, have in the past and in the future could cause delays or disruptions in certain of our business operations and product development;
•regional impacts of climate change which increase the risk of extreme weather events, wildfire and drought that can impact local infrastructure such as the reliability of local electrical grids and telecommunications;
•economic or political instability, military actions or armed conflict, such as the Russian invasion of Ukraine, both of which are locations where we have employees, partners and customers, and uncertainty about or changes in government and trade relationships, policies, and treaties that could adversely affect the ability of U.S.-based companies to conduct business in non-U.S. markets, such as in the U.K. where considerable regulatory uncertainty remains regarding compliance post-Brexit; and
•legal risks, particularly in emerging markets, relating to compliance with U.S. exchange control requirements and international and U.S. anti-corruption laws and associated exposure to significant fines, penalties and reputational harm.
Our failure to manage any of these risks successfully could negatively affect our reputation and materially adversely affect our operating results.
Russia’s military actions in Ukraine have affected and may continue to affect our business.
In response to Russian military actions in Ukraine, we have suspended business operations in Russia and Belarus, including suspension of sales, support on existing contracts and professional services in both countries. Furthermore, the sanctions imposed by the U.S. and other countries in connection with the Russian invasion of Ukraine include restrictions on selling or importing goods, services or technology in or from affected regions and travel bans and asset freezes impacting connected individuals and political, military, business and financial organizations in Russia. Sanctions imposed on Russia and our suspension of business operations could impact the fulfillment of existing orders, future revenue streams from impacted customers and the recoverability of certain financial assets. It is not possible to predict the broader consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on the global economy.
Our success depends on the interoperability of our products and services with those of other companies.
The success of our products depends upon the cooperation of hardware and software vendors to ensure interoperability with our products and offer compatible products and services to end users. In addition, we extend the functionality of various products to work with native public cloud applications, which in some cases requires the cooperation of public cloud vendors. To the extent that hardware, software and public cloud vendors perceive that their products and services compete with ours, they may have an incentive to withhold their cooperation, decline to share access or sell to us their proprietary APIs, protocols or formats, or engage in practices to actively limit the functionality, compatibility and certification of our products. In addition, vendors may fail to certify or support or continue to certify or support our products for their systems. If any of the foregoing occurs, our product development efforts may be delayed or foreclosed and it may be difficult and more costly for us to achieve functionality and service levels that would make our services attractive to end users, any of which could negatively impact our business and operating results.
Failure to effectively manage our product and service lifecycles could harm our business.
As part of the natural lifecycle of our products and services, we periodically inform customers that products or services will be reaching their end of life or end of availability and will no longer be supported or receive updates and security patches. To the extent these products or services remain subject to a service contract with the customer, we offer to transition the customer to alternative products or services. Failure to effectively manage our product and service lifecycles could lead to customer dissatisfaction and contractual liabilities, which could adversely affect our business and operating results.
Financial Risks
Our operating results may fluctuate significantly.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and our past results should not be relied upon as an indication of our future performance. In addition, a significant portion of our quarterly sales typically occurs during the last two weeks of the quarter, which generally reflects customer buying patterns for enterprise technology. As a result, our quarterly operating results are difficult to predict even in the near term. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our Class A common stock would likely decline substantially.
Factors that may cause fluctuations in our operating results include, among others, the factors described elsewhere in this risk factors section and the following:
•fluctuations in demand, adoption and renewal rates, sales cycles and pricing levels for our products and services;
•variations in customer choices among our on-premises and subscription and SaaS offerings, which can impact our rates of total revenue and license revenue growth;
•the timing of announcements or releases of new or upgraded products and services by us, our partners or competitors;
•the timing of sales orders processing, which can cause fluctuations in our backlog and impact our bookings and timing of revenue recognition;
•our ability to maintain scalable internal systems for reporting, order processing, license fulfillment, product delivery, purchasing, billing and general accounting, among other functions;
•our ability to control costs, including our operating expenses, and the timing and amount of internal use software development costs that may be capitalized;
•the credit risks associated with our distributors, who account for a significant portion of our product revenue and accounts receivable, and our customers;
•the timing and size of realignment plans and restructuring charges;
•seasonal factors such as end of fiscal period expenditures by our customers and the timing of holiday and vacation periods;
•unplanned events that could affect market perception of the quality or cost-effectiveness of our products and solutions; and
•fluctuations in the severity and duration of the COVID-19 pandemic and resulting restrictions on business activity which may vary significantly by region.
Adverse economic conditions may harm our business.
Our business success depends in part on worldwide economic conditions. The overall demand for and spend on IT may be viewed by our current and prospective customers as discretionary and, in times of economic uncertainty, customers may delay, decrease, reduce the value and duration, or cancel purchases and upgrades of our products and services. Weak economic conditions or significant uncertainty regarding the stability of financial markets related to stock market volatility, inflation, recession, changes in tariffs, trade agreements or governmental fiscal, monetary and tax policies, among others, could adversely impact our business, financial condition and operating results. General and ongoing tightening in the credit market, lower levels of liquidity, increases in rates of default and bankruptcy and significant volatility in equity and fixed-income markets could all negatively impact our customers’ purchasing decisions. Increases in interest rates on credit and debt that would increase the cost of our borrowing could impact our ability to access the capital markets and adversely affect our ability to repay or refinance our outstanding indebtedness, fund future product development and acquisitions or conduct stock buybacks.
For example, the COVID-19 pandemic has depressed economic activity worldwide, and the timing and strength of an economic recovery is highly uncertain and likely to vary significantly by region. While the COVID-19 pandemic, including the dangers posed by COVID-19 variants, has not had a material adverse financial impact on our operations to date, we have observed negative impacts on our sales and our financial results from, and there continues to be significant uncertainty regarding, the economic effects of the COVID-19 pandemic. For example, during much of fiscal 2021, we saw delays in customers’ large transformative on-premises projects that we believe were largely due to COVID-19, which negatively impacted our product sales. Accordingly, should the pandemic continue to persist for an extended period of time, economic conditions globally or in particular regions may fail to recover or even worsen, which could cause material adverse impacts to our earnings and other results of operations. More recently, inflation rates in the U.S. have increased to levels not seen in
several years, which may result in decreased demand for our products and services, increases in our operating costs, constrained credit and liquidity, reduced government spending and volatility in financial markets.
Additionally, trade tensions between the U.S. and its trading partners, like China, have caused and may continue to cause significant volatility in global financial markets. Amidst sustained economic uncertainty, many national and local governments that are current or prospective customers, including the U.S. federal government, may need to make significant changes in their spending priorities, which could reduce the amount of government spending on IT and the potential demand for our products and services from the government sector.
These adverse economic conditions can arise suddenly, have unpredictable impacts and materially adversely affect our future sales and operating results. Further, volatility due to these types of adverse economic conditions in financial and other capital markets, has and may continue to adversely impact our stock price and may in the future impact our ability to access the equity or debt capital markets on attractive terms or at all for a period of time, which could have an adverse effect on our liquidity position.
We have substantial indebtedness, and we may incur other debt in the future, which may adversely affect our financial condition and future financial results.
As of January 28, 2022, we had an aggregate of $12.7 billion of outstanding indebtedness. Additionally, we have entered into a $1.5 billion unsecured revolving credit facility, which is undrawn.
The terms of our indebtedness and revolving credit facility impose restrictions on us, including in specified and customary covenants, our compliance with which may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If we fail to satisfy any of the terms or breach any of the covenants and do not obtain a waiver from the lenders or note holders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable or, with respect to the unsecured notes, we may be required to repurchase our unsecured notes at a price equal to 101% of the aggregate principal plus any accrued and unpaid interest.
We intend to reduce our indebtedness during the next fiscal years. While we believe our remaining cash balances and cash generated by our business operations will be sufficient to fund our operations and pursue our existing stock repurchase program and strategic plans, if our business operations do not generate the cash flows we expect, then our ability to fund future stock repurchases, invest in our business and pursue strategic alternatives, including business acquisitions, will be reduced, which could reduce our ability to manage dilution of our stock and limit our future growth. If in the future we are unable to generate sufficient operating cash flows to service our debt, we may be required to, among other things, seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets or reduce or delay planned expenditures. Even so, such measures may not be sufficient to enable us to service our debt.
Our current and any future debt may adversely affect our financial condition and future financial results by, among other things, increasing our vulnerability to adverse changes in general economic and industry conditions, necessitating use or dedication of our expected cash flow from operations to service our indebtedness instead of for other purposes, such as capital expenditures and acquisitions, impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes, and limiting our flexibility in planning for, or reacting to, business changes.
In addition, any actual or anticipated changes to our credit ratings, including any announcement that our credit ratings are under review by any rating agency, may:
•negatively impact the value and liquidity of our debt and equity securities;
•result in an increase in the interest rate payable by us and the cost of borrowing under our revolving credit facility and senior unsecured term loan facility;
•negatively affect the terms of and restrict our ability to obtain financing in the future; and
•upon the occurrence of certain downgrades of the ratings of our unsecured notes, require us to repurchase our unsecured notes at a price equal to 101% of the aggregate principal plus any accrued and unpaid interest.
Refer to “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K for more information on our outstanding indebtedness.
We have potential tax liabilities as a result of our former controlling ownership by Dell, which could have an adverse effect on our operating results and financial condition.
Membership in a consolidated tax group. We were included in EMC’s consolidated group for U.S. federal income tax purposes, as well as in certain consolidated, combined or unitary groups that include EMC or certain of its subsidiaries for state and local income tax purposes, from the time of our acquisition by EMC in 2004 through the acquisition of EMC by Dell effective September 7, 2016 (the “Dell Acquisition”), when we became included in Dell’s consolidated tax group. 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. Similarly, in some jurisdictions, each member of a consolidated, combined or unitary group for state, local or foreign income tax purposes is jointly and severally liable for the state, local or foreign income tax liability of each other member of such group. Accordingly, for any period in which we were included in the Dell consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of Dell and its subsidiaries, we could be liable in the event that any income tax liability was incurred, but not discharged, by any other member of any such group. Additionally, the impact of the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) upon consolidated groups is highly complex and uncertain and its impact must be further interpreted in the context of various tax-related agreements we have agreed to with EMC and Dell (the “Tax Agreements”) to determine VMware’s related payment. As a result of the Spin-Off, we are no longer a member of Dell’s consolidated tax group, however, we are still subject to potential tax liabilities for the periods prior to the Spin-Off.
Tax Agreements. We have agreed to Tax Agreements that govern, among other things, our potential liabilities for other members of the consolidated tax groups of which we are considered members. Pursuant to the Tax Agreements, we and Dell generally will make payments to each other such that, with respect to tax returns for any taxable period in which we or any of our subsidiaries are included in Dell’s consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of Dell or its subsidiaries, the amount of taxes to be paid by us will be determined, subject to certain consolidated return adjustments, as if we and each of our subsidiaries included in such consolidated, combined or unitary group filed our own consolidated, combined or unitary tax return. Although the Tax Agreements provide that our tax liability is calculated primarily as though VMware were a separate taxpayer, certain tax attributes and transactions are assessed using consolidated tax return rules as applied to the Dell consolidated tax group and are subject to other specialized terms under the Tax Agreements. In April 2019, we expanded the Tax Agreements by entering into a letter agreement with Dell and EMC that governs our portion of the one-time transition tax imposed by the 2017 Tax Act on accumulated earnings of foreign subsidiaries. Additionally, in December 2019, we amended the Tax Agreements to, subject to certain exceptions, generally limit VMware’s maximum annual tax liability to Dell to the amount VMware would owe on a separate tax return basis. Concurrent with the signing of the Separation and Distribution Agreement in April 2021, we and Dell entered into a new tax matters agreement and terminated a preceding tax sharing agreement. A substantial lack of alignment or disagreement between us and Dell regarding the applicability or interpretation of the Tax Agreements, or any unanticipated material tax liability arising pursuant to the Tax Agreements, could adversely impact our financial condition and operating results.
Pivotal. Prior to the Spin-Off, Pivotal filed a separate tax return for U.S. federal income tax purposes as it left the Dell consolidated tax group at the time of Pivotal’s initial public offering in April 2018. Pivotal continued to be included on Dell’s unitary state tax returns until the Spin-Off. Pursuant to a tax agreement between Pivotal and Dell, Pivotal may receive or owe payments from or to Dell for tax benefits or expenses that Dell realized due to Pivotal’s inclusion on such returns.
Tracking Stock. Pursuant to the Tax Agreements, if it is subsequently determined that the tracking stock issued in connection with the Dell Acquisition and which Dell subsequently eliminated through a share exchange constitutes a taxable distribution, we could be liable for all or a portion of the tax liability, which could have a material adverse effect on our operating results and financial condition.
Spin-Off. If the Spin-Off is later determined to not be tax-free for any reason, we could be liable for all or a portion of the tax liability. Additionally, under the Tax Agreements, we are prohibited from taking or failing to take any action that prevents the Spin-Off from being tax-free for U.S. federal income tax purposes. We would be responsible for any taxes imposed on Dell or any of its affiliates as a result of the failure of the Spin-Off to qualify for favorable treatment under the Code if such failure is attributable to certain actions taken after the Spin-Off by or in respect of us, which could have a material adverse effect on our operating results and financial condition. Further, during the two-year period following the Spin-Off, without obtaining the consent of Dell, a private letter ruling from the IRS or an unqualified opinion of a nationally recognized law firm, we may be prohibited from taking certain specified actions that could impact the treatment of the Spin-Off, such as significant equity transactions that shift more than a significant portion of the value or total combined voting power of all outstanding shares of our stock. These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. These obligations may also discourage, delay or prevent a change of control of our company.
Our operating results may be adversely impacted by exposure to additional tax liabilities and higher than expected tax rates.
We are subject to income taxes as well as non-income-based taxes, such as payroll, sales and property taxes, in many of the jurisdictions in which we operate. Our tax liabilities are dependent on the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. Significant judgment is required to determine our worldwide provision for income taxes and other tax liabilities. For example, in the ordinary course of our global business, we execute
intercompany transactions, including intellectual property transfers, that require us to make tax estimates because the ultimate tax determination is uncertain.
We are subject to income and indirect tax examinations and are undergoing audits in various jurisdictions. For instance, the Internal Revenue Service (“IRS”) has started its examination of fiscal years 2015 through 2019 for the Dell consolidated group, of which VMware was a member beginning in Dell’s fiscal year 2017. As a result of the Spin-Off, VMware is no longer a member of the Dell consolidated group. However, we are still subject to examination by the IRS for the periods in which we were a member of the Dell consolidated group. While we believe we have complied with all applicable income tax laws and made reasonable tax estimates, a governing tax authority could have a different legal interpretation and a final determination of tax audits or disputes may differ from what is reflected in our historical income tax provisions or benefits and accruals and we may be assessed with additional taxes. Further, the Tax Agreements between us and Dell provide that, when we become subject to federal income tax audits as a member of Dell’s consolidated group, Dell has authority to control the audit and represent Dell and our interests to the IRS. Accordingly, if we and Dell differ on appropriate responses and positions to take with respect to tax questions that may arise in the course of an audit, our ability to affect the outcome of such audits may be impaired.
In addition, regulatory guidance is still forthcoming with respect to the 2017 Tax Act and such guidance may adversely impact our tax provision. Any assessment of additional taxes could materially affect our financial condition and operating results. Further, beginning in fiscal 2023, the 2017 Tax Act eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for domestic expenses and fifteen years for certain foreign expenses. Although the U.S. Congress is considering various legislative options that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If these provisions are not deferred, modified, or repealed by Congress with retroactive effect to January 1, 2022, they will materially decrease our cash from operations beginning in fiscal 2023. We currently estimate an impact on fiscal 2023 cash from operations based on the provisions currently in effect possibly in excess of $500 million. The actual impact on fiscal 2023 cash from operations will depend on if and when these provisions are deferred, modified, or repealed by Congress, including if retroactively, and the amount of research and development expenses paid or incurred in fiscal 2023, among other factors.
Our future effective tax rate may also be affected by such factors as:
•the expiration of legal statutes of limitation and settlements of audits;
•the impact of accounting for stock-based compensation and for business combinations;
•the recognition of excess tax benefits or deficiencies within the income tax provision or benefit in the period in which they occur;
•the overall levels and proportion of our income before provision for income taxes earned in the U.S. and in jurisdictions with a tax rate lower than the U.S. statutory rate; and
•other developments related to tax laws or their interpretations, in our business or statutory rates, and in our corporate structure.
For example, numerous other countries have also recently enacted or are considering enacting changes to tax laws, administrative interpretations, decisions, policies and positions. In addition, the Organization for Economic, Co-operation and Development (“OECD”), an international association of countries, including the U.S., has made changes and is contemplating additional changes to numerous long-standing tax principles.
These and any other significant developments related to U.S. or international tax laws could materially adversely affect our effective tax rate, the timing and amount of our tax liabilities and payments, our financial condition and operating results.
Security Risks
Cybersecurity breaches of our systems or the systems of our vendors, partners and suppliers could materially harm our business.
Cyber risks represent a large and growing risk to our business, as we depend upon our IT systems, internally developed and proprietary software and services, as well as the software and systems of SaaS providers, to conduct virtually all of our business operations. Some of the factors that contribute to significant cyber risks include:
•We increasingly develop and maintain large data sets and rely on machine learning, artificial intelligence and analytics to provide services to our customers and partners.
•Customers conduct purchase and service transactions online, and we store increasing amounts of customer data and host or manage parts of customers’ businesses in cloud-based IT environments.
•We rely on third parties and their systems for a number of our business functions and to sell our products and services as distributors, resellers, system vendors and systems integrators.
•Hardware, software and applications that we produce or procure from third parties can contain defects or vulnerabilities, such as the Log4J vulnerability reported in December 2021, that have in the past and could in the future interfere with our systems and processes and introduce defects and vulnerabilities into our products and services.
•Our leadership position in the enterprise security industry makes us, our employees and contractors and our products a target of hackers or other threat actors seeking to compromise product security.
•Our large and globally distributed workforce may increase our exposure to internal threats and cyber-attacks.
•Our products, to function as intended, often require heightened permissions within customer environments, and also serve as underlying technology infrastructure for customers’ other systems, making our products more attractive targets for threat actors.
•We are considered an essential supplier in the digital supply chain for the United States government and others, including entities operating critical infrastructure, which makes us and our products a target for those seeking to threaten the confidentiality, availability and integrity of critical infrastructure globally.
Cyber-attacks, which are increasing in number and technical sophistication, threaten to misappropriate our proprietary information, cause interruptions of our IT services, introduce vulnerabilities or malicious files into our IT systems and our products and services, extract financial gain and commit fraud. Hackers and other threat actors often target company employees and contractors in an effort to compromise our IT systems and products using techniques such as email phishing and social engineering, which risk is heightened due to greater numbers of employees and contractors working remotely as a result of the “work from anywhere” movement. We may not be able to anticipate the techniques used in such attacks, as they change frequently and may not be recognized until launched or at all. If unauthorized access or sabotage remains undetected for an extended period of time, or if the source of an incident cannot be determined for an extended period of time, the effects of any such breach, incident or exploit could be exacerbated.
Unauthorized parties (which may have included nation states and individuals sponsored by them, as well as internal actors exceeding access permissions and policies) have penetrated our network security and our website in the past and may do so in the future. We are increasingly targeted for financial gain and fraud by criminal persons and groups that seek to extort or steal funds from companies and employees. Significant and increasing investments of time, resources and management and Board attention have been, and will continue to be, required to anticipate and address cyber-related risks, incidents and challenges. Accordingly, if our cybersecurity systems and those of our contractors, partners and vendors fail to protect against breaches, internal threats or other incidents, our ability to conduct our business could be damaged in a number of ways, including:
•sensitive data regarding our business, including intellectual property and other proprietary data, could be stolen;
•our IT systems could be disrupted, and our ability to conduct our business operations could be seriously damaged untilthey are restored and secured;
•our supply chain may become compromised, resulting in impact to confidentiality, availability and integrity of our internal or customer-facing systems;
•our ability to process and electronically deliver customer orders could be degraded, and our distribution channels could be disrupted, resulting in delays in revenue recognition; and
•personally identifiable information or confidential data of our customers, employees and business partners could be stolen or lost.
Should any of the above events occur, or are perceived to have occurred, we could be subject to significant claims for liability from our customers, partners, vendors, or employees (among others); we could face regulatory actions and sanctions from governmental agencies under privacy, data protection, cybersecurity or other laws; our ability to protect our intellectual property rights could be compromised; our ability to attract and retain customers could be negatively impacted; our reputation and competitive position could be materially harmed; we could face material losses as the result of successful financial cyber-fraud schemes; and we could incur significant costs in order to upgrade our cybersecurity systems, remediate damages and defend the Company in any legal, regulatory or legislative proceedings. Consequently, our business, financial condition and operating results could be materially adversely affected.
Our products and services are highly technical and may contain, or be subject to our own or suppliers’, errors, defects or security vulnerabilities.
Our products and services are highly technical and complex and, when deployed, contain errors, defects or security vulnerabilities, some of which may not be discovered before or after a product or service has been released, installed and used
by customers. The complexity of our technical and production environment, which involves multiple product and engineering teams working on different product initiatives, increases the risk that vulnerabilities or defects are introduced into our products and services and may delay our ability to detect or mitigate such vulnerabilities. The need to coordinate with multiple parties in the supply chain when vulnerabilities are detected can also delay mitigation, thereby increasing risks to customers. Our internal logging, alerting, and cyber incident detection mechanisms may not cover every system potentially targeted by threat actors, may not have the capability to detect certain types of incidents and may not capture and surface information sufficient to enable us to detect and take responsive action. In addition, employees or contractors have introduced vulnerabilities in, and enabled the exploitation of, our IT environments, our software products (and correspondingly our customers’ environments), and our subscription and SaaS offerings in the past and may do so in the future.
Security vulnerabilities in our IT environments, software products or customer environments, installation errors or misuse can also lead to increased cybersecurity risks for customers and partners, including unintended access to or exploitation of our products, which risks are exacerbated if customers fail to implement security recommendations and software updates that we and other IT vendors issue from time to time when significant issues have been identified. Undiscovered or unresolved vulnerabilities in our products or services could expose our customers to hackers, threat actors or other unscrupulous third parties who develop and deploy viruses, worms and other malicious software programs that could attack customers using our products or services. Further, our use of open-source software in our offerings can make our products and services vulnerable to additional security risks not posed by proprietary products.
In the past, VMware has been made aware of public postings by hackers of portions of our source code. It is possible that the released source code could expose unknown security vulnerabilities in our products and services that could be exploited by hackers or others. In addition, public exposure, or exploitation of vulnerabilities in our products by threat actors, could result in reputational damage and lost customers and could negatively affect our operating results and those of our customers.
VMware products and services are also subject to known and unknown security vulnerabilities resulting from integration with products or services of other companies (such as applications, operating systems or semiconductors).
Actual or perceived errors, defects or security vulnerabilities in our products or services could harm our reputation, result in litigation or regulatory actions or lead some customers to return products or services or cancel subscriptions, reduce or delay future purchases or use competitive products or services, any of which could materially negatively impact our business, operating results and stock price.
Problems with our information systems could interfere with our business and could adversely impact our operations.
We rely on our information systems and those of third parties for fulfilling contractual obligations, including processing customer orders, delivering products and providing services, performing accounting operations, supporting our employees, managing employee data and otherwise running our business. If our systems fail, our disaster and data recovery planning and capacity may prove insufficient to enable timely recovery of important functions and business records. Additionally, our information systems may not efficiently support new business models and initiatives, and significant investments could be required in order to upgrade existing or implement new systems. Business requirements may require additional capabilities including implementation of a new information system. In particular, our systems and operations were built to support a perpetual software licensing model, and significant enhancements are required to support our transition to subscription and SaaS products and services. Further, we continuously work to enhance our information systems, such as our enterprise resource planning software, and the implementation of such enhancements is frequently disruptive to the underlying enterprise, which may especially be the case for us due to the size and complexity of our business, and may disrupt internal controls and business processes that could introduce unintended vulnerability to error. Any such disruption to our information systems and those of the third parties upon whom we rely could have a material impact on our business.
Legal and Compliance Risks
We are involved in litigation, investigations and regulatory inquiries and proceedings that could negatively affect us.
As described in Note E (Litigation) to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, we are, and may become, involved in various legal and regulatory proceedings, and investigations relating to our business, including with respect to antitrust and competition, breach of contract, class action, commercial, corporate governance, cybersecurity, employment, intellectual property, privacy, securities, and whistleblower matters. Matters such as these may impact our business in different ways. Intellectual property infringement claims, for example, may seek injunctive relief or other court orders that could prevent us from offering our products. As a result, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all, or we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Because we generally indemnify our customers and partners from intellectual property infringement claims in connection with the use of our products, we may be called on to defend these customers and partners in litigation. From time to time, we also receive inquiries from and have discussions with government entities regarding our compliance with laws and
regulations. Such litigation, investigations, regulatory inquiries, and proceedings can be unpredictable and time-consuming, divert management’s attention and resources, and cause us to incur significant expenses. Allegations made in connection with these matters may harm our reputation, regardless of their merit and could have a material adverse impact on our business, financial condition, cash flows or results of operations if decided adversely to or settled by us.
We may not be able to adequately protect our intellectual property rights.
We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. As such, despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the U.S. In addition, we rely on confidentiality and license agreements with third parties in connection with their use of our products and technology. There is no guarantee that such parties will abide by the terms of such agreements or that we will be able to adequately enforce our rights, in part because we rely on “click-wrap” and “shrink-wrap” licenses in some instances.
Detecting and protecting against the unauthorized use of our products, technology proprietary rights and intellectual property rights is expensive, difficult, uncertain and, in some cases, impossible. Litigation is necessary from time to time to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property, which could result in a substantial loss of our market share.
Actual or perceived non-compliance with privacy and data protection laws, regulations and standards could adversely impact our business.
Our business is subject to laws and regulations by various federal, state and international legislative and governmental agencies responsible for legislating, monitoring and enforcing privacy and data protection laws (“Data Privacy Laws”). The regulatory framework regarding the collection, protection, use, transfer and disclosure of personal information is rapidly evolving, and Data Privacy Laws are subject to new and changing interpretations and amendments, creating uncertainty and additional legal obligations for ourselves, our partners, vendors and customers. We expect that there will continue to be newly proposed or changes to interpretations of existing Data Privacy Laws and industry standards, including self-regulatory standards advocated by industry groups, in various jurisdictions globally, and we may not be able to appropriately anticipate or timely respond to the impacts such and similar developments may have on our business or the businesses of our partners, vendors and customers.
We continue to regularly enhance our policies and controls across our business relating to how we and our business partners collect, protect and use customer and employee personal information. Ongoing changes to the regulatory landscape will likely increase the cost and complexity of our business relationships, internal operations and the delivery of our products and services. In addition, this may affect our ability to run promotions and effectively market our offerings and could subsequently impact the demand for our products and services.
Any actual or perceived failure by us or our business partners to comply with Data Privacy Laws, the privacy commitments contained in our contracts, or the privacy notices we have posted on our website could subject us to investigations, sanctions, enforcement actions, negative financial consequences, civil and criminal liability or injunctions. For example, failure to comply with the EU’s General Data Protection Regulation requirements may lead to fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. Additionally, as a technology provider, our customers expect us to demonstrate compliance with current Data Privacy Laws and further make contractual commitments and implement processes to enable the customer to comply with their own obligations under Data Protection Laws, and our actual or perceived inability to do so may adversely impact sales of our products and services, particularly to customers in highly regulated industries. As a result, our reputation and brand may be harmed, we could incur significant costs, and our financial and operating results could be materially adversely affected.
Our use of “open source” software in our products could negatively affect our ability to sell our products and subject us to litigation.
Many of our products and services incorporate so-called “open source” software, and we may incorporate open source software into other products and services in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. Open source licensors generally do not provide warranties or assurance of title or controls on origin of the software, which exposes us to potential liability if the software fails to work or infringes the intellectual property of a third party.
We monitor our use of open source software in an effort to avoid subjecting our products to conditions we do not intend and avoid exposing us to unacceptable financial risk. However, the processes we follow to monitor our use of open source
software could fail to achieve their intended result. In addition, although we believe that we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of terms in most of these licenses, which increases the risk that a court could interpret the licenses differently than we do.
From time to time, we receive inquiries or claims from authors or distributors of open source software included in our products regarding our compliance with the conditions of one or more open source licenses. An adverse outcome to a claim could require us to:
•pay significant damages;
•stop distributing our products that contain the open source software;
•revise or modify our product code to remove alleged infringing code;
•release the source code of our proprietary software; or
•take other steps to avoid or remedy an alleged infringement.
We have faced and successfully defended against allegations of copyright infringement and failing to comply with the terms of an open source license, but we can provide no assurances that we will not face similar lawsuits with respect to our use of open source software in the future, nor what the outcome of any such lawsuits may be.
If we fail to comply with government contracting regulations, our business could be adversely affected.
Our contracts with federal, state, local and non-U.S. governmental customers and our arrangements with distributors and resellers who may sell directly to governmental customers are subject to various procurement regulations, contract provisions and other requirements relating to their formation, administration and performance. Any failure by us to comply with government contracting regulations (such as cybersecurity- and COVID-19-related requirements) could result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension from future government contracting, any of which could adversely affect our business, operating results or financial condition. Further, any negative publicity related to our government contracts or any proceedings surrounding them, regardless of accuracy, may damage our business and affect our ability to compete for new contracts.
Some of our directors have potential conflicts of interest with Dell.
The Chairman of our Board of Directors, Michael Dell, is also Chairman and CEO of Dell and is a significant stockholder of Dell, and one of our directors, Egon Durban, serves on the Dell board of directors and as managing partner of Silver Lake Partners, a significant stockholder of Dell. Ownership of Dell common stock by our directors and the presence of executive officers or directors of Dell on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and Dell that could have different implications for Dell than they do for us. Our Board has approved resolutions that address corporate opportunities that are presented to Messrs. Dell and Durban. These provisions may not adequately address potential conflicts of interest or ensure that potential conflicts of interest will be resolved in our favor. As a result, we may not be able to take advantage of corporate opportunities presented to individuals who are directors of both us and Dell and we may be precluded from pursuing certain growth initiatives.
Risks Related to Owning Our Class A Common Stock
The MSD Stockholders and the SLP Stockholders have significant influence over us, and their interests may conflict with our interests and the interests of our other stockholders.
As a result of the Spin-Off, the MSD Stockholders and SLP Stockholders became direct beneficial holders of VMware with interests representing 40.2% and 10.0%, respectively, of our outstanding stock, based on the number of shares outstanding as of March 15, 2022. As a result, the MSD Stockholders and the SLP Stockholders have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets. The interests of the MSD Stockholders or the SLP Stockholders could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of voting power held by the MSD Stockholders and SLP Stockholders could delay, defer or prevent a change of control of us or impede a merger, takeover or other business combination which we or others of our stockholders may view favorably. Effective upon the consummation of the Spin-Off, we entered into a stockholders agreement pursuant to which the MSD Stockholders have the right to nominate up to two members of our Board and the SLP Stockholders have the right to nominate one member of our Board, subject to maintaining certain ownership thresholds. Michael Dell, the Chairman of our Board, is the first MSD Stockholders nominee; the MSD Stockholders have the right to nominate a second member of the Board. Egon Durban is the SLP Stockholders’ nominee. This concentrated control may negatively impact other stockholders’ ability to influence corporate matters and may also adversely affect our stock price. The MSD Stockholders and SLP Stockholders collectively beneficially own 62.9% of
Dell’s outstanding stock as of March 15, 2022. Accordingly, their interests may not be aligned with other VMware stockholders with respect to actions involving or impacting Dell.
The price of our ClassA common stock has fluctuated significantly in recent years and may fluctuate significantly in the future.
The trading price of our Class A common stock has fluctuated significantly in the past and could fluctuate substantially in the future, due toand stockholders’ investments in our stock could lose some or all of their value. The stock market in general and technology companies in particular have often experienced extreme price and volume fluctuations. Neither the factors discussed in this Risk Factors section and elsewhere in this report. The elimination ofMSD Stockholders nor the trading market for Class V common stock upon completion of the Dell Share Exchange could increase the volatility in the price of our Class A common stock due to our relatively small public float.
Dell, which beneficially owned 80.5% of our outstanding stock as of February 1, 2019, is notSLP Stockholders are restricted from selling itstheir respective shares, and each is entitled to certain registration rights. If a significant number of these shares enters the public trading markets in a short period of time, the market price of our Class A common stock may decline. In addition, if our Class B common stock is distributed to Dell stockholders and remains outstanding, it would trade separately from and potentially at a premium to our Class A common stock, and could thereby contribute additional volatility to the price of our Class A common stock.
Broad market and industry factors may also decrease the market price of our Class A common stock, regardless of our actual operating performance. The stock market in generalAdditionally, fluctuations and technology companies in particular have often experienced extreme price and volume fluctuations. Our public float is also relatively small due to Dell’s holdings, which can result in greater volatilitydeclines in our stock comparedprice have been, and in the future may be, due to, among other reasons, the factors discussed in this Risk Factors section and elsewhere in this report, as well as:
•our ability to meet or exceed the forward-looking guidance we have given, to give forward-looking guidance consistent with past practice and any changes to or withdrawal of previous guidance or long-range targets;
•trading activity by directors, executive officers, significant stockholders or a limited number of stockholders who together beneficially own a significant portion of our outstanding common stock, or the market’s perception that such holders intend to sell;
•the inclusion or exclusion of other companies with a market capitalization similar to ours. our stock from any trading indices, such as the S&P 500 Index;
•speculation in the press and on social media; and
•changes in recommendations regarding our stock or more favorable relative recommendations about our competitors by the industry or securities analysts who cover and publish about us, our business, our competitors, or the markets in which we compete.
In addition, to direct value lost, volatility or declines in our stock price may adversely affect our ability to retain key employees, most of whom are compensated, in part, based on the performance of our stock price. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted, including against us, and, if not resolved swiftly, can result in substantial costs and a diversion of management’s attention and resources.
If securities or industry analysts change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our Class A common stock is influenced by the research and reports that industry or securities analysts publish about us, our business, our market or our competitors. If any of the analysts who cover us change their
recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline.
Anti-takeover provisions in Delaware law and our charter documents could discourage takeover attempts.
As our controlling stockholder, Dell has the ability to prevent a change in control of VMware. ProvisionsCertain provisions in our certificate of incorporation and bylaws may also have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
•the division of our board of directors into three classes, with each class serving for a staggered three-year term, which prevents stockholders from electing an entirely new board of directors at any annual meeting;
•that any director may only be removed for cause and only by the affirmative vote of holders of at least a majority of the votes entitled to be cast to elect any such director;
•the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;
following a 355 Distribution of Class B common stock by Dell to its stockholders, the restriction that a beneficial owner of 10% or more of our Class B common stock may not vote in any election of directors unless such person or group also owns at least an equivalent percentage of Class A common stock or obtains approval of our board of directors prior to acquiring beneficial ownership of at least 5% of Class B common stock;
•the prohibition of cumulative voting in the election of directors or any other matters, which would otherwise allow less than a majority of stockholders to elect director candidates;
•the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;
•the ability of the board of directors to issue, without stockholder approval, up to 100,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock; and
in the event that Dell or its successor-in-interest no longer owns shares of our common stock representing at least a majority of the votes entitled to be cast in the election of directors, •stockholders may not act by written consent and may not call special meetings of the stockholders.
In addition, we have elected to apply the provisions of Section 203 of the Delaware General Corporation Law. These provisionsLaw may prohibitdiscourage, delay or prevent a change in control of our company and could reduce the price that investors may be willing to pay for shares of our common stock. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and large stockholders, in particular those owning 15% or more of our outstanding voting stock, from mergingstock.
Our bylaws provide for an exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or combiningour directors, officers or employees.
Our bylaws include a provision providing that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
•any derivative action or proceeding brought on our behalf;
•any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors, officers, employees or stockholders to us or to our stockholders;
•any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware; or
•any action asserting a claim governed by the internal affairs doctrine.
This provision would not apply to suits brought to enforce any duty or liability created by the Securities Exchange Act of 1934 (the “Exchange Act”). Furthermore, Section 22 of the Securities Act of 1933 (the “Securities Act”) creates concurrent jurisdiction for federal and state courts over all such Securities Act actions.
While the Delaware courts have determined that exclusive forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than the one we have designated. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provision of our bylaws, which may require significant expenditures of resources, and, ultimately, there can be no assurance that the provisions would be enforced by a court in those other jurisdictions. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us. These provisionsus or our directors, officers, or other employees and may discourage these types of lawsuits. If a court were to find the exclusive forum provision contained in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors mightto be willinginapplicable or unenforceable in an action, we may incur additional costs to pay for sharesresolve such action in other jurisdictions.
General Risks
We are exposed to foreign exchange risks.
We conduct a meaningful portion of our common stock.business in currencies other than the U.S. dollar, but report our operating results in U.S. dollars. Accordingly, our operating results are subject to fluctuations in currency exchange rates. The realized gain or loss on foreign currency transactions is dependent upon the types of foreign currency transactions into which we enter, the exchange rates associated with these transactions and changes in those rates, the net realized gain or loss on our foreign currency forward contracts, among other factors. Although we hedge a portion of our foreign currency exposure, significant fluctuations in exchange rates between the U.S. dollar and foreign currencies have adversely affected, and may adversely affect in the future, our operating results. For example, the economic uncertainty introduced by Brexit resulted in significant volatility in the value of the British pound and other currencies, and the COVID-19 pandemic may make it more difficult for us to accurately forecast future transactions in foreign currencies and cause us to have to modify hedging positions, thereby adversely impacting the efficacy of our foreign currency hedging strategy and our operating results. Any future weakening of foreign currency exchange rates against the U.S. dollar would likely result in additional adverse impacts on our revenue.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
We may not realize all the economic benefit from our business acquisitions, which could result in an impairment of goodwill or intangibles. As of January 28, 2022, goodwill and amortizable intangible assets were $9.6 billion and $714 million, respectively. We review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment at least annually. Factors that may lead to impairment include a substantial decline in stock price and market capitalization or cash flows, reduced future cash flow estimates related to the assets and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which would negatively impact our operating results.
Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. These principles are subject to interpretation by the Securities and Exchange Commission and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a material effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Natural disasters, catastrophic events or geo-political conditions could disrupt our business.
A significant natural disaster, such as an earthquake, fire, flood or other act of God, catastrophic event or pandemic, abrupt political change, terrorist activity and armed conflict, and any similar disruption, as well as any derivative disruption, such as those to services provided through localized physical infrastructure, including utility or telecommunication outages, or any to the continuity of our, our partners’ and our customers’ workforce, could have a material adverse impact on our business and operating results. Our worldwide operations are dependent on our network infrastructure, internal technology systems and website, as well as our intellectual property and personnel, significant portions of which, including our corporate headquarters, are located in California, a region known for seismic activity, fires and floods. Disruption to these dependencies may negatively impact our ability to respond to customer requests, process orders, provide services and maintain local and global business continuity. Delays or cancellations of customer orders or the deployment or availability of our products and services, for example, could materially impact our revenue. Furthermore, some of our newer product initiatives, offerings and business functions are hosted or carried out by third parties that may be vulnerable to these same types of disruptions, the response to or resolution of which may be beyond our control. Additionally, any such disruption could cause us to incur significant costs to repair damages to our facilities, equipment, infrastructure and business relationships.
Climate change may have a long-term negative impact on our business.
Risks related to rapid climate change, such as extreme weather conditions, sea-level rise, drought, flooding and wildfires, may have an increasingly adverse impact on our business and those of our customers, partners and vendors in the longer term. While we seek to mitigate the business risks associated with climate change for our operations, there are inherent climate-related risks wherever business is conducted. Access to clean water and reliable energy in the communities where we conduct our business, whether for our offices, data centers, vendors, customers or other stakeholders, is a priority. Any of our primary locations may be vulnerable to the adverse effects of climate change and the impacts of extreme weather events, which have caused regional short-term systemic failures in the U.S. and elsewhere. For example, our California headquarters are projected to be vulnerable to future water scarcity due to climate change, and unanticipated extreme cold weather has resulted in electrical grid outages in Texas where many of our U.S. employees are located. While this danger currently has a low-assessed risk of disrupting normal business operations in the near term, it has the potential to impact employees’ abilities to commute to work or to work from home and stay connected effectively. Climate-related events, including the increasing frequency of extreme weather events, their impact on critical infrastructure in the U.S. and internationally and their potential to increase political instability in regions where we, our customers, partners and our vendors do business, have the potential to disrupt our business, our third-party suppliers, or the business of our customers and partners, and may cause us to experience higher attrition and additional costs to maintain or resume operations. Climate change and environmental regulations may result in changes in the supply, demand or available sources of energy or other resources that could adversely impact the availability or cost of goods and services, including natural resources necessary to run our business. Additionally, changes in climate in the locations where we operate may increase the costs of powering and cooling the computer hardware we use to develop software and deliver our subscription and SaaS-based offerings as well as the costs of carbon offsets that we may procure from time to time as we pursue our carbon-neutral objectives.
Social and ethical issues, including our ability to make progress on our ESG goals and commitments, may result in reputational harm and liability.
In December 2020, we announced our 2030 Agenda, which represents our ESG strategy focused on sustainability, equity and trust. Our public commitments include promoting environmental sustainability and decarbonization; human capital development and diversity, equity and inclusion; and cybersecurity, privacy, digital ethics and transparent business practices. Each of these are areas of increasing scrutiny from the investment community, customers, employees, partners, suppliers and communities who expect us to report transparently on our progress. In order to meet expectations from our stakeholders, we are working to align our reporting with emerging disclosure and accounting standards such as the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (“TCFD”), the Sustainability Accounting Standards Board (“SASB”) and the Global Reporting Initiative as well as potential new disclosure requirements from regulators such as the SEC while we also seek to report timely on progress toward our 2030 Agenda objectives. In order to do so, we are working to develop internal operational, information and data assurance systems that will enable us to accurately report on these matters on a timely basis. If we fail to report accurately or on a timely basis or fail to anticipate reporting requirements and expectations in this emerging area, our reputation may be adversely affected, and we could be exposed to increased risk of litigation. Additionally, if we are perceived as failing to make or accurately report on our progress on our ESG goals or to follow through on our commitments, our brand and our reputation may be harmed, we may be exposed to increased risk of litigation, our ability to attract and retain employees may be damaged and our financial performance and stock price may be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
As of February 1, 2019,January 28, 2022, we owned or leased the facilities described below:
| | | | | | | | | | | | | | | | | |
| Location | | | Approximate
Sq. Ft. | | Principal Use(s) |
| Palo Alto, CA | owned: | | 1,604,769 | | (1) | Executive and administrative offices, sales and marketing and R&D |
| North and Latin American region | leased: | | 1,851,268 | | | Administrative offices, sales and marketing, R&D and data center |
| Asia Pacific region | leased: | | 2,370,984 | | | Administrative offices, sales and marketing, R&D and data center |
| Europe, Middle East and Africa region | leased: | | 838,623 | | | Administrative offices, sales and marketing, R&D and data center |
|
| | | | | | | |
Location | | | Approximate(1) Represents all of the right, title and interest purchased in ground leases, which expire in fiscal 2047, covering the property and improvements located at VMware’s Palo Alto, California campus.
Sq. Ft.
| | | Principal Use(s) |
Palo Alto, CA | owned: | | 1,604,769 |
| (1)
| | Executive and administrative offices, sales and marketing, and R&D |
North and Latin American region | leased: | | 1,238,212 |
| (2)
| | Administrative offices, sales and marketing, R&D and data center |
Asia Pacific region | leased: | | 1,339,174 |
| | | Administrative offices, sales and marketing, R&D and data center |
Europe, Middle East and Africa region | leased: | | 576,660 |
| | | Administrative offices, sales and marketing, R&D and data center |
| |
(1)
| Represents all of the right, title and interest purchased in ground leases, which expire in fiscal 2047, covering the property and improvements located at VMware’s Palo Alto, California campus. |
| |
(2)
| Includes leased space for a Washington data center facility, for which VMware is considered to be the owner for accounting purposes. |
We believe that our current facilities are suitable forwill support our current employee headcount and will sustain us through fiscal 2020, but we intend2023 while working in a distributed manner that empowers our people to add new facilities or expand existing facilities as needed as we add employeeswork from any location, consistent with business requirements. We review our real estate on an ongoing basis to support our growing employee base and expand our operations. We believe that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.operational excellence.
ITEM 3.LEGAL PROCEEDINGS
Refer to Note LE to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a description of legal proceedings. See also the risk factor entitled “We are involved in litigation, investigations and regulatory inquiries and proceedings that could negatively affect us” in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of potential risks to our results of operations and financial condition that may arise from legal proceedings.
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Class A common stock, par value $0.01 per share (“Class A Stock”), trades on the New York Stock Exchange under the symbol VMW.
Holders
WeOn November 1, 2021, our spin-off from Dell Technologies Inc. (“Dell”) (the “Spin-Off”) was completed. Automatically as a result of the Spin-Off, each share of our Class B convertible common Stock (“Class B Stock”) converted into one fully paid and non-assessable share of Class A Stock. As of March 15, 2022, we had 303,809 holders of record of our Class A common stock, and two holders of record, EMC Corporation (“EMC”) and VMW Holdco LLC, a wholly-owned subsidiary of EMC, of our Class B common stock as of March 19, 2019.Stock.
Dividends
Subsequent to our initial public offering in August 2007, we have not declared or paid regular cash dividends on our common stock.
On JulyNovember 1, 2018,2021, in accordance with the Separation and Distribution Agreement entered into with Dell, effective as of April 14, 2021 (the “Separation Agreement”), upon the satisfaction of all conditions and immediately prior to the Spin-Off, we declared a conditional specialpaid an $11.5 billion cash dividend, pro rata, to each of $11 billionthe holders of Class A Stock and Class B Stock, including Dell (the “Special Dividend”). During the fourth quarter as of fiscal 2019, the conditions of the Special Dividend were met. The record date for the dividend was December 27, 2018, the dividend payment date was December 28, 2018 and the per share dividend amount was $26.81.October 29, 2021 (the “Record Date”).
We currently do not anticipate declaring any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to the consent of the holders of our Class B common stock pursuant to our certificate of incorporation. Holders of our Class A common stock and our Class B common stock will share equally on a per share basis in any dividend declared on our common stock by our board of directors.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
Issuer purchases of Class A common stock during the quarterthree months ended February 1, 2019:January 28, 2022 were as follows: |
| | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid Per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs (2) |
| November 3 – November 30, 2018 | — |
| | $ | — |
| | — |
| | $ | 876,272,615 |
|
| December 1 – December 28, 2018 | — |
| | — |
| | — |
| | 876,272,615 |
|
| December 29, 2018 – February 1, 2019 | 286,000 |
| | 148.05 |
| | 286,000 |
| | 833,929,476 |
|
| | 286,000 |
| | $ | 148.05 |
| | 286,000 |
| | 833,929,476 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs(2) |
| October 30 – November 26, 2021 | — | | | $ | — | | | — | | | $ | 2,000,000,000 | |
| November 27 – December 24, 2021 | 690,097 | | | 114.63 | | | 690,097 | | | 1,920,892,141 | |
| December 25, 2021 – January 28, 2022 | 1,807,869 | | | 120.29 | | | 1,807,869 | | | 1,703,415,827 | |
| 2,497,966 | | | $ | 118.73 | | | 2,497,966 | | | 1,703,415,827 | |
| |
(1)
| The average price paid per share excludes commissions. |
(1)The average price paid per share excludes commissions.
(2) Represents On October 7, 2021, VMware authorized the amounts remaining from VMware’s $1,000 milliontermination of the existing stock repurchase authorization announcedprogram authorized in July 2020 and authorized a new repurchase program of up to $2.0 billion of Class A common stock through the end of fiscal 2024, effective upon the consummation of the Spin-Off from Dell on August 14, 2017 that expiresNovember 1, 2021. Amounts remaining exclude commissions. Refer to Note Q to the consolidated financial statements in Part II, Item 8 of this Annual Report on August 31, 2019.Form 10-K for more information.
Stock Performance Graph
The graph below compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the S&P 500 Index and the S&P 500 Systems Software index for the period beginning on December 31, 2013February 3, 2017 through February 1, 2019,January 28, 2022, assuming an initial investment of $100. The stockholder return assumes reinvestment of dividends.
| | | | Base Period 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 2/3/2017 | | 2/2/2018 | | 2/1/2019 | | | Base Period
2/3/2017 | | 2/2/2018 | | 2/1/2019 | | 1/31/2020 | | 1/29/2021 | | 1/28/2022 |
| VMware, Inc. | $ | 100.00 |
| | $ | 91.99 |
| | $ | 63.06 |
| | $ | 87.76 |
| | $ | 99.15 |
| | $ | 136.80 |
| | $ | 201.96 |
| VMware, Inc. | | $ | 100.00 | | | $ | 137.97 | | | $ | 203.69 | | | $ | 200.37 | | | $ | 186.55 | | | $ | 213.06 | |
| S&P 500 Index | 100.00 |
| | 113.69 |
| | 115.26 |
| | 129.05 |
| | 132.61 |
| | 162.63 |
| | 162.54 |
| S&P 500 Index | | 100.00 | | | 122.64 | | | 122.57 | | | 148.99 | | | 174.69 | | | 211.38 | |
| S&P 500 Systems Software Index | 100.00 |
| | 123.01 |
| | 135.89 |
| | 153.87 |
| | 159.37 |
| | 225.93 |
| | 253.38 |
| S&P 500 Systems Software Index | | 100.00 | | | 141.76 | | | 158.98 | | | 251.76 | | | 345.14 | | | 459.29 | |
Note: The stock price performance shown on the graph above is not necessarily indicative of future price performance. This graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act, regardless of any general incorporation language in such filing.
| |
ITEM 6. | SELECTED FINANCIAL DATA |
FIVE-YEAR SELECTED CONSOLIDATEDITEM 6.[Reserved]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL DATACONDITION AND RESULTS OF OPERATIONS
(amounts in millions, except per share amounts, and shares in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | December 31, | | December 31, | | February 3, |
| | 2019 | | 2018(1)(2) | | 2016(1)(2) | | 2015(2) | | 2014(2) | | 2017(1)(2) |
| Results of Operations Data: | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| License | $ | 3,788 |
| | $ | 3,200 |
| | $ | 2,799 |
| | $ | 2,720 |
| | $ | 2,591 |
| | $ | 134 |
|
| Services | 5,186 |
| | 4,662 |
| | 4,274 |
| | 3,927 |
| | 3,444 |
| | 378 |
|
| GSA settlement | — |
| | — |
| | — |
| | (76 | ) | | — |
| | — |
|
| Total revenue | $ | 8,974 |
| | $ | 7,862 |
| | $ | 7,073 |
| | $ | 6,571 |
| | $ | 6,035 |
| | $ | 512 |
|
| Operating income (loss) | 2,050 |
| | 1,702 |
| | 1,469 |
| | 1,197 |
| | 1,027 |
| | (42 | ) |
| Net income (loss) | 2,422 |
| | 659 |
| | 1,223 |
| | 997 |
| | 886 |
| | (5 | ) |
| Net income (loss) per weighted average share, basic, for Classes A and B | $ | 5.94 |
| | $ | 1.62 |
| | $ | 2.91 |
| | $ | 2.35 |
| | $ | 2.06 |
| | $ | (0.01 | ) |
| Net income (loss) per weighted average share, diluted, for Classes A and B | $ | 5.85 |
| | $ | 1.59 |
| | $ | 2.87 |
| | $ | 2.34 |
| | $ | 2.04 |
| | $ | (0.01 | ) |
| Weighted average shares, basic, for Classes A and B | 407,766 |
| | 406,738 |
| | 420,520 |
| | 424,003 |
| | 430,355 |
| | 408,625 |
|
| Weighted average shares, diluted, for Classes A and B | 414,267 |
| | 413,368 |
| | 423,994 |
| | 426,547 |
| | 434,513 |
| | 408,625 |
|
| Cash Flow Data: | | | | | | | | | | | |
| Net cash provided by operating activities | $ | 3,663 |
| | $ | 3,218 |
| | $ | 2,379 |
| | $ | 1,898 |
| | $ | 2,184 |
| | $ | 361 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | February 1, | | February 2, | | February 3, | | December 31, | | December 31, | | December 31, |
| | 2019 | | 2018(1) | | 2017(1) | | 2016(1) | | 2015(1) | | 2014 |
| Balance Sheet Data: | | | | | | | | | | | |
Cash, cash equivalents and short-term investments(3) | $ | 2,849 |
| | $ | 11,653 |
| | $ | 8,393 |
| | $ | 7,985 |
| | $ | 7,509 |
| | $ | 7,075 |
|
Working capital(3)(4) | (45 | ) | | 9,026 |
| | 5,908 |
| | 6,114 |
| | 5,581 |
| | 4,886 |
|
| Total assets | 14,662 |
| | 21,206 |
| | 16,837 |
| | 17,090 |
| | 16,130 |
| | 15,216 |
|
| Total unearned revenue | 6,978 |
| | 5,839 |
| | 4,885 |
| | 5,168 |
| | 4,634 |
| | 4,833 |
|
Long-term obligations(5)(6) | 4,242 |
| | 4,234 |
| | 1,500 |
| | 1,500 |
| | 1,500 |
| | 1,500 |
|
| Total stockholders’ equity | 551 |
| | 8,624 |
| | 8,975 |
| | 8,853 |
| | 8,642 |
| | 7,586 |
|
| |
(1)
| Amounts reflect the impact of our retrospective adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”). |
| |
(2)
| Amounts reflect the impact of our retrospective adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. |
| |
(3)
| On July 1, 2018, VMware’s board of directors declared a conditional $11 billion Special Dividend, payable pro-rata to VMware stockholders as of the record date. The Special Dividend was paid on December 28, 2018 to stockholders of record as of the close of business on December 27, 2018 in the amount of $26.81 per outstanding share of VMware common stock. Refer to Note P to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information. |
| |
(4)
| Working capital as of February 1, 2019 was impacted by a decrease in cash, cash equivalents and short-term investments and an increase in the current portion of unearned revenue when compared to February 2, 2018. |
| |
(5)
| On January 21, 2014, in connection with our agreement to acquire A.W.S. Holding, LLC, the sole member and equity holder of AirWatch LLC, we entered into a note exchange agreement with Dell Technologies Inc. (“Dell”) (formerly EMC) providing for the issuance of three |
promissory notes in the aggregate principal amount of $1,500 million. Refer to Note C to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
| |
(6)
| On August 21, 2017, we issued three series of unsecured senior notes pursuant to a public debt offering in an aggregate principal amount of $4,000 million, which consisted of outstanding principal due on the following dates: $1,250 million due August 21, 2020, $1,500 million due August 21, 2022 and $1,250 million due August 21, 2027. Upon closing, a portion of the net proceeds from the offering was used to repay two of the notes payable to Dell due May 1, 2018 and May 1, 2020 in the aggregate principal amount of $1,230 million. Refer to Note H to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information. |
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following management’s discussion and analysis is provided in addition to the accompanying consolidated financial statements and notes to assist in understanding our results of operations and financial condition. Multiple accounting standards were adopted during the year ended February 1, 2019, which resulted in adjustments or reclassifications of amounts previously reported.
As a result of the change to ourOur fiscal year from a fiscal year ending on December 31 of each calendar year to a fiscal yearis the 52 or 53 weeks ending on the Friday nearest to January 31 of each year. We refer to our fiscal year the period that began on January 1, 2017 and ended onending February 3, 2017 was2023 and fiscal years ended January 28, 2022, January 29, 2021 and January 31, 2020 as “fiscal 2023,” “fiscal 2022,” “fiscal 2021,” and “fiscal 2020,” respectively. Fiscal 2023 is a transition period (the “Transition Period”). Our first full53-week fiscal year, 2018 was awhile fiscal 2022, fiscal 2021 and fiscal 2020 were each 52-week year that began on February 4, 2017 and ended on February 2, 2018. Prior-period financial statements have not been recast as we believe (i) the year ended December 31, 2016 is comparable to the year ended February 2, 2018 and (ii) recasting prior-period results was not practicable or cost justified.fiscal years.
Period-over-period changes are calculated based upon the respective underlying non-rounded data. We refer to our fiscal years ended January 31, 2020, February 1, 2019, February 2, 2018, and December 31, 2016 as “fiscal 2020,” “fiscal 2019,” “fiscal 2018,” and “fiscal 2016,” respectively. 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.”
Discussion regarding our financial condition and results of operations for fiscal 2021 as compared to fiscal 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 29, 2021, filed with the SEC on March 26, 2021.
Overview
We originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware.hardware, and then evolved to become the private cloud and mobility management leader. Building upon that leadership, we are focused on becoming the multi-cloud leader. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. Organizations’ IT isdepartments and corporate divisions are working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses and their businessproduct teams through a digital transformation. To take on these challenges, we are working withhelping customers indrive their multi-cloud strategy by providing the areas of hybrid cloud, multi-cloud modernplatform for all applications, networkingenabling digital innovation and security, and digital workspaces. Our software provides a flexible digital foundation to help enable customers in their digital transformation.enterprise control.
We help customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments by offering solutions across three categories: Software-Defined Data Center (“SDDC”), Hybrid Cloud Computing and End-User Computing (“EUC”). ThisOur portfolio supports and addresses theour customers’ key IT priorities, of our customers:including modernizing their applications, managing multi-cloud environments, accelerating their cloud journey, modernizing the network using commodity hardware, embracing zero-trust security and empowering digital workspaces and transforming networking and security. These VMware solutionsanywhere workspaces. We enable the digital transformation our customers need as they ready theirof customers’ applications, infrastructure and devicesoperations for their futureconstantly evolving business and employee needs.
We sellEnd users can purchase the full breadth of our solutions usingsubscription, SaaS, license and services portfolio through discrete purchases or through enterprise agreements (“EAs”) or as part of our non-EA, or transactional, business.. EAs are comprehensive volume license offerings, offered both directly by ussold to our direct customers and through certain channel partners that also provide forand can include our license, multi-year maintenance and support.support, subscription and SaaS offerings. We continue to experience strong renewals including renewals of our EAs, resulting in additional license sales of both our existing and newer products and solutions.
SDDC or Software-Defined Data Center
Our SDDC technologies form the foundation of our customers’ private cloud environments and provide the capabilities for our customers to extend their private cloud to the public cloud and to help them run, manage, secure and connect all their applications across all clouds and devices. During fiscal 2019,2022, we continued to see broad-based strengthan increase in the portion of our SDDC solutions. Future sales occurring through our subscription and SaaS offerings compared to the portion of our on-premises solutions sold as perpetual licenses. We expect this trend to continue and as a result, a greater portion of our revenue will be recognized over time as subscription and SaaS revenue rather than license revenue, which is typically recognized in the fiscal period in which sales occur. As this trend continues, the rate of growth ratesin our license revenue, which has historically been viewed as a leading indicator of our business performance, may fluctuate periodbe less relevant on a standalone basis, and we believe that the overall growth rate of our combined license and subscription and SaaS revenue and annual recurring revenue for subscription and SaaS, as well as the growth in the current portion of our remaining performance obligations, will become better indicators of our future growth prospects. In addition, we expect our operating margin to period, depending largely uponbe negatively impacted in fiscal 2023 as a result of our incremental investment in our subscription and SaaS portfolio.
Global Events
Suspension of Business Operations in Russia
In response to Russian military actions in Ukraine occurring subsequent to fiscal 2022, we suspended business operations in Russia and Belarus, including suspension of sales, support on existing contracts and professional services in both countries. Furthermore, the U.S. and other countries have imposed sanctions on Russia that could impact the fulfillment of our existing orders and our future revenue streams from impacted customers. The impact to our fiscal 2022 financial statements was not material, and we are unable to estimate the financial impact of these events on our operations in future periods. We will closely monitor the impact of these events on all aspects of our business.
COVID-19 Impact
The worldwide spread of COVID-19 resulted in a global slowdown of economic activity while also disrupting sales channels and marketing activities and the COVID-19 pandemic may cause economic disruption and market volatility in future periods. Although the pandemic has not had the level of financial impact on our business we initially expected, we did experience negative impacts on our sales and certain of our financial results and there continues to be uncertainty regarding the magnitude and duration of the economic effects of the COVID-19 pandemic and the extent to which SDDC technologies are included init will have a negative impact on our larger EAs. For example, sales fromand our management products were positively impacted duringfinancial results into fiscal 2019 as a result of being included in some2023. We continue to closely monitor the impact of the larger strategic deals.pandemic on all aspects of our business.
Hybrid Cloud Computing
Our overarching cloud strategy contains three key components: (i) continue to expand beyond compute virtualization in the private cloud; (ii) extend the private cloud into the public cloud;Spin-Off and (iii) connect and secure endpoints across a range of public clouds. Hybrid Cloud Computing was primarily comprised of VMware Cloud Provider Program (“VCPP”) and included
VMware Cloud Services, which enable customers to run, manage, connect and secure their applications across private and public clouds.
During fiscal 2019, revenue growth in our Hybrid Cloud Computing offerings was primarily driven by our VCPP offerings. We expect VMware Cloud on AWS and other cloud services offerings such as CloudHealth by VMware to drive revenue growth in this product category in fiscal 2020.
End-User Computing
Our EUC solution consists of VMware Workspace ONE (“Workspace ONE”), our digital workspace platform, which includes VMware AirWatch (“AirWatch”) and VMware Horizon. Our AirWatch business model includes an on-premises solution that we offer through the sale of perpetual licenses, subscription and software-as-a-service (“SaaS”) solutions. Workspace ONE continued to be our primary growth driver within our EUC product group during fiscal 2019.
Dell Synergies
We continue joint marketing, sales, branding and product development efforts with Dell and other Dell companies to enhance the collective value we deliver to our mutual customers. Our collective business built with Dell continued to create synergies that benefit our sales during fiscal 2019.
Special Dividend
On JulyNovember 1, 2018, our board2021, the Spin-Off from Dell was completed, and, in accordance with the Separation Agreement, upon the satisfaction of directors declared a conditional $11all conditions and immediately prior to the Spin-Off, we paid an $11.5 billion Special Dividend, payable pro-ratacash dividend, pro rata, to our stockholders aseach of the record date. The Special Dividend was paid on December 28, 2018 to stockholdersholders of recordCommon Stock, including Dell (the “Special Dividend”), as of the close of business on December 27, 2018October 29, 2021 (the “Record Date”). Based upon the number of shares of Common Stock held by Dell as of the Record Date, approximately $9.3 billion in the amount of $26.81 per outstanding share of our common stock. The Special Dividendcash was paid in connection with the closing of a proposed transaction by Dell (the “Dell Class V Transaction”) pursuant to which holders of Dell Class V common stock, which was designed to track our economic performance, exchanged the Dell Class V common stock for Dell Class C common stock or cash or both, resulting in the elimination of the Dell Class V common stock.
AsDell. Automatically as a result of the paymentSpin-Off, each share of Class B Stock converted into one
fully paid and non-assessable share of Class A Stock. Refer to Note A to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding the Spin-Off and Special Dividend,Dividend.
As we were a majority-owned and controlled subsidiary of Dell through October 29, 2021, our cash, cash equivalentsresults of operations and short-term investments declined significantly. This will result in significantly lower investment income for the foreseeable future, which will also impact cash provided by operating activities, net income and net income per share in future periods.financial position through October 29, 2021 were consolidated with Dell’s financial statements.
Results of Operations
Approximately 70% of our sales are denominated in the United States (“U.S.”) dollar, however, indollar. In certain countries, however, we also invoice and collect in the following currencies: euro;various foreign currencies, principally euro, British pound;pound, Japanese yen;yen, Australian dollar;dollar and Chinese renminbi. In addition, we incur and pay operating expenses in currencies other than the U.S. dollar. As a result, our financial statements, including our revenue, operating expenses, unearned revenue and the resulting cash flows derived from the U.S. dollar equivalent of foreign currency transactions, are affected by foreign exchange fluctuations.
Revenue
Our revenue during the periods presented was as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended | | Fiscal Year |
| Fiscal Year |
| | February 1, | | February 2, | | December 31, | | 2019 vs. 2018 |
| 2018 vs. 2016 |
| | 2019 | | 2018(1) | | 2016(1) | | $ Change |
| % Change |
| $ Change |
| % Change |
| Revenue: | | | | | | | | | | | | | |
| License | $ | 3,788 |
| | $ | 3,200 |
| | $ | 2,799 |
| | $ | 588 |
| | 18 | % | | $ | 401 |
| | 14 | % |
| Services: | | | | | | | | | | | | | |
| Software maintenance | 4,506 |
| | 4,032 |
| | 3,722 |
| | 474 |
| | 12 |
| | 310 |
| | 8 |
|
| Professional services | 680 |
| | 630 |
| | 552 |
| | 49 |
| | 8 |
| | 78 |
| | 14 |
|
| Total services | 5,186 |
| | 4,662 |
| | 4,274 |
| | 523 |
| | 11 |
| | 388 |
| | 9 |
|
| Total revenue | $ | 8,974 |
| | $ | 7,862 |
| | $ | 7,073 |
| | $ | 1,112 |
| | 14 |
| | $ | 789 |
| | 11 |
|
| | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | |
| United States | $ | 4,205 |
| | $ | 3,834 |
| | $ | 3,538 |
| | $ | 371 |
| | 10 | % | | $ | 296 |
| | 8 | % |
| International | 4,769 |
| | 4,028 |
| | 3,535 |
| | 741 |
| | 18 |
| | 493 |
| | 14 |
|
| Total revenue | $ | 8,974 |
| | $ | 7,862 |
| | $ | 7,073 |
| | $ | 1,112 |
| | 14 |
| | $ | 789 |
| | 11 |
|
(1) Fiscal 2018 and fiscal 2016 amounts reflect the impact of our retrospective adoption of Topic 606, effective February 3, 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | | | | | | | | | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| License | | | | | | | | | | | | | | | | $ | 3,128 | | | $ | 3,033 | | | $ | 3,181 | | | $ | 95 | | | 3 | % | | $ | (149) | | | (5) | % |
| Subscription and SaaS | | | | | | | | | | | | | | | | 3,205 | | | 2,587 | | | 1,877 | | | 617 | | | 24 | | | 711 | | | 38 | |
| Total license and subscription and SaaS | | | | | | | | | | | | | | | | 6,333 | | | 5,620 | | | 5,058 | | | 713 | | | 13 | | | 562 | | | 11 | |
| Services: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Software maintenance | | | | | | | | | | | | | | | | 5,356 | | | 5,105 | | | 4,754 | | | 252 | | | 5 | | | 351 | | | 7 | |
| Professional services | | | | | | | | | | | | | | | | 1,162 | | | 1,042 | | | 999 | | | 120 | | | 11 | | | 43 | | | 4 | |
| Total services | | | | | | | | | | | | | | | | 6,518 | | | 6,147 | | | 5,753 | | | 371 | | | 6 | | | 394 | | | 7 | |
| Total revenue | | | | | | | | | | | | | | | | $ | 12,851 | | | $ | 11,767 | | | $ | 10,811 | | | $ | 1,084 | | | 9 | | | $ | 956 | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | | | | | | | | | | | | | | | $ | 6,232 | | | $ | 5,878 | | | $ | 5,405 | | | $ | 354 | | | 6 | % | | $ | 473 | | | 9 | % |
| International | | | | | | | | | | | | | | | | 6,619 | | | 5,889 | | | 5,406 | | | 730 | | | 12 | | | 483 | | | 9 | |
| Total revenue | | | | | | | | | | | | | | | | $ | 12,851 | | | $ | 11,767 | | | $ | 10,811 | | | $ | 1,084 | | | 9 | | | $ | 956 | | | 9 | |
Revenue from our Hybrid Cloud Computingsubscription offerings consisted primarily of our VCPP cloud-based offerings that are billed to customers on a consumption basis and revenue from VMware Tanzu and other offerings that are billed on a subscription basis. Revenue from our SaaS offerings consisted primarily of our AirWatch mobile solution within Workspace ONE. VCPP revenue is included in license revenueONE Unified Endpoint Management, VMware Carbon Black Cloud, VMware Cloud on AWS, VMware SD-WAN by VeloCloud and SaaS revenue is included in both license and services revenue. Hybrid Cloud Computing, together with our SaaS offerings, increased to approximately 10% of our total revenue during fiscal 2019 from approximately 9% and 8% of our total revenue during fiscal 2018 and fiscal 2016, respectively.CloudHealth by VMware.
License revenue relating to the sale of perpetualon-premises licenses that are part of a multi-year contract is generally recognized upon delivery of the underlying license, whereas revenue derived from our Hybrid Cloud Computingsubscription and SaaS offerings is generally recognized onover time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
As customers adopt our subscription and SaaS offerings, license and software maintenance revenue may be lower and subject to greater fluctuation in the future, driven by a consumption basis or overhigher proportion of our sales occurring through our subscription and SaaS offerings as well as the variability of large deals between fiscal quarters, which deals historically have had a period of time.large license revenue impact.
License Revenue
During fiscal 2019, licenseLicense revenue continued to benefit from broad-based growth across our diverse product portfolio and across our U.S. and international geographies. Revenue growth from our VCPP offerings continued to contribute to license revenue growthincreased during fiscal 2019. Strength in our EA renewal business and product offerings acquired in recent acquisitions such as VeloCloud Networks, Inc. (“VeloCloud”), also contributed to license revenue growth during fiscal 20192022 compared to fiscal 2018.
Drivers of2021, primarily driven by an increase in term license revenue, growthwhich was $442 million during fiscal 20182022 compared to $119 million during fiscal 2021. The growth in term license was primarily due to certain customers moving from perpetual license to term license.
Subscription and SaaS Revenue
Subscription and SaaS revenue increased during fiscal 2022 compared to fiscal 2016 included continued scale and growth2021, primarily due to increased sales of our VMware NSX (“NSX”) and vSAN offerings. EUC growth driven in part by sales ofVCPP, Workspace ONE, VMware Tanzu, VMware Carbon Black Cloud, vRealize Cloud Management and continuedVMware Cloud on AWS offerings.
Annual recurring revenue (“ARR”) represents the annualized value of our committed customer subscription and SaaS contracts as of the end of the reporting period, assuming any contract that expires during the next 12 months is renewed on its existing terms, except that, for consumption-based subscription and SaaS offerings, ARR represents the annualized quarterly revenue based on revenue recognized for the current reporting period. ARR is an operating measure we use to assess the strength of our VCPP offerings were also key factors contributing to license growth. Strength in our renewal business, including EAs, also contributed to licensesubscription and SaaS offerings. ARR is a performance metric and should be viewed independently of, and not as a substitute for or combined with, revenue growth during fiscal 2018 compared to fiscal 2016.and unearned revenue. ARR was $3.6 billion as of January 28, 2022 and $2.9 billion as of January 29, 2021.
Services Revenue
During fiscal 20192022 and fiscal 2018,2021, software maintenance revenue continued to benefit from strong renewals of our EAs, maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales.periods. In each period presented, customers purchased, on a weighted-average basis, approximatelygreater than three years of support and maintenance with each new license purchased.
Professional services revenue increased 8% induring fiscal 2019 and 14% in2022 compared to fiscal 2018.2021. Services we provide through our consultants and technical account managers and our continued focus on solution deployments, including our NSX products,networking, security, cloud management and digital workspace offerings, contributed to the increase in professional services revenue. We continue to also focus on enabling our partners to deliver professional services for our solutions, and as such, our professional services revenue may vary as we continue to leverage our partners. TimingThe timing of service engagementsservices rendered will also impact the amount of professional services revenue we recognize during a period.
Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (dollars(table in millions):
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018(1) |
| Unearned license revenue | $ | 255 |
| | $ | 184 |
|
| Unearned software maintenance revenue | 5,972 |
| | 5,082 |
|
| Unearned professional services revenue | 751 |
| | 573 |
|
| Total unearned revenue | $ | 6,978 |
| | $ | 5,839 |
|
(1) Fiscal 2018 amounts reflect the impact of our retrospective adoption of Topic 606, effective February 3, 2018. | | | | | | | | | | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| Unearned license revenue | $ | 19 | | | $ | 15 | |
| Unearned subscription and SaaS revenue | 2,669 | | | 1,998 | |
| Unearned software maintenance revenue | 7,208 | | | 7,092 | |
| Unearned professional services revenue | 1,326 | | | 1,209 | |
| Total unearned revenue | $ | 11,222 | | | $ | 10,314 | |
Unearned licensesubscription and SaaS revenue is primarily related to the allocated portion of our SaaS offerings and is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
Unearned software maintenance revenue is attributable to our maintenance contracts and is generally recognized over time on a ratable basisratably over the contract duration. The weighted-average remaining contractual term as of February 1, 2019January 28, 2022 was approximately two years. In addition, unearned software maintenance revenue also includes the allocated portion of our SaaS offerings. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.
Remaining Performance Obligations and Backlog
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted non-cancellable customer contracts at the end of any given period.
As of February 1, 2019,January 28, 2022, the aggregate transaction price allocated to remaining performance obligations was $7,749 million. Approximately 56%$12.0 billion, of which approximately 57% is expected to be recognized as revenue over the next 12twelve months and the remainder thereafter. As of January 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.3 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2022 and the remainder thereafter.
Backlog
Backlog is comprised of unfulfilled purchase orders or unfulfilled executed agreements at the end of a given period and is net of related estimated rebates and marketing development funds. Backlog consists of licenses, subscription and SaaS and
services. As of February 1, 2019,January 28, 2022, our total backlog was $449 million. Backlog primarily consists of licenses, maintenance$88 million and services. Ourour backlog related to licenses was $147 million, which$14 million. For our backlog related to licenses, we generally expect to deliver and recognize as revenue during the following quarter. Backlog totaling $34$36 million as of February 1, 2019 isJanuary 28, 2022 was excluded from the remaining performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs. is fulfilled.
As of February 2, 2018,January 29, 2021, our total backlog was approximately $285$93 million and our backlog related to licenses was approximately $99$23 million. Backlog totaling $18 million as of January 29, 2021 was excluded from the remaining performance obligations because such contracts are subject to cancellation until the performance obligation is fulfilled.
The amount and composition of backlog will fluctuate period to period and backlog is managed based upon multiple considerations, including product and geography. We do not believe the amount of backlog is indicative of future sales or revenue or that the mix of backlog at the end of any given period correlates with actual sales performance of a particular geography or particular products and services.
Cost of License Revenue, Cost of Subscription and SaaS Revenue, Cost of Services Revenue and Operating Expenses
OurCollectively, our cost of license revenue, cost of subscription and SaaS revenue, cost of services revenue and operating expenses primarily reflected increasing cash-based employee-related expenses, driven by incremental growth in salariesheadcount and headcountsalaries across most of our income statement expense categories induring fiscal 2019. We expect increases in cash-based employee-related expenses to continue.2022.
Cost of License Revenue
Cost of license revenue primarily consists of the cost of fulfillment of our software and SD-WAN offerings, royalty costs in connection with technology licensed from third-party providers and amortization of intangible assets. The cost of fulfillment of our software and hardware SD-WAN offerings includes personnel costs and related overhead associated with the physical and electronic delivery of our products.
Cost of license revenue during the periods presented was as follows (dollars in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| Fiscal Year |
| Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 |
| | 2019 |
| 2018 |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change |
| Cost of license revenue | $ | 190 |
| | $ | 155 |
| | $ | 157 |
| | $ | 35 |
| | 23 | % | | $ | (2 | ) | | (1 | )% |
| Stock-based compensation | 1 |
| | 2 |
| | 2 |
| | (1 | ) | | (50 | ) | | — |
| | (21 | ) |
| Total expenses | $ | 191 |
| | $ | 157 |
| | $ | 159 |
| | $ | 34 |
| | 22 |
| | $ | (2 | ) | | (1 | ) |
| % of License revenue | 5 | % | | 5 | % | | 6 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | | | | | | | | | | | | | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Cost of license revenue | | | | | | | | | | | | | | | | $ | 151 | | | $ | 162 | | | $ | 165 | | | $ | (11) | | | (7) | % | | $ | (3) | | | (2) | % |
| Stock-based compensation | | | | | | | | | | | | | | | | 1 | | | 1 | | | 1 | | | — | | | (14) | | | — | | | 2 | |
| Total expenses | | | | | | | | | | | | | | | | $ | 152 | | | $ | 163 | | | $ | 166 | | | $ | (11) | | | (7) | | | $ | (3) | | | (2) | |
| % of License revenue | | | | | | | | | | | | | | | | 5 | % | | 5 | % | | 5 | % | | | | | | | | |
Cost of license revenue decreased slightly in fiscal 2022 compared to fiscal 2021.
Cost of Subscription and SaaS Revenue
Cost of subscription and SaaS revenue primarily includes personnel costs and related overhead associated with hosted services supporting our SaaS offerings. Additionally, cost of subscription and SaaS revenue also includes depreciation of equipment supporting our subscription and SaaS offerings.
Cost of subscription and SaaS revenue during the periods presented was as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | | | | | | | | | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Cost of subscription and SaaS revenue | | | | | | | | | | | | | | | | $ | 669 | | | $ | 569 | | | $ | 387 | | | $ | 100 | | | 18 | % | | $ | 182 | | | 47 | % |
| Stock-based compensation | | | | | | | | | | | | | | | | 21 | | | 19 | | | 13 | | | 2 | | | 9 | | | 6 | | | 45 | |
| Total expenses | | | | | | | | | | | | | | | | $ | 690 | | | $ | 588 | | | $ | 400 | | | $ | 102 | | | 17 | | | $ | 188 | | | 47 | |
| % of Subscription and SaaS revenue | | | | | | | | | | | | | | | | 22 | % | | 23 | % | | 21 | % | | | | | | | | |
Cost of subscription and SaaS revenue increased in fiscal 20192022 compared to fiscal 2018,2021. The increase was primarily driven by fulfillment-relatedgrowth in costs forassociated with hosted services to support our SD-WANSaaS offerings as well as an increaseof $53 million and growth in cash-based employee-related costs of $43 million, which was primarily driven by incremental growth in headcount. These increases were partially offset by decreased amortization of intangible assets in fiscal 2019.of $15 million.
Cost of Services Revenue
Cost of services revenue primarily includes the costs of personnel and related overhead to physically and electronically deliver technical support for our products hosted services supporting our SaaS offerings, and costs to deliver professional services. Additionally, cost of services revenue includes depreciation of equipment supporting our service offerings.
Cost of services revenue during the periods presented was as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| Fiscal Year |
| Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 |
| | 2019 |
| 2018 |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change |
| Cost of services revenue | $ | 1,016 |
| | $ | 934 |
| | $ | 842 |
| | $ | 83 |
| | 9 | % | | $ | 91 |
| | 11 | % |
| Stock-based compensation | 51 |
| | 50 |
| | 52 |
| | 1 |
| | 1 |
| | (1 | ) | | (2 | ) |
| Total expenses | $ | 1,067 |
| | $ | 984 |
| | $ | 894 |
| | $ | 83 |
| | 8 |
| | $ | 90 |
| | 10 |
|
| % of Services revenue | 21 | % | | 21 | % | | 21 | % | | | | | | | | |
Cost of services revenue increased during fiscal 2019 compared to fiscal 2018. The increase was primarily due to an increase in costs associated with third-party hosting services to support our SaaS offerings of $36 million in fiscal 2019, and growth in cash-based employee-related expenses of $27 million, driven by incremental growth in headcount and salaries. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | | | | | | | | | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Cost of services revenue | | | | | | | | | | | | | | | | $ | 1,337 | | | $ | 1,193 | | | $ | 1,150 | | | $ | 143 | | | 12 | % | | $ | 42 | | | 4 | % |
| Stock-based compensation | | | | | | | | | | | | | | | | 92 | | | 99 | | | 83 | | | (7) | | | (7) | | | 16 | | | 20 | |
| Total expenses | | | | | | | | | | | | | | | | $ | 1,429 | | | $ | 1,292 | | | $ | 1,233 | | | $ | 137 | | | 11 | | | $ | 59 | | | 5 | |
| % of Services revenue | | | | | | | | | | | | | | | | 22 | % | | 21 | % | | 21 | % | | | | | | | | |
Cost of services revenue increased in fiscal 20182022 compared to fiscal 2016, but remained consistent as a percentage of revenue.2021. The increase was primarily due to growth in cash-based employee-related expenses of $81$110 million, during fiscal 2018,primarily driven by incremental growth in headcount and salaries, as well assalaries. The increase was also driven by increased IT developmentthird-party professional services costs of $24$26 million. These increased costs were offset in part by a decrease in equipment, depreciation and facilities-related costs of $33 million.
Research and Development Expenses
Research and development expenses include the personnel and related overhead associated with the development of our product softwareproducts and serviceservices offerings. We continue to invest in and focus on expanding our key growth areas, including NSXsubscription and VMware vSAN, while also investing in areas that we expect to be significant growth drivers in future periods, such as VMware Cloud on AWS.
SaaS offerings.
Research and development expenses during the periods presented were as follows (dollars in millions):
| | | | For the Year Ended |
| Fiscal Year |
| Fiscal Year | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | 2019 |
| 2018 |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Research and development | $ | 1,604 |
| | $ | 1,400 |
| | $ | 1,198 |
| | $ | 204 |
| | 15 | % | | $ | 203 |
| | 17 | % | Research and development | | $ | 2,529 | | | $ | 2,292 | | | $ | 2,063 | | | $ | 237 | | | 10 | % | | $ | 228 | | | 11 | % |
| Stock-based compensation | 371 |
| | 355 |
| | 305 |
| | 16 |
| | 5 |
| | 49 |
| | 16 |
| Stock-based compensation | | 528 | | | 524 | | | 459 | | | 4 | | | 1 | | | 65 | | | 14 | |
| Total expenses | $ | 1,975 |
| | $ | 1,755 |
| | $ | 1,503 |
| | $ | 220 |
| | 13 |
| | $ | 252 |
| | 17 |
| Total expenses | | $ | 3,057 | | | $ | 2,816 | | | $ | 2,522 | | | $ | 241 | | | 9 | | | $ | 294 | | | 12 | |
| % of Total revenue | 22 | % | | 22 | % | | 21 | % | | | | | | | | | % of Total revenue | | 24 | % | | 24 | % | | 23 | % | | | | | |
Research and development expenses increased in fiscal 20192022 compared to fiscal 2018.2021. The increase was primarily due to growth in cash-based employee-related expenses of $136$229 million, in fiscal 2019,primarily driven by incremental growth in headcount and salaries, as well as increased equipment and an increase in stock-based compensationdepreciation of $42 million and increased third-party professional services cost of $16 million, primarily drivenmillion. These increases were partially offset by an increase in performance stock unit awards granted in fiscal 2019. The increase was also driven by increased equipment, depreciation and facilities-related costs of $50 million, primarily including costs associated with third-party hosting services related to research and development, and a decrease in capitalized internal-use software development costs of $26 million.
Research and development expenses increased in fiscal 2018 compared to fiscal 2016. The increase was primarily due to growth in cash-based employee-related expenses of $194 million, driven by incremental growth in headcount and salaries. In
addition, stock-based compensation increased by $49 million, primarily driven by an increase in restricted stock unit awards
and performance stock unit awards granted after the fourth quarter of fiscal 2016. Research and development expenses also
increased due to higher equipment, depreciation and facilities-related costs of $34 million. These increases were offset in part
by an increase in capitalized internal-use software development costs of $55$63 million.
Sales and Marketing Expenses
Sales and marketing expenses include personnel costs, sales commissions and related overhead associated with the sale and marketing of our license, subscription and SaaS and services offerings, as well as the cost of product launches and marketing initiatives. A significant portion of our sales commissions are deferred and recognized over the expected period of benefit.
Sales and marketing expenses during the periods presented were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | | | | | | | | | | | | | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Sales and marketing | | | | | | | | | | | | | | | | $ | 3,765 | | | $ | 3,389 | | | $ | 3,384 | | | $ | 375 | | | 11 | % | | $ | 7 | | | — | % |
| Stock-based compensation | | | | | | | | | | | | | | | | 302 | | | 322 | | | 293 | | | (20) | | | (6) | | | 28 | | | 9 | |
| Total expenses | | | | | | | | | | | | | | | | $ | 4,067 | | | $ | 3,711 | | | $ | 3,677 | | | $ | 356 | | | 10 | | | $ | 34 | | | 1 | |
| % of Total revenue | | | | | | | | | | | | | | | | 32 | % | | 32 | % | | 34 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| Fiscal Year |
| Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 |
| | 2019 |
| 2018(1) | | 2016(1) |
| $ Change |
| % Change |
| $ Change |
| % Change |
| Sales and marketing | $ | 2,715 |
| | $ | 2,309 |
| | $ | 2,112 |
| | $ | 404 |
| | 17 | % | | $ | 199 |
| | 9 | % |
| Stock-based compensation | 203 |
| | 197 |
| | 195 |
| | 7 |
| | 3 |
| | 1 |
| | 1 |
|
| Total expenses | $ | 2,918 |
| | $ | 2,506 |
| | $ | 2,307 |
| | $ | 410 |
| | 16 |
| | $ | 201 |
| | 9 |
|
| % of Total revenue | 33 | % | | 32 | % | | 33 | % | | | | | | | | |
Sales and marketing expenses increased in fiscal 20192022 compared to fiscal 2018.2021. The increase was primarily due to growth in cash-based employee-related expenses of $298$264 million, in fiscal 2019,primarily driven by incremental growth in headcount and salaries, as well as higher commission costs resulting from increased sales volume and headcount. The increase during fiscal 2019 was also driven by an increase in costs incurred for sales enablement-based initiatives of $30$106 million and an increase in travel-related expenses primarily driven by incremental growth in headcount. An increase in equipment, depreciation and facilities-related costs of $20 million also contributed to the increase in sales and marketing expenses during fiscal 2019.
Sales and marketing expenses increased in fiscal 2018 compared to fiscal 2016. The increase was primarily due to growth in cash-based employee-related expenses of $233 million, driven by incremental growth in headcount and salaries, as well as higher commission costs, resulting from increased sales volume. The increase was also driven by increased equipment and depreciation of $17 million. These increases were partially offset by decreased stock-based compensation of $20 million, primarily due to the vesting of awards associated with prior acquisitions, offset in part by an increase in restricted stock unit awards granted to our employees.
General and Administrative Expenses
General and administrative expenses include personnel and related overhead costs to support the business. These expenses include the costs associated with finance, human resources, IT infrastructure and legal, as well as expenses related to corporate costs and initiatives, including certain charitable donations to the VMware Foundation.initiatives.
General and administrative expenses during the periods presented were as follows (dollars in millions): | | | | For the Year Ended |
| Fiscal Year |
| Fiscal Year | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | 2019 |
| 2018 |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| General and administrative | $ | 659 |
| | $ | 575 |
| | $ | 607 |
| | $ | 85 |
| | 15 | % | | $ | (32 | ) | | (5 | )% | General and administrative | | $ | 937 | | | $ | 610 | | | $ | 1,125 | | | $ | 327 | | | 54 | % | | $ | (515) | | | (46) | % |
| Stock-based compensation | 105 |
| | 79 |
| | 82 |
| | 25 |
| | 32 |
| | (2 | ) | | (3 | ) | Stock-based compensation | | 131 | | | 157 | | | 168 | | | (26) | | | (17) | | | (11) | | | (6) | |
| Total expenses | $ | 764 |
| | $ | 654 |
| | $ | 689 |
| | $ | 110 |
| | 17 |
| | $ | (35 | ) | | (5 | ) | Total expenses | | $ | 1,068 | | | $ | 767 | | | $ | 1,293 | | | $ | 301 | | | 39 | | | $ | (526) | | | (41) | |
| % of Total revenue | 9 | % | | 8 | % | | 10 | % | | | | | | | | | % of Total revenue | | 8 | % | | 7 | % | | 12 | % | | | | | |
General and administrative expenses increased in fiscal 20192022 compared to fiscal 2018.2021. The increase was primarily due to $45driven by the absence of the $237 million of costs incurredaccrued litigation loss derecognized in fiscal 2021 in connection with certain patent litigation. The increase was also driven by certain costs incurred during fiscal 2022 related to the Special DividendSpin-Off, such as legal and an increase in stock-based compensationadvisory fees, of $25$73 million. Additionally, cash-based employee-related expenses increased by $51 million, primarily driven by an increase in performance stock unit awards granted in fiscal 2019. An increase in IT-related costs, including telecommunication, of $23 million also contributed to the increase in general and administrative costs during fiscal 2019.
General and administrative expenses decreased in fiscal 2018 compared to fiscal 2016. The decrease was primarily driven by a decrease in IT-related costs, including telecommunication, equipment and depreciation, of $73 million, offset in part by decreased capitalization of internal-use software development costs of $27 million, as well as increased cash-based employee-related expenses of $33 million, resulting primarily from incremental growth in headcount and salaries.
RealignmentThese increases were partially offset by a decrease in acquisition-related costs of $63 million and Lossdecreased stock-based compensation of $26 million, which was primarily due to the vesting of awards associated with prior acquisitions.
Refer to Note E to the consolidated financial statements in Part II, Item 8 of this Annual Report on DispositionForm 10-K for
a description of certain claims and litigation.
Realignment
Realignment expenses
and loss on disposition during the periods presented were as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| Fiscal Year |
| Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 |
| | 2019 |
| 2018(1) |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change |
| Realignment and loss on disposition | $ | 9 |
| | $ | 104 |
| | $ | 52 |
| | $ | (95 | ) | | (91 | )% | | $ | 52 |
| | 99 | % |
| % of Total revenue | — | % | | 1 | % | | 1 | % | | | | | | | | |
(1) Fiscal 2018 amounts reflect the impact of our retrospective adoption of Topic 606, effective February 3, 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | | | | | | | | | | | | | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Realignment | | | | | | | | | | | | | | | | $ | 1 | | | $ | 42 | | | $ | 79 | | | $ | (41) | | | (97) | % | | $ | (36) | | | (46) | % |
| % of Total revenue | | | | | | | | | | | | | | | | — | % | | — | % | | 1 | % | | | | | | | | |
During the secondthird quarter of fiscal 2018, we completed the sale of our VMware vCloud Air business to OVH US LLC. The loss recognized in connection with this transaction was $104 million during fiscal 2018 and included the impairment of deferred commissions of approximately $13 million resulting from the retrospective adoption of Topic 606.
On January 22, 2016,2021, we approved a plan to streamline our operations and better align resources with plans to reinvest the associated savings in field, technical and support resources associated with growth products.our business priorities. As a result of these actions,this action, approximately 800280 positions were eliminated duringin fiscal 2016.2021. We recognized $50$42 million of severance-related realignment expenses duringin fiscal 20162021 on the consolidated statements of income (loss). Additionally, we consolidated certain facilities as part of this plan, which resulted in the recognition of $2 million of related expenses during fiscal 2016.income. Actions associated with this plan were substantially completedcomplete by December 31, 2016.the end of fiscal 2021.
Investment Income
Investment income during the periods presented was as follows (dollars in millions):44
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| Fiscal Year |
| Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 |
| | 2019 |
| 2018 |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change |
| Investment income | $ | 161 |
| | $ | 120 |
| | $ | 77 |
| | $ | 41 |
| | 35 | % | | $ | 42 |
| | 55 | % |
| % of Total revenue | 2 | % | | 2 | % | | 1 | % | | | | | | | | |
Investment income increased in fiscal 2019 compared to fiscal 2018 and fiscal 2018 compared to fiscal 2016, primarily driven by increased interest income earned on our cash equivalents and short-term investments resulting from higher yields and from higher average invested balances.
Interest expenseExpense
Interest expense during the periods presented was as follows (dollars in millions): | | | | For the Year Ended |
| Fiscal Year |
| Fiscal Year | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | 2019 |
| 2018 |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Interest expense | $ | 134 |
| | $ | 74 |
| | $ | 26 |
| | $ | 60 |
|
| 80 | % | | $ | 48 |
| | 183 | % | Interest expense | | $ | 252 | | | $ | 204 | | | $ | 149 | | | $ | 48 | | | 24 | % | | $ | 56 | | | 38 | % |
| % of Total revenue | 1 | % | | 1 | % | | — | % | | | | | | | | | % of Total revenue | | 2 | % | | 2 | % | | 1 | % | |
On August 21, 2017, we issued threeInterest expense increased in fiscal 2022 compared to fiscal 2021. The increase was primarily driven by the five series of unsecured senior notes (“Senior Notes”) pursuant to a public debt offeringissued during the third quarter of fiscal 2022 in the aggregate principal amount of $4,000 million. Upon closing, a portion of$6.0 billion. We expect the net proceeds from the offering was used to repay two of the notes payable to Dell in the aggregate principal amount of $1,230 million. Interest expense increased by $60 million in fiscal 2019 compared to fiscal 2018 and $48 million in fiscal 2018 compared to fiscal 2016, due to the issuance of the Senior Notes, offset in part by a reduction inannual interest expense on theassociated with these senior notes payable to Dell.be approximately $100 million.
Other Income (Expense), net
Other income (expense), net during the periods presented was as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | For the Year Ended | | Fiscal Year | | Fiscal Year |
| | | | | | | | | | | | | | | | January 28, | | January 29, | | January 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| Other income (expense), net | | | | | | | | | | | | | | | | $ | (52) | | | $ | 191 | | | $ | 86 | | | $ | (242) | | | (127) | % | | $ | 107 | | | 126 | % |
| % of Total revenue | | | | | | | | | | | | | | | | — | % | | 2 | % | | 1 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| Fiscal Year |
| Fiscal Year |
| | February 1, |
| February 2, |
| December 31, |
| 2019 vs. 2018 |
| 2018 vs. 2016 |
| | 2019 |
| 2018 |
| 2016 |
| $ Change |
| % Change |
| $ Change |
| % Change |
| Other income (expense), net | $ | 806 |
| | $ | 66 |
| | $ | (17 | ) | | $ | 739 |
| | 1,110 | % | | $ | 84 |
| | 479 | % |
| % of Total revenue | 9 | % | | 1 | % | | — | % | | | | | | | | |
OtherThe change in other income (expense), net increased in fiscal 20192022 compared to fiscal 20182021 was primarily driven by gains and losses, whether realized or unrealized, on our investments in equity securities. During fiscal 2022, net losses of $31 million were recognized on our investments in equity securities compared to net gains of $157 million recognized during fiscal 2021. The change was primarily due to the adoptionabsence of ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurementa gain of Financial Assets and Financial Liabilities. Upon adoption, all gains and losses$163 million recognized during fiscal 2021 on non-marketableone of our investments in equity securities, realizedwhich completed its initial public offering during the third quarter of fiscal 2021. The fair value of the publicly traded investment is determined primarily using the quoted market price of its common stock. As a result, any volatility in its publicly traded common stock introduces a degree of variability to our consolidated statements of income.
The change was also driven by the loss on extinguishment of debt of $21 million associated with the redemption of $1.5 billion unsecured senior note due August 21, 2022 recognized during fiscal 2022.
Pursuant to a tax matters agreement entered into with Dell effective April 14, 2021 (the “Tax Matters Agreement”), we have agreed to indemnify one another for certain tax liabilities or tax benefits relating to periods prior to the Spin-Off and unrealized, arecertain adjustments to these amounts that will be recognized in future periods will be recorded in other income (expense), net on the consolidated statements of income (loss). During fiscal 2019,income. We cannot reasonably predict the amount that we recognized an unrealized gainmay receive or pay in future periods and it could introduce significant risk of $813 million on our investment in Pivotal Software Inc. (“Pivotal”), which included an unrealized gain of $668 million resulting from Pivotal’s initial public offering during the first quarter of fiscal 2019. As of February 1, 2019, the fair value of our investment in Pivotal was $833 million.
The fair value of our investment is determined primarily using the quoted market price of Pivotal’s Class A common stock. As a result, any volatility in Pivotal’s publicly traded Class A common stock introduces variability to our consolidated statements of income (loss).income.
The unrealized gain related to our investment in Pivotal was partially offset by the absence of gains recognized on two step acquisitions completed in fiscal 2018. During fiscal 2018, we completed two step acquisitions, Wavefront, Inc. (“Wavefront”) and VeloCloud, which resulted in an aggregate gain of $42 million for the remeasurement of our respective ownership interest in each company. Additionally, an unrealized loss of $14 million was recognized for an equity security in fiscal 2019, compared to an unrealized gain of $11 million in fiscal 2018.
Other income (expense), net increased in fiscal 2018 compared to fiscal 2016 primarily due to a $42 million gain recognized upon completion of two step acquisitions, Wavefront and VeloCloud and $6 million gain on extinguishment of debt related to the repayment of two of the notes payable to Dell in aggregate principal amount of $1,230 million in fiscal 2018. The increase in other income (expense), net, as compared to fiscal 2016, was also driven by gains and losses on foreign currency exchange.
Income Tax Provision (Benefit)
Our annual effectiveThe following table summarizes our income tax rate was 16.0%, 63.7% and 18.6%provision (benefit) during fiscal 2019, 2018, and 2016, respectively. Ourthe periods presented (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Year Ended |
| | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | 2022 | | 2021 | | 2020 |
| Income tax provision (benefit) | | | | | | | | $ | 265 | | | $ | 324 | | | $ | (4,918) | |
| Effective income tax rate | | | | | | | | 12.7 | % | | 13.6 | % | | N/M |
| N/M - Effective tax rate is not considered meaningful. | | | | | |
The decrease in our effective income tax rate in fiscal 2019 decreased2022 compared to fiscal 20182021 was primarily duedriven by the discrete tax impact related to our book and tax basis difference on our investment in equity securities, which provided a discrete tax benefit of $31 million recognized in fiscal 2022 as compared to a one-timediscrete tax expense of approximately $900$52 million recognized in fiscal 2018 resulting from the U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”). Our2021. The decrease was partially offset by an increase in effective income tax rate in fiscal 2018 was substantially higher compared to fiscal 2016 primarily due to this one-time expense resulting from the 2017 Tax Act.a discrete tax benefit of $59 million recognized as a deferred tax asset due to an intra-group transfer of Pivotal’s intellectual property rights to our Irish subsidiary during fiscal 2021.
Key components of the tax expense relatingPrior to the 2017 Tax ActSpin-Off, our financial results were included provisional estimates for the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (“Transition Tax”) of approximately $800 million and the remeasurement of our deferred tax assets and liabilities of approximately $100 million resulting from the reduction in the U.S. statutory corporate tax rate from 35% to 21%, effective January 1, 2018.
Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, we made reasonable estimates for the related tax effects and recorded provisional amounts on our consolidated financial statements for fiscal 2018. During fiscal 2019, we collected and prepared necessary data and finalized our income tax accounting analysis based on the guidance and interpretations issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies, and relevant authorities. The adjustment to the provisional amount was not material.
We are included in Dell’sDell consolidated tax groupreturn for U.S. federal income tax purposes, but our income tax provision or benefit was calculated primarily as though we were a separate taxpayer, with certain
transactions between us and will continue to be included in Dell’sDell being assessed using consolidated tax group for periods in which Dell beneficially owns at least 80%return rules. As a result of the total voting power and value of our combined outstanding Class A and Class B common 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 Dell due to the greater voting power of our Class B common stock as compared to our Class A common stock and other factors. EachSpin-Off, we are no longer a member of a consolidated tax 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 Dell’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 Dell consolidated tax group for U.S. federal income tax purposes, and our U.S. federal income tax wouldwill be reported separately from that of the Dell consolidated tax group. We and Dell have agreed to indemnify one another, pursuant to the Tax Matters Agreement, for certain tax liabilities or tax benefits relating to periods prior to the Spin-Off and certain adjustments to these amounts that will be recognized in future periods will be recorded in other income (expense), net on the consolidated statements of income. The actual amount that we may receive from or pay to Dell could vary depending on the outcome of tax matters arising from Dell’s future tax audits, which may not be resolved for years. Refer to Note P to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.
Although our results are includedOur effective tax rate in the Dell consolidated return for U.S. federal income tax purposes, our income tax provision, including the impact of taxes relating to the 2017 Tax Act, is calculated primarily as though we were a separate taxpayer. However, under certain circumstances, transactions between us and Dell are assessed using consolidated tax return rules.
Our future effective tax rate will depend upon the proportion of our income before provision for income taxes earned in the U.S. and in jurisdictions with a tax rate lower than the U.S. statutory rate. Our non-U.S. earnings are primarily earned by our subsidiariessubsidiary organized in Ireland, where the rate of taxation is lower than our U.S. tax rate and, as such, our annual effective tax rate can be significantly affected by the composition of our earnings in the U.S. and non-U.S. jurisdictions. Our future effective tax rate is subject to variance arising from changes in international tax laws and may also be significantly affected by such factors asas: changes in our business changes in tax laws or statutory rates,rates; changing interpretation of existing laws or regulations,regulations; the impact of accounting for stock-based compensation andcompensation; the recognition of excess tax benefits andor tax deficiencies within the income tax provision or benefit in the period in which they occur,occur; the impact of accounting for business combinations, changescombinations; shifts in the compositionamount of earnings in the U.S. compared with other regions in the world andworld; overall levels of income before tax,tax; changes in our international organization,organization; as well as the expiration of statute of limitations and settlements of audits.
Transition Period
In conjunction with our changeBeginning in fiscal year end, we had a Transition Period2023, the Tax Cuts and Jobs Act of 34 days that began on January 1, 2017 (the “2017 Tax Act”) eliminates the option to deduct research and ended on February 3, 2017. The most comparable prior-year period, the one month ended January 31, 2016, had a duration of 31 days.
The following table presents certain financial information during the periods presented (dollars in millions):
|
| | | | | | | |
| | Transition Period | | Comparable Period |
| | January 1 to | | January 1 to |
| | February 3, | | January 31, |
| | 2017 | | 2016 |
| Total revenue | $ | 512 |
| | $ | 469 |
|
| Operating income (loss) | (42 | ) | | 25 |
|
| Income tax provision (benefit) | (30 | ) | | 5 |
|
| Net income (loss) | (5 | ) | | 24 |
|
During the Transition Period, total revenue increased and license sales declined when compared to the one-month period ended January 31, 2016. Operating loss during the Transition Period reflected costs related to our global sales event, as well as increases in employee-related expenses compared to the one month ended January 31, 2016. Factors contributing to the increase in employee-related expenses include both incremental headcount and costs associated with three additional days of expense includeddevelopment expenditures immediately in the Transition Period.
Theyear incurred and requires taxpayers to amortize such expenditures over five years for domestic expenses and fifteen years for certain foreign expenses. If the existing statute is not deferred, modified or repealed or repealed retroactively as we expect, our effective income tax benefit recognized during the Transition Period was drivenrate in fiscal 2023 could increase materially. The actual impact will depend on if and when this statute is deferred, modified, or repealed by the pre-tax loss incurred during the period and our Internal Revenue Code Section 199 deduction (“Deduction”), which reflected the impact of claiming a higher Deduction for two of our U.S. tax return periods compared to the Deduction for fiscal 2016, which was calculated on a separate return basis. Two tax returns were required, with the first covering the period prior to the Dell Acquisition from January 1, 2016 to September 7, 2016Congress, including if such legislative action would be retroactively applied, and the second covering the period following the Dell Acquisition through Dell’samount of research and development expenses paid or incurred in fiscal 2017 which ended on February 3, 2017. The Deduction was greater during the two U.S tax return periods due to higher taxable income resulting from the acceleration of income recognized from unearned revenue for tax purposes.2023, among other factors.
Our Relationship with Dell
As of February 1, 2019,Following the Spin-Off, entities affiliated with Michael Dell controlled 31 million shares of Class A common stock and all 300 million shares of Class B common stock, representing 80.5% of our total outstanding shares of common stock and 97.4%(the “MSD Stockholders”), who serves as VMware’s Chairman of the combined voting powerBoard and chairman and chief executive officer of Dell, and entities affiliated with Silver Lake Partners (the “SLP Stockholders”), of which Egon Durban, a VMware director, is a managing partner, became owners of direct interests in VMware. Transactions with Dell continue to be considered related party transactions following the Spin-Off due to the MSD Stockholders’ and SLP Stockholders’ direct ownership in both VMware and Dell, as well as Mr. Dell’s executive position with Dell.
On November 1, 2021, in connection with the Spin-Off, we and Dell entered into the Commercial Framework Agreement to provide a framework under which we and Dell will continue our outstanding common stock. Forstrategic commercial relationship, particularly with respect to projects mutually agreed by the parties as having the potential to accelerate the growth of an industry, product, service or platform that may provide the parties with a descriptionstrategic market opportunity. The Commercial Framework Agreement has an initial term of related risks, referfive years, with automatic one-year renewals occurring annually thereafter, subject to “Risks Related to Our Relationship with Dell” in Part I, Item 1A of this Annual Report on Form 10-K.certain terms and conditions.
The information provided below includes a summary of the transactions entered into with Dell and Dell’s consolidated subsidiaries, including EMC (collectively, “Dell”) from the effective date of the Dell Acquisition through February 1, 2019. Transactions prior to the effective date of the Dell Acquisition reflect transactions with EMC and its consolidated subsidiaries.Dell.
Transactions with Dell
We engaged with Dell in the following ongoing related party transactions, which resulted in revenue and receipts and unearned revenue for us:
•Pursuant to original equipment manufacturer (“OEM”)OEM and reseller arrangements, Dell integrates or bundles our products and services with Dell’s products and sells them to end users. Dell also acts as a distributor, purchasing our standalone products and services for resale to end-user customers through VMware-authorized resellers. Revenue under these arrangements is presented net of related marketing development funds and rebates paid to Dell. In addition, we provide professional services to end users based upon contractual agreements with Dell.
•Dell purchases products and services from us for its internal use.
Pursuant to an ongoing distribution agreement, we act as the selling agent for certain products and services of Pivotal, a subsidiary of Dell, in exchange for an agency fee. Under this agreement, cash is collected from the end user by us and remitted to Pivotal, net of the contractual agency fee.
•From time to time, VMwarewe and Dell enter into agreements to collaborate on technology projects and Dell pays VMwareus for services or reimburses VMwareus for costs incurred by VMware,us, in connection with such projects.
During fiscal 2022, fiscal 2021 and fiscal 2020, revenue from Dell accounted for 38%, 35% and 31% of our consolidated revenue, respectively. During fiscal 2022, fiscal 2021 and fiscal 2020, revenue recognized on transactions where Dell acted as an OEM accounted for 13%, 12% and 12% of total revenue from Dell, respectively, or 5%, 4% and 4% of our consolidated revenue, respectively.
Dell purchases our products and services directly from us, as well as through our channel partners. Information about our revenue and receipts, and unearned revenue from such arrangements, for the periods presented consisted of the following (table in millions):
| | | | Revenue and Receipts | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Transition Period | | Unearned Revenue | | | Revenue and Receipts | | | Unearned Revenue |
| | For the Year Ended | | January 1 to | | As of | | | For the Year Ended | | | As of |
| | February 1, | | February 2, | | December 31, | | February 3, | | February 1, | | February 2, | | | January 28, | | January 29, | | January 31, | | | January 28, | | January 29, |
| | 2019 | | 2018(1) | | 2016(1) | | 2017(1) | | 2019 | | 2018(1) | | | 2022 | | 2021 | | 2020 | | | 2022 | | 2021 |
| Reseller revenue | $ | 2,180 |
| | $ | 1,315 |
| | $ | 612 |
| | $ | 44 |
| | $ | 2,375 |
| | $ | 1,236 |
| Reseller revenue | | $ | 4,764 | | | $ | 4,053 | | | $ | 3,288 | | | | $ | 5,550 | | | $ | 4,952 | |
| Internal-use revenue | 22 |
| | 34 |
| | 28 |
| | 7 |
| | 13 |
| | 12 |
| Internal-use revenue | | 56 | | | 63 | | | 82 | | | | 39 | | | 45 | |
| Agency fee revenue | 5 |
| | 2 |
| | 4 |
| | — |
| | — |
| | — |
| |
| Collaborative technology project receipts | 4 |
| | — |
| | — |
| | — |
| | n/a |
| | n/a |
| |
|
(1) Fiscal 2018,Sales through Dell as a distributor, which is included in reseller revenue, comprise the largest route-to-market for our sales.
Receipts from Dell for collaborative technology projects were not material, $13 million and $10 million during fiscal 20162022, fiscal 2021 and the Transition Period amounts have been adjusted to reflect the impact of our retrospective adoption of Topic 606, effective February 3, 2018.fiscal 2020, respectively.
Customer deposits resulting from transactions with Dell were $85$298 million and $37$214 million as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively.
We engaged with Dell in the following ongoing related party transactions, which resulted in costs to us:
•We purchase and lease products and purchase services from Dell.
•From time to time, we and Dell enter into agreements to collaborate on technology projects and we pay Dell for services provided to us by Dell related to such projects.
•In certain geographic regions where we do not have an established legal entity, we contract with Dell subsidiaries for support services and support from Dell personnel who are managed by us. The costs incurred by Dell on our behalf related to these employees are charged to us with a mark-up intended to approximate costs that would have been incurred had we contracted for such services with an unrelated third party. These costs are included as expenses on our consolidated statements of income (loss) and primarily include salaries, benefits, travel and occupancy expenses. Dell also incurs certain administrative costs on our behalf in the U.S. that are recorded as expenses on our consolidated statements of income (loss).income.
In•Prior to the Spin-Off, in certain geographic regions, Dell filesfiled a consolidated indirect tax return, which includesincluded value added taxes and other indirect taxes collected by us from our customers. We remitremitted the indirect taxes to Dell and Dell remitsremitted the tax payment to the foreign governments on our behalf.
•From time to time, we invoice end users on behalf of Dell for certain services rendered by Dell. Cash related to these services is collected from the end user by us and remitted to Dell.
•From time to time, we enter into agency arrangements with Dell that enable us to sell our subscriptions and services, leveraging the Dell enterprise relationships and end customer contracts.
Information about our payments fromfor such arrangements during the periods presented consisted of the following (table in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Year Ended |
| | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | 2022 | | 2021 | | 2020 |
Purchases and leases of products and purchases of services(1) | | | | | | | | $ | 228 | | | $ | 206 | | | $ | 242 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Dell subsidiary support and administrative costs | | | | | | | | 38 | | | 74 | | | 119 | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
Purchases and leases of products and purchases of services(1) | $ | 198 |
| | $ | 142 |
| | $ | 97 |
| | $ | 14 |
|
| Dell subsidiary support and administrative costs | 106 |
| | 123 |
| | 105 |
| | 13 |
|
(1) Amount includes indirect taxes that were remitted to Dell during the periods presented.
We also purchase Dell products through Dell’s channel partners. Purchases of Dell products through Dell’s channel partners were not significant during the periods presented.
From time to time, we and Dell also enter into joint marketing, sales, branding and product development arrangements, for which both parties may incur costs.
During the thirdfourth quarter of fiscal 2019,2020, we acquiredentered into an arrangement with Dell to transfer approximately 250 professional services employees from Dell to us. These employees are experienced in providing professional services that deliver our technology and employees relatedthis transfer centralizes these resources within our Company in order to serve our customers more efficiently and effectively. The transfer was substantially completed during the Dell EMC Service Assurance Suite, which provides root cause analysis management software for communications service providers, from Dell. The purchase of the Dell EMC Service Assurance Suite was accounted for as a transaction by entities under common control. The amount of the purchase price in excess of the historical cost of the acquired assets was recognized as a reduction to retained earnings on the consolidated balance sheets. Transition services are to be provided by Dell over a period of 18 months, starting from the date of the acquisition. Payments for transition services are not expected to be significant.
During the secondfourth quarter of fiscal 2018, we acquired Wavefront. Upon closing of2020 and did not have a material impact to the acquisition,consolidated financial statements. We also expect that Dell was paid $20 million in cash for its non-controlling ownership interest in Wavefront.will continue to resell our consulting solutions.
Dell Financial Services (“DFS”)
DFS providedprovides financing to certain of our end users at our end users’ discretion. Upon acceptance of the financing arrangement by both our end userusers and DFS, amounts classified as trade accounts receivable are reclassified to the current portion of due from related parties net on the consolidated balance sheets. Revenue recognized on transactions financed through DFS was recorded net of financing fees. Financing fees whichon arrangements accepted by both parties were $40$29 million, $60 million and $25$66 million during the year ended February 1, 2019fiscal 2022, fiscal 2021 and February 2, 2018,fiscal 2020, respectively. Financing fees during the Transition Period were not significant.
Due To/From Related Parties Net
AmountsAs of January 28, 2022, the current and non-current amounts due from and due to andrelated parties were presented separately on the consolidated balance sheets, as a right of setoff no longer exists subsequent to the Spin-Off. As of January 29, 2021, the current portion of due from related parties was presented net of the current portion of due to related parties on the consolidated balance sheets.
The following table summarizes the current portion of due from and due to related parties as of the periods presented consisted of the followingJanuary 29, 2021 (table in millions):
| | | | | | | | | |
| | | |
| | | |
| Due from related parties | | | $ | 1,558 | |
Due to related parties(1) | | | 120 | |
| | | |
| | | |
| Current portion of due from related parties | | | $ | 1,438 | |
| | | |
| | | |
| | | |
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Due from related parties | $ | 1,079 |
| | $ | 638 |
|
| Due to related parties | 142 |
| | 106 |
|
| Due from related parties, net | $ | 937 |
| | $ | 532 |
|
Amounts included in the current and non-current portions of due from related parties net, excluding DFS and tax obligations, are generally settled in cash within 60 days of each quarter-end.
Special Dividend
On July 1, 2018, our board of directors declared a conditional Special Dividend of $11 billion, payable pro-ratadue to our stockholdersrelated parties on the consolidated balance sheets as of January 28, 2022 included amounts due to Dell pursuant to the record date. During the fourth quarter of fiscal 2019, the conditions of the Special Dividend were met. The Special Dividend was paid on December 28, 2018 to stockholders of record as of the close of business on December 27, 2018 in the amount of $26.81 per outstanding share of our common stock. Dell was paid approximately $9 billion in cash as a result of its financial interest in our common stock as of the record date.Tax Matters Agreement. Refer to Note P to the consolidated financial statementsstatement in Part II, Item 8 of this Annual Report on Form 10-K for more information.
Stock Purchase ArrangementsAmounts included in the current portion of due from related parties, with Dellthe exception of DFS and tax obligations, are generally settled in cash within 60 days of each quarter-end.
From timeSpecial Dividend
On November 1, 2021, we paid an $11.5 billion Special Dividend, pro rata, to time, we enter into stock purchase arrangements with Dell. The following table summarizes purchaseseach of ourthe holders of Class A common stock fromStock and Class B Stock, including Dell, duringas of the periods presented, pursuant to stock purchase agreements entered into on March 29, 2017 (aggregate purchase price in millions, shares in thousands):
|
| | | |
| | For the Year Ended |
| | February 2, |
| | 2018 |
| Aggregate purchase price | $ | 725 |
|
Class A common shares repurchased(1) | 7,572 |
|
| Weighted-average price per share | $ | 95.75 |
|
(1) The aggregateRecord Date. Based upon the number of shares purchased was determined based upon a volume-weighted average price during a defined period, less an agreed upon discount.
There were no purchases of our Class A common stock fromheld by Dell during the year ended February 1, 2019 and the Transition Period.
Notes Payable to Dell
On January 21, 2014, we entered into a note exchange agreement with our parent company providing for the issuance of three promissory notes in the aggregate principal amount of $1,500 million, which consisted of outstanding principal due on the following dates: $680 million due May 1, 2018, $550 million due May 1, 2020 and $270 million due December 1, 2022.
On August 21, 2017, we repaid twoas of the notes payableRecord Date, approximately $9.3 billion in cash was paid to Dell in the aggregate principal amount of $1,230 million, representing repayment of the note due May 1, 2018 at par value and repayment of the note due May 1, 2020 at a discount. During the year ended February 2, 2018, VMware recognized a gain on extinguishment of debt of $6 million, which was recorded in other income (expense), net on the consolidated statements of income (loss). The remaining note payable of $270 million due December 1, 2022 may be prepaid without penalty or premium.
Interest is payable quarterly in arrears, at the annual rate of 1.75%. During the year ended February 1, 2019 and the Transition Period, interest expense on the notes payable to Dell was not significant. Interest expense recognized during the years ended February 2, 2018 and December 31, 2016 was $16 million and $26 million, respectively.
Pivotal
As of February 2, 2018, we had a 20% ownership interest in Pivotal, and the investment was accounted for using the cost method. The carrying value of the investment was included in other assets on the consolidated balance sheets and was $20 million as of February 2, 2018. Prior to Pivotal’s initial public offering on April 20, 2018, our previously held preferred shares were converted to shares of non-trading Class B common stock, resulting in us having a financial interest of 17% and a voting interest of 24% in Pivotal as of February 1, 2019. We recognized an unrealized gain of $813 million during the year ended February 1, 2019 in other income (expense), net on the consolidated statements of income (loss) to adjust our investment in Pivotal to its fair value of $833 million as of February 1, 2019, including an unrealized gain of $668 million recognized as a result of Pivotal’s initial public offering.Dell. Refer to Note IA to the consolidated financial statementsstatement in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.more information regarding the Spin-Off.
As of January 29, 2021, we had an outstanding promissory note payable to Dell in the principal amount of $270 million due December 1, 2022. We repaid the outstanding balance of $270 million during the third quarter of fiscal 2022. During each of fiscal 2022, fiscal 2021 and fiscal 2020, interest expense on the note payable to Dell was not significant.
Liquidity and Capital Resources
As of the periods presented, we held cash, cash equivalents and short-term investments as follows (table in millions):
| | | | | | | | | | | |
| | January 28, | | January 29, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 3,614 | | | $ | 4,692 | |
| Short-term investments | 19 | | | 23 | |
| Total cash, cash equivalents and short-term investments | $ | 3,633 | | | $ | 4,715 | |
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Cash and cash equivalents | $ | 2,830 |
| | $ | 5,971 |
|
| Short-term investments | 19 |
| | 5,682 |
|
| Total cash, cash equivalents and short-term investments | $ | 2,849 |
| | $ | 11,653 |
|
Our cash, cashCash equivalents and short-term investments declined significantly as a result of the payment of the Special Dividend on December 28, 2018.
We held a diversified portfolio of money-market funds and fixed income securities. Our fixed income securities were denominated in U.S. dollars and primarily consisted of highly liquid debt instruments of the U.S. Government and its agencies, municipal obligations, mortgage-backed securities and U.S. and foreign corporate debt securities. We limitedamounts invested in money market funds. To diversify our credit risk, we limit the amount of our investments with any single issuer, and monitoredmonitor the diversity of the portfolio and limit the amount of investments held at any single financial institution, thereby diversifying our credit risk.institution. Short-term investments consisted of marketable equity securities in a company that completed its initial public offering during the third quarter of fiscal 2021.
We continue to expect that cash generated by operations will be our primary source of liquidity. We also continue to believe that existing cash, and cash equivalents and investments,our borrowing capacity, together with any cash generated from operations, will be sufficient to fund our operations for at least the next twelve months. As a result of the enactment of the 2017 Tax Act, we have greater flexibility to repatriate foreign earnings in future periods without significant U.S. tax impact. While we believe these cash sources will be sufficient to fund our operations, our overall level of cash needs may be affected by capital allocation decisions that may include the number and size of acquisitions and stock repurchases, among other things. We remain committedexpect to ause free cash flow primarily to repay our outstanding indebtedness through the end of fiscal 2023. In addition, we plan to continue with our balanced capital allocation policy through investing in our product and solution offerings, acquisitions and returning capital to stockholders through share repurchases. Additionally, given the unpredictable nature of our outstanding legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a negative impact on our overall liquidity.
Beginning in fiscal 2023, the 2017 Tax Act eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for domestic expenses and fifteen years for certain foreign expenses. If the existing statute is not deferred, modified or repealed or repealed retroactively as we expect, our effective income tax rate in fiscal 2023 could increase materially and our cash taxes could increase by an amount in excess of $500 million. The actual impact will depend on if and when this statute is deferred, modified, or repealed by Congress, including if such legislative action would be retroactively applied and the amount of research and development expenses paid or incurred in fiscal 2023, among other factors.
The 2017 Tax Act imposed a mandatory one-time Transition Tax and eliminateseliminated U.S. Federal taxes on foreign subsidiary distributions. The Transition Tax was calculated on a separate tax return basis andbasis. Our liability related to the amount unpaidTransition Tax as of February 1, 2019January 28, 2022 was $671$504 million, which we expect to pay over the next seven years.four years pursuant to a letter agreement between Dell, EMC and us executed during the first quarter of fiscal 2020. Actual tax payments made to Dell pursuant to the tax sharing agreement may differ materially from our total estimated tax liability calculated on a separate tax return basis. ThePrior to the Spin-Off, the difference between our estimated liability and the amount paid to Dell iswas recognized as a component of additional paid-in capital, generally in the period in which the consolidated tax return iswas filed.
Subsequent to the Spin-Off, pursuant to the Tax Matters Agreement with Dell, we have agreed to indemnify one another for certain tax liabilities or tax benefits relating to periods prior to the Spin-Off and certain adjustments to these amounts that will be recognized in future periods will be recorded in other income (expense), net on the consolidated statements of income.
Our cash flows summarized for the periods presented were as follows (table in millions):
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018(1) | | 2016(1) | | 2017(1) |
| Net cash provided by (used in): | | | | | | | |
| Operating activities | $ | 3,663 |
| | $ | 3,218 |
| | $ | 2,379 |
| | $ | 361 |
|
| Investing activities | 4,447 |
| | (1,512 | ) | | (463 | ) | | 7 |
|
| Financing activities | (11,219 | ) | | 1,058 |
| | (1,619 | ) | | 62 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (3,109 | ) | | $ | 2,764 |
| | $ | 297 |
| | $ | 430 |
|
(1) Fiscal 2018, fiscal 2016 and the Transition Period amounts have been adjusted to reflect the impact of our retrospective adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| | | | | January 28, | | January 29, | | January 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Net cash provided by (used in): | | | | | | | | |
| Operating activities | | | | $ | 4,357 | | | $ | 4,409 | | | $ | 3,872 | |
| Investing activities | | | | (329) | | | (713) | | | (2,728) | |
| Financing activities | | | | (5,135) | | | (1,957) | | | (1,707) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | — | | | — | | | (2) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | | | $ | (1,107) | | | $ | 1,739 | | | $ | (565) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Operating Activities
Cash provided by operating activities increased $445decreased by $53 million induring fiscal 20192022 compared to fiscal 2018. Cash provided by operating activities benefited from an increase in cash collections2021, primarily due to increased sales. These positive impacts were partially offset by increased cash payments for employee-related expenses, including salaries, bonuses and commissions, resulting primarily from growth in headcount and salaries, as well as increasedhigher cash payments foroutflows related to operating expenses, our employee stock purchase plan. Additionally, cash outflows related toplan and interest on the Senior Notes and tax paymentsoutstanding debts. These activities were higher in fiscal 2019 compared to fiscal 2018.
Cash providedpartially offset by operating activities increased $839 million in fiscal 2018 compared to fiscal 2016. Cash provided by operating activities benefited from increased cash collections due to increased sales and improved linearity due to the fiscal year change in fiscal 2018, and a decrease indecreased tax payments as a result of significant tax payments made duringcompared to fiscal 2016. These positive impacts were partially offset by higher cash outflows related to operating expenses, as well as increased cash payments for employee-related expenses, including salaries, bonuses and commissions, resulting primarily from growth in headcount.
Cash provided by operating activities of $361 million during the Transition Period primarily reflected cash provided by cash collections, partially offset by cash payments for employee-related expenses.2021.
Investing Activities
Cash used in investing activities is generally attributable to the purchase of available-for-sale securities, business acquisitions and capital expenditures. Cash provideddecreased by investing activities is affected by the sales and maturities of our available-for-sale securities.
Cash provided by investing activities increased $5,959$383 million induring fiscal 20192022 compared to fiscal 2018,2021, primarily driven primarily by the liquidationa decrease in cash used in business combinations, as well as an increase in proceeds from sales of our fixed income investments to fund the Special Dividend during fiscal 2019,in equity securities. These activities were partially offset by an increase in cash used in business combinations of $267 million asadditions to property and equipment compared to fiscal 2018. The increase was also due to an increase2021.
Cash used in investing activities increased $1,049 million in fiscal 2018 compared to fiscal 2016, driven primarily by an increase in net cash used in business combinations of $597 million, property and equipment additions of $110 million, and net purchases of available-for-sale securities of $311 million.
Financing Activities
Cash used in financing activities increased $12,277 million inby $3.2 billion during fiscal 20192022 compared to fiscal 2018. The increase was2021, primarily due todriven by the payment of the $11$11.5 billion Special Dividend on December 28, 2018, partiallyin fiscal 2022, offset in part by an increase in indebtedness incurred, as well as a decrease in the aggregate amount of $1,407 million inindebtedness repaid during fiscal 2022 compared to fiscal 2021. In addition, cash used for repurchases of shares of our Class A common stock in fiscal 2019, asincreased $224 million compared to fiscal 2018, due to2021.
Unsecured Senior Notes
The following table summarizes the temporary suspensionprincipal on our series of our stock repurchase program in light of Dell’s announcement of their evaluation of strategic business opportunities outlined in their Schedule 13D/A filed February 2, 2018, which concluded upon the announcement of the Dell Class V Transaction on July 2, 2018. Additionally, the increase in cash used in financing activities was driven by the absence of the net cash proceeds received from the issuance of long-term debt, partially offset by the repayment of two of our outstandingunsecured senior notes payable to Dell in fiscal 2018.
Cash provided by financing activities increased $2,677 million in fiscal 2018 compared to fiscal 2016, driven primarily by the net cash proceeds received from the issuance of long-term debt of $3,961 million, partially offset by the repayment of two of our outstanding notes payable to Dell of $1,225 million.
Cash provided by financing activities of $62 million during the Transition Period was driven by cash proceeds from the issuance of common stock of $61 million, resulting primarily from our employee stock purchase plan.
Long-term Debt
Onissued August 21, 2017 we(the “2017 Senior Notes”), three series of unsecured senior notes issued April 7, 2020 (the “2020 Senior Notes”) and five series of unsecured senior notes issued August 2, 2021 (the “2021 Senior Notes”, collectively with the 2017 Senior Notes pursuant to a public debt offeringand 2020 Senior Notes, the “Senior Notes”) as of January 28, 2022 (amounts in the aggregate principal amount of $4,000 million, which consisted of outstanding principal duemillions):
| | | | | | | | | | |
| 2017 Senior Notes: | | | | | | |
| | | | | | |
| | | | | | |
| 3.90% Senior Note Due August 21, 2027 | $ | 1,250 | | | | | | |
| 2020 Senior Notes | | | | | | |
| 4.50% Senior Note Due May 15, 2025 | 750 | | | | | | |
| 4.65% Senior Note Due May 15, 2027 | 500 | | | | | | |
| 4.70% Senior Note Due May 15, 2030 | 750 | | | | | | |
| 2021 Senior Notes: | | | | | | |
| 0.60% Senior Note Due August 15, 2023 | 1,000 | | | | | | |
| 1.00% Senior Note Due August 15, 2024 | 1,250 | | | | | | |
| 1.40% Senior Note Due August 15, 2026 | 1,500 | | | | | | |
| 1.80% Senior Note Due August 15, 2028 | 750 | | | | | | |
| 2.20% Senior Note Due August 15, 2031 | 1,500 | | | | | | |
| Total principal amount | $ | 9,250 | | | | | | |
Interest on the following dates: $1,250 million due2021 Senior Notes is payable semiannually in arrears, on February 15 and August 21,15 of each year, commencing on February 15, 2022. Interest on the 2020 $1,500 million due August 21, 2022Senior Notes is payable semiannually in arrears, on May 15 and $1,250 million due August 21, 2027.November 15 of each year, commencing on November 15, 2020. The notes bear interest rate on the 2020 Senior Notes is subject to adjustment based on certain rating events. Interest on the 2017 Senior Notes is payable semiannually in arrears, on February 21 and August 21 of each year, at annual rates of 2.30%, 2.95%commencing on February 21, 2018. During fiscal 2022, fiscal 2021 and 3.90%, respectively. In fiscal 2019,2020, $185 million, $170 million and $122 million, respectively, was paid for interest related to the Senior Notes. We used a portion of the net proceeds from the offering to repay certain notes payable to Dell due May 1, 2018 and May 1, 2020.
The Senior Notes also includecontain restrictive covenants that, in certain circumstances, limit our ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.
As of January 28, 2022, the aggregate future principal and interest payments on the outstanding Senior Notes were $10.7 billion, with $230 million payable within 12 months.
On January 18, 2022, we exercised a make-whole call and redeemed the $1.5 billion unsecured senior note due August 21, 2022 at a premium. The loss on extinguishment of debt was $21 million during fiscal 2022 and was recognized in other income (expense), net on the consolidated statements of income.
On May 11, 2020, we exercised a make-whole call and redeemed the $1.3 billion unsecured senior note due August 21, 2020 at a premium. The loss on extinguishment of debt was not material during fiscal 2021 and was recognized in other income (expense), net on the consolidated statements of income.
Senior Unsecured Term Loan Facility
On September 2, 2021, we received commitments from financial institutions for a three-year senior unsecured term loan facility and a five-year senior unsecured term loan facility that provided us with a one-time aggregate borrowing capacity of up to $4.0 billion (the “2021 Term Loan”). On November 1, 2021, we drew down an aggregate of $4.0 billion with a weighted average interest rate of 0.90%. The drawdown was used to fund a portion of the Special Dividend. On January 25, 2022, we repaid an aggregate of $500 million.
As of January 28, 2022, the outstanding principal balance on the 2021 Term Loan was $3.5 billion, none of which is payable within 12 months. Given the variable nature of the interest on the term loan facilities, including when the repayment will take place, interest payments have not been included in the aggregate amount payable in future periods.
Revolving Credit Facility
On September 12, 2017,2, 2021, we entered into an unsecured credit agreement establishing a revolving credit facility (“Credit Facility”) with a syndicate of lenders that provides us with a borrowing capacity of up to $1,000 million, which may be used $1.5 billion for general corporate purposes.purposes (the “2021 Revolving Credit Facility”). The 2021 Revolving Credit Facility replaced our existing $1.0 billion revolving credit agreement contains certain representations, warrantiesfacility that was entered into on September 12, 2017 and covenants.was undrawn. Commitments under the 2021 Revolving Credit Facility are available for a period of five years, which may be extended, subject to the satisfaction of certain conditions, by up to two one-year periods. AsThe 2021 Revolving Credit Facility contains certain representations, warranties and covenants.
As of February 1, 2019,January 28, 2022, there werewas no outstanding borrowingsborrowing under the 2021 Revolving Credit Facility.
Notes Payable to Dell
On January 21, 2014, we entered into a note exchange agreement with Dell providing for the issuance of three promissory notes in the aggregate principal amount of $1,500 million, which consisted of outstanding principal due on the following dates: $680 million due May 1, 2018, $550 million due May 1, 2020 and $270 million due December 1, 2022. During fiscal 2018, we repaid the notes due May 1, 2018 and May��1, 2020.
Interest is payable quarterly in arrears, at the annual rate of 1.75%. The amount paid for interest related to these notes was not significant in fiscal 2019, and was $19 million and $26 million in fiscal 2018 and fiscal 2016.
Stock Repurchase Program
From time to time, we repurchase stock pursuant to authorized stock repurchase programs in open market transactions as permitted by securities laws and other legal requirements. We are not obligated to purchase any shares under our stock repurchase programs. The timing of any repurchases and the actual number of shares repurchased depends on a variety of factors, including our stock price, cash requirements for operations and business combinations, corporate and regulatory requirements and other market and economic conditions. Purchases canmay be discontinued at any time we believe additional purchases are not warranted. From time to time, we also purchase stock in private transactions, such as with Dell. All shares repurchased under our stock repurchase programs are retired. During August 2017, our board of directors authorized the repurchase of up to $1,000 million of Class A common stock through August 31, 2018, of which $834 million remained available for repurchase as of February 1, 2019. On July 1, 2018, our board of directors extended authorization of the existing stock repurchase program through August 31, 2019.
Refer to Note PQ to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Off-Balance Sheet Arrangements and Contractual Obligations
Guarantees and Indemnification Obligations
We enter into agreements instock repurchase authorizations approved by our board of directors during the ordinary course of business with, among others, customers, distributors, resellers, system vendors and systems integrators. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require us to indemnify the other party against certain claims relating to property damage, personal injury, or the acts or omissions by us and our employees, agents or representatives.
We have agreements with certain vendors, financial institutions, lessors and service providers pursuant to which we have agreed to indemnify the other party for specified matters, such as acts and omissions by us and our employees, agents, or representatives.
We have procurement or license agreements with respect to technology that we have obtained the right to use in our products and agreements. Under some of these agreements, we have agreed to indemnify the supplier for certain claims that may be brought against such party with respect to our acts or omissions relating to the supplied products or technologies.
We have agreed to indemnify our directors and executive officers, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or officer. Our by-laws and charter also provide for indemnification of our directors and officers to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. We also indemnify certain employees who provide service with respect to employee benefits plans, including the members of the Administrative Committee of the VMware 401(k) Plan, and employees who serve as directors or officers of our subsidiaries.
In connection with certain acquisitions, we have agreed to indemnify the former directors and officers of the acquired company in accordance with the acquired company’s by-laws and charter in effect immediately prior to the acquisition or in accordance with indemnification or similar agreements entered into by the acquired company and such persons. We typically purchase a “tail” directors and officers insurance policy, which should enable us to recover a portion of any future indemnification obligations related to the former directors and officers of an acquired company.
We are unable to determine the maximum potential amount under these indemnification agreements due to our limited history with prior indemnification claims and the unique facts and circumstances involved in each particular situation. Historically, costs related to these indemnification provisions have not been significant.
Contractual Obligations
WeIn addition to the Senior Notes and the 2021 Term Loan discussed earlier, we have variousother contractual obligations impactingthat impact our liquidity. The following represents our other contractual obligations as of February 1, 2019 (tableJanuary 28, 2022.
•Future Lease Commitments—We have operating and finance leases primarily related to office facilities and equipment. As of January 28, 2022, our future minimum lease payments under non-cancellable operating and finance leases were $1.4 billion, with $183 million payable within 12 months. The amounts exclude legally binding minimum lease payments for leases signed but not yet commenced of $29 million, as well as expected sublease income.
•Purchase Obligations—Our purchase obligations consist of agreements to purchase goods and services entered into in millions):the ordinary course of business. As of January 28, 2022, we had non-cancellable unconditional purchase obligations of $615 million, with $473 million payable within 12 months.
•Tax Obligations and Uncertain Tax Positions—As of January 28, 2022, future cash payments related to the Transition Tax were $504 million, with $59 million payable within 12 months. As of January 28, 2022, we had $527 million of gross uncertain tax benefits, excluding interest and penalties. The timing of future payments relating to the uncertain tax benefits is highly uncertain. Based on the timing and outcome of examinations of our subsidiaries, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that within the next 12 months total unrecognized tax benefits could be potentially reduced by approximately $20 million.
•Asset Retirement Obligations—Asset retirement obligations represent the estimated costs to bring certain office buildings that we lease back to their original condition after the termination of the lease. As of January 28, 2022, we had asset retirement obligations of $22 million, with an immaterial amount payable within 12 months.
Refer to Note E to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information on our contractual commitments, guarantees and indemnification obligations.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Senior Notes(1) | $ | 4,674 |
| | $ | 122 |
| | $ | 1,465 |
| | $ | 1,642 |
| | $ | 1,445 |
|
Note payable to Dell(2) | 288 |
| | 5 |
| | 9 |
| | 274 |
| | — |
|
Operating leases(3) | 870 |
| | 109 |
| | 143 |
| | 95 |
| | 523 |
|
| Purchase obligations | 339 |
| | 143 |
| | 188 |
| | 8 |
| | — |
|
Tax obligations(4) | 671 |
| | 57 |
| | 117 |
| | 168 |
| | 329 |
|
Other contractual commitments(5) | 23 |
| | 5 |
| | 8 |
| | 6 |
| | 4 |
|
| Sub-Total | 6,865 |
| | 441 |
| | 1,930 |
| | 2,193 |
| | 2,301 |
|
Uncertain tax positions(6) | 382 |
| | | | | | | | |
| Total | $ | 7,247 |
| | | | | | | | |
| |
(1)
| Consists of principal and interest payments on the Senior Notes. Refer to “Liquidity and Capital Resources” for a discussion of the public debt offering we issued on August 21, 2017 in the aggregate principal amount of $4,000 million. |
| |
(2)
| Consists of principal and interest payments on the outstanding note payable to Dell. Refer to “Liquidity and Capital Resources” for a discussion of the $270 million note payable we entered into with Dell per the note exchange agreement from January 21, 2014. |
| |
(3)
| Our operating leases are primarily for facility space and land. Amounts in the table above exclude legally binding minimum lease payments for leases signed but not yet commenced of $164 million, as well as expected sublease income. |
| |
(4)
| Consists of future cash payments related to the Transition Tax. |
| |
(5)
| Consists of various contractual agreements, which include commitments on the lease for our Washington data center facility and asset retirement obligations. |
| |
(6)
| As of February 1, 2019, we had $382 million of gross uncertain tax benefits, excluding interest and penalties. The timing of future payments relating to these obligations is highly uncertain. Based on the timing and outcome of examinations of our subsidiaries, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that within the next 12 months total unrecognized tax benefits could be potentially reduced by approximately $84 million. |
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we are required to make estimates, assumptions and judgments that affect the amounts reported on our financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. We base our estimates, assumptions and
judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. These estimates may change in future periods and will be recognized in the consolidated financial statements as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they becomebecomes known. 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 and estimates set forth below involve a higher degree of judgment and complexity in their application than our other significant accounting policies. Our senior management has reviewed our critical accounting policies and related disclosures with the Audit Committee of the Board of Directors. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed
materially from actual results. Refer to Note A to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information on significant accounting policies and estimates used in the preparation of the consolidated financial statements.
As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the consolidated financial statements as new events occur and additional information becomes known. To the extent our actual results differ materially from those estimates and assumptions, our future financial statements could be affected.
Revenue Recognition
We derive revenue primarily from licensing software under perpetual licenses orand consumption-based contracts and related software maintenance and support, software subscriptions (“subscriptions”), hosted services, training consulting services and hostedconsulting services. We account for a contract with a customer if all criteria defined by the guidance are met, including collectibilitycollectability of the consideration is probable. Revenue is recognized upon transfer of control of licenses or services to our customer in an amount that reflects the consideration we expect to receive in exchange for those licenses or services. ControlAt inception of a promised good or service may be transferred tocontract with a customer, either at a point in time or over time, which affectswe evaluate whether the timing of revenue recognition. Our contracts with customers may include a combination of licensespromised products and services represent distinct performance obligations within the context of the contract. Performance obligations that are accounted forboth capable of being distinct on their own and distinct within the context of the contract are recognized on their own as distinct performance obligations. Performance obligations under which both of these two criteria are not met are recognized as a combined, single performance obligation. Determining whether our licenses, subscriptions and services are considered distinct performance obligations that should be accounted for separately or together often involves assumptions and significant judgments that can have a significant impact on the timing and amount of revenue recognized.
Revenue is recognized upon transfer of control of licenses, subscriptions or services to our customer in an amount that reflects the consideration we expect to receive in exchange for those licenses, subscriptions or services. Control of a promised license, subscription or service may be transferred to a customer either at a point in time or over time, which affects the timing of revenue recognition. Licenses that represent distinct performance obligations are recognized at a point in time when the software license keys have been made available to the customer. Licenses sold as part of our subscriptions that do not represent distinct performance obligations are recognized over time along with the associated services that form a combined performance obligation with the software. Management assesses relevant contractual terms in contracts with customers and applies significant judgment in identifying and accounting for all terms and conditions in certain contracts.
In addition, revenue from on-premises license software licenses sold to OEMs is recognized when the sale to the end user occurs. Revenue is recognized upon reporting by the OEMs of their sales, and for the period where information of the underlying sales has not been made available, revenue is recognized based upon estimated sales. Our VCPP partners rentlicense on-premises licensessoftware from us and the rental fee is recognized as license revenue upon consumption. License revenueon a monthly basis under a usage-based model. Revenue recognition is based uponon fees associated with reported license consumption by the VCPP partners and includes estimates for the period when consumption information has not been made available. Certain contracts include third-party offerings and revenue may be recognized net of the third-party costs, based upon an assessment as to whether we had control of the underlying third-party offering.
We enter into revenue contracts with multiple performance obligations in which a customer may purchase combinations of licenses, maintenance and support, subscriptions, hosted services, training, consulting services, hosted services and rights to future products and services. For contracts with multiple performance obligations, we allocate total transaction value to the identified underlying performance obligations based on relative standalone selling price (“SSP”). We typically estimate SSP of servicesperformance obligations based on observable transactions when the servicesobligations are sold on a standalone basis and those prices fall within a reasonable range. We utilize the residual approach to estimate SSP of license as the licenses are not sold standalone and the same products areprimarily for offerings when sold to different customers at a broad range of prices which are highly variable.variable pricing. Changes in assumptions or judgments used in determining standalone selling price could have a significant impact on the timing and amount of revenue we report in a particular period.
Professional services include design, implementation, training and consulting services. Professional services performed by us represent distinct performance obligations as they do not modify or customize licenses sold. These services are not highly interdependent or highly interrelated to licenses sold such that a customer would not be able to use the licenses without the professional services. Revenue from professional services engagements performed for a fixed fee, for which we are able to make reasonably dependable estimates of progress toward completion, is recognized based on progress. We believe this method of measurement provides the closest depiction of our performance in transferring control of the professional services.
Rebate Reserves
We offer rebates to certain channel partners, which are recognized as a reduction to revenue or unearned revenue. Rebates based on actual partner sales are recognized as a reduction to revenue as the underlying revenue is recognized. Rebates earned based upon partner achievement of cumulative level of sales are recognized as a reduction of revenue proportionally for each sale that is required to achieve the target.
The estimated reserves for channel rebates and sales incentives are based on channel partners’ actual performance against the terms and conditions of the programs, historical trends and the value of the rebates. The accuracy of these reserves for these rebates and sales incentives depends on our ability to estimate these items and could have a significant impact on the timing and amount of revenue we report.
Deferred Commissions
Sales commissions, including the employer portion of payroll taxes, earned by our sales force are considered incremental and recoverable costs of obtaining a contract and are deferred and generally amortized on a straight-line basis over the expected period of benefit. The expected period of benefit is generally determined using the contract term or underlying technology life,
if renewals are expected and the renewal commissions are not commensurate with the initial commissions. The determination of the expected period of benefit requires us to make significant estimates and assumptions, including the life of the underlying technology and the estimated period of contract renewal. We believe the assumptions and estimates we have made are reasonable. Differences in the estimated period of benefit could have a significant impact on the timing and amount of amortization expense recognized.
Accounting for Income Taxes
We arePrior to the Spin-Off, our financial results were included in Dell’sthe Dell consolidated tax group for U.S. federal income tax purposes and will continue to be included in Dell’s consolidated group for periods in which Dell beneficially owns at least 80% of the total voting power and value of our combined outstanding Class A and Class B common stock as calculatedreturn 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 Dell 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.
Our income tax expense and the related income tax balance sheet accounts isprovision or benefit was calculated primarily as though we were a separate taxpayer. However, undertaxpayer, with certain circumstances, transactions between us and Dell arebeing assessed using consolidated tax return rules. The difference between the income taxes payable that iswas calculated on a separate tax return basis and the amount paid to Dell pursuant to our tax sharing agreement with Dell iswas presented as a component of additional paid-in capital, generally incapital. As a result of the period in whichSpin-Off, we are no longer a member of the Dell consolidated return is filed. Our assumptions, judgmentstax group and estimates used to calculate our U.S. income tax expense considers currentwill be reported separately from that of the Dell consolidated tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities.group.
We establish reserves for income taxes to address potential exposures involving tax positions that could be challenged by federal, state and foreign tax authorities, which may result in proposed assessments. In the ordinary course of our global business there are many intercompany transactions, including the transfer of intellectual property, where the ultimate tax determination could be challenged by the tax authorities. In the instance of transfers of intellectual property, the related deferred tax asset recognized is based on the intellectual property’s current fair value. Management applies significant judgment when determining the fair value of the intellectual property, which serves as the tax basis of the deferred tax asset, and in evaluating the associated tax laws in the applicable jurisdictions. Our assumptions, estimates and judgments used to determine the reserve relating to these positions considers current tax laws, interpretation of current tax laws and possible outcomes of current and future examinations conducted by tax authorities. As parta result of the DellSpin-Off, we are no longer a member of Dell’s consolidated tax group, and separately,however, we are still subject to potential tax liabilities for the periods prior to the Spin-Off. We are also subject to the periodic examination of our income tax returns by the IRS and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our reserves and any potential adjustments that may result from the current and future examinations. We believe such estimates to be reasonable; however, the final determination from examinations and changes in tax laws could significantly impact the amounts provided for income taxes in the consolidated financial statements.
Our deferred tax assets reflect our estimates of the amount and category of future taxable income, such as income from operations and capital gains, and also take into account valuation allowances that consider other key factors that might restrict our ability to realize the deferred tax assets. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate.
New Accounting PronouncementsBusiness Combinations
ASU 2016-02, Leases
During February 2016,We allocate the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842). The updated standard requirespurchase price of acquirees to the recognition of a liability for lease obligationsidentifiable assets acquired, the liabilities assumed and corresponding right-of-use assetsany noncontrolling interests in an acquiree, which are measured based on the balance sheet, and disclosuresacquisition date fair value. Goodwill is measured as the excess of key information regarding leasing arrangements. The standard may be early adopted and is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption withconsideration transferred over the option of applying the requirementsnet amounts of the standard either (1) retrospectively to each prior comparative reporting period presented, or (2) retrospectivelyidentifiable tangible and intangible assets acquired and the liabilities assumed at the beginningacquisition date.
The allocation of the purchase price requires us to make significant estimates and assumptions to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the acquisition date. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•future expected cash flows from sales, maintenance agreements and acquired developed technologies;
•the acquired company’s trade name and customer relationships as well as assumptions about the period of adoption. Wetime the acquired trade name and customer relationships will adopt this standard beginning with our first quarter of fiscal 2020 and will apply it retrospectively at the beginning of the period of adoption through a cumulative-effect adjustmentcontinue to retained earnings. Upon adoption, we expect to recognize a liability for lease obligations between $625 million and $635 million, right-of-use assets between $660 million and $670 million and an immaterial cumulative-effect adjustment to retained earnings. We do not expect the updated standard to have a material impact on the consolidated statements of income (loss) or net cash provided by orbe used in operating, investingthe combined company’s product portfolio; and financing activities on
•discount rates used to determine the consolidated statementspresent value of estimated future cash flows.
WeThese estimates are continuing to evaluateinherently uncertain and unpredictable and if different estimates were used the effect that the updated standard will have on our consolidated financial statements. In preparationpurchase price for the adoption of the updated standard, we implemented a new lease accounting software to facilitate the preparation of financial information relatedacquisition could be allocated to the standardacquired assets and are in the process of implementing internal controls. The preliminary impact under the updated standard may differliabilities differently from the final impact toallocation that we have made. Additionally, unanticipated events and circumstances may occur, which may affect the consolidated financial statements upon adoption.accuracy or validity of such assumptions, estimates or actual results.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
We operate in foreign countries, which expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which is the euro.
Although approximately 70% of our sales are denominated in the U.S. dollar, we also invoice and collect in thevarious foreign currencies, principally euro, the British pound, the Japanese yen, the Australian dollar and the Chinese renminbi in their respective regions. renminbi.
The U.SU.S. dollar is the functional currency for all of VMware's legal entities.VMware’s foreign subsidiaries. At the time a non-U.S. dollar transaction is recorded, the value of the transaction is converted into U.S. dollars at the exchange rate in effect for the month in which each order is booked. As a result, the amount of license and total revenue derived from these transactions will be impacted by foreign currency exchange fluctuations.
Additionally, a portion of our operating expenses, primarily the cost of personnel to deliver technical support on our products, SaaS offerings and professional services, sales and sales support and research and development, are denominated in foreign currencies, primarily those currencies in which we also invoice and collect. As exchange rates vary, operating results may differ materially from expectations.
To manage the risk associated with fluctuations in foreign currency exchange rates, we utilize derivative financial instruments, principally foreign currency forward contracts (“forward contracts”), as described below.
Cash Flow Hedging Activities. To mitigate our exposure to foreign currency fluctuations resulting from certain operating expenses denominated in certain foreign currencies, we enter into forward contracts. We enter into forward contracts annually, which have maturities of twelvefourteen months or less. As of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, we had outstanding forward contracts with a total notional value of $367$642 million and $318$486 million, respectively. The fair value of these forward contracts was not significant as of February 1, 2019January 28, 2022 and February 2, 2018.January 29, 2021.
Forward Contracts Not Designated as Hedges. We enter into forward contracts to offset the foreign currency risk associated with net outstanding monetary asset and liability positions. Our forward contractspositions that are traded on a monthly basis and typicallygenerally have a contractual term of one month. As of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, we had outstanding forward contracts with a total notional value of $1,208 million$1.5 billion and $1,020 million,$1.2 billion, respectively. The fair value of these forward contracts was not significant as of February 1, 2019January 28, 2022 and February 2, 2018.January 29, 2021.
Sensitivity Analysis. There can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. A hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a potential loss of $154$219 million in the fair value of our forward contracts as of February 1, 2019.January 28, 2022. This sensitivity analysis is based on the notional value of our outstanding forward contracts as of February 1, 2019January 28, 2022 and disregards any offsetting gain that may be associated with the underlying foreign-currency denominated assets and liabilities that we hedge.
This analysis also assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however, foreign currency exchange rates do not always move in such a manner and actual results may differ materially. We do not and do not intend to use derivative financial instruments for trading or speculative purposes. Refer to Note JL to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
Interest Rate Risk
Fixed Income Securities
Our fixed income investment portfolio was denominated in U.S. dollars and consisted of various sectors at different maturities. Our primary objective for holding fixed income securities was to achieve an appropriate investment return consistent with preserving principal and managing risk. During the fourth quarter of fiscal 2019, we liquidated our fixed income securities primarily to fund the $11 billion Special Dividend. Refer to Notes G to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
Equity Price Risk
Strategic Investments
Our strategic investments include privately held companies whichthat are considered to be in the start-up or development stages and are inherently risky. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of a substantial part of our initial investment in these companies. We account for these investments at cost minusless impairment, if any, plus or minus changes resulting fromadjusted for observable price changes in orderly transactions for
the identical or a similar security of the same issuer. The evaluation is based on information provided by these companies, which is not subject to the same disclosure regulations as U.S. publicly traded companies and as
such, the basis for these evaluations is subject to the timing and accuracy of the data provided. The carrying value of VMware’s strategic investments was $95was $163 million and $146$129 million as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively.
Marketable Equity SecuritiesOur marketable equity investments in publicly traded companies are subject to market price risk. As
Table of February 1, 2019 and February 2, 2018, the fair value of our equity investments was $852 million and $33 million, respectively. Our marketable equity investments as of February 1, 2019 included our investment in Pivotal, which became publicly traded on April 20, 2018. Accordingly, a fluctuation in the price of each equity security could have an adverse impact on the fair value of our investment. A hypothetical adverse price change of 10% would have resulted in a potential decrease of $85 million in the fair value of our marketable equity security as of February 1, 2019. Refer to Notes G and I to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VMware, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
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| Schedule: | |
Schedule II—Valuation and Qualifying Accounts for the years ended February 1, 2019, February 2, 2018, DecemberJanuary 28, 2022, January 29, 2021 and January 31, 2016 and the Transition Period from January 1, 2017 to February 3, 20172020 | |
Note: All other financial statement schedules are omitted because they are not applicable or the required information is included on the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of VMware, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of VMware, Inc. and its subsidiaries(the “Company”) as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021,and the related consolidated statements of income, (loss),of comprehensive income, of stockholders’ equity (deficit) and of cash flows for each of the twothree years in the period ended February 1, 2019, the period from January 1, 2017 to February 3, 2017, and for the year ended December 31, 2016,28, 2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of February 1, 2019,January 28, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 1, 2019January 28, 2022 and February 2, 2018, January 29, 2021,and the results of itsoperations and itscash flows for each of the twothree years in the period ended February 1, 2019, the period from January 1, 2017 to February 3, 2017, and for the year ended December 31, 201628, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2019,January 28, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note BA to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in the year endedleases effective February 1,2, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition — Identifying and Evaluating Terms and Conditions in Certain Contracts
As described in Note A to the consolidated financial statements, the Company derives revenue primarily from licensing software under perpetual and consumption-based contracts and related software maintenance and support, subscriptions, hosted services, training and consulting services. Revenue is recognized upon transfer of control of licenses, subscriptions or services to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those licenses, services or subscriptions. Control of a promised license, subscription or service may be transferred to a customer either at a point in time or over time, which affects the timing of revenue recognition. The Company’s contracts with customers may include a combination of licenses, subscriptions and services that are accounted for as distinct performance obligations. Management assesses relevant contractual terms in contracts with customers and applies significant judgment in identifying and accounting for all terms and conditions in certain contracts. For the year ended January 28, 2022, the Company’s total revenue was $12.9 billion.
The principal considerations for our determination that performing procedures relating to revenue recognition, specifically the identification and evaluation of terms and conditions in certain contracts, is a critical audit matter are the significant judgment by management in identifying terms and conditions in certain contracts that impact revenue recognition. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence to determine whether contract terms and conditions, which may impact revenue recognition, were appropriately identified and evaluated by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls relating to the identification and evaluation of terms and conditions in contracts that impact revenue recognition. These procedures also included, among others, evaluating the completeness and accuracy of management’s identification and evaluation of the terms and conditions in contracts by examining contracts on a test basis and evaluating management’s determination of the impact of those terms and conditions on revenue recognition.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 29, 201924, 2022
We have served as the Company’s auditor since 2007.
VMware, Inc.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(amounts in millions, except per share amounts, and shares in thousands)
| | | | | | | | | | Transition Period | | | For the Year Ended |
| | For the Year Ended | | January 1 to | | | January 28, | | January 29, | | January 31, |
| | February 1, | | February 2, | | December 31, | | February 3, | | | 2022 | | 2021 | | 2020 |
| | 2019 | | 2018(1) | | 2016(1) | | 2017(1) | |
Revenue(2): | | | | | | | | |
Revenue(1): | | Revenue(1): | | | | | | |
| License | $ | 3,788 |
| | $ | 3,200 |
| | $ | 2,799 |
| | $ | 134 |
| License | | $ | 3,128 | | | $ | 3,033 | | | $ | 3,181 | |
| Subscription and SaaS | | Subscription and SaaS | | 3,205 | | | 2,587 | | | 1,877 | |
| Services | 5,186 |
| | 4,662 |
| | 4,274 |
| | 378 |
| Services | | 6,518 | | | 6,147 | | | 5,753 | |
| Total revenue | 8,974 |
| | 7,862 |
| | 7,073 |
| | 512 |
| Total revenue | | 12,851 | | | 11,767 | | | 10,811 | |
Operating expenses(3): | | | | | | | | |
Operating expenses(2): | | Operating expenses(2): | | |
| Cost of license revenue | 191 |
| | 157 |
| | 159 |
| | 13 |
| Cost of license revenue | | 152 | | | 163 | | | 166 | |
| Cost of subscription and SaaS revenue | | Cost of subscription and SaaS revenue | | 690 | | | 588 | | | 400 | |
| Cost of services revenue | 1,067 |
| | 984 |
| | 894 |
| | 80 |
| Cost of services revenue | | 1,429 | | | 1,292 | | | 1,233 | |
| Research and development | 1,975 |
| | 1,755 |
| | 1,503 |
| | 150 |
| Research and development | | 3,057 | | | 2,816 | | | 2,522 | |
| Sales and marketing | 2,918 |
| | 2,506 |
| | 2,307 |
| | 248 |
| Sales and marketing | | 4,067 | | | 3,711 | | | 3,677 | |
| General and administrative | 764 |
| | 654 |
| | 689 |
| | 63 |
| General and administrative | | 1,068 | | | 767 | | | 1,293 | |
| Realignment and loss on disposition | 9 |
| | 104 |
| | 52 |
| | — |
| |
| Operating income (loss) | 2,050 |
| | 1,702 |
| | 1,469 |
| | (42 | ) | |
| Realignment | | Realignment | | 1 | | | 42 | | | 79 | |
| Operating income | | Operating income | | 2,387 | | | 2,388 | | | 1,441 | |
| Investment income | 161 |
| | 120 |
| | 77 |
| | 8 |
| Investment income | | 2 | | | 7 | | | 60 | |
| Interest expense | (134 | ) | | (74 | ) | | (26 | ) | | (2 | ) | Interest expense | | (252) | | | (204) | | | (149) | |
| Other income (expense), net | 806 |
| | 66 |
| | (17 | ) | | 1 |
| Other income (expense), net | | (52) | | | 191 | | | 86 | |
| Income (loss) before income tax | 2,883 |
| | 1,814 |
| | 1,503 |
| | (35 | ) | |
| Income before income tax | | Income before income tax | | 2,085 | | | 2,382 | | | 1,438 | |
| Income tax provision (benefit) | 461 |
| | 1,155 |
| | 280 |
| | (30 | ) | Income tax provision (benefit) | | 265 | | | 324 | | | (4,918) | |
| Net income (loss) | $ | 2,422 |
| | $ | 659 |
| | $ | 1,223 |
| | $ | (5 | ) | |
| Net income (loss) per weighted-average share, basic for Classes A and B | $ | 5.94 |
| | $ | 1.62 |
| | $ | 2.91 |
| | $ | (0.01 | ) | |
| Net income (loss) per weighted-average share, diluted for Classes A and B | $ | 5.85 |
| | $ | 1.59 |
| | $ | 2.87 |
| | $ | (0.01 | ) | |
| Weighted-average shares, basic for Classes A and B | 407,766 |
| | 406,738 |
| | 420,520 |
| | 408,625 |
| |
| Weighted-average shares, diluted for Classes A and B | 414,267 |
| | 413,368 |
| | 423,994 |
| | 408,625 |
| |
| Net income | | Net income | | 1,820 | | | 2,058 | | | 6,356 | |
| Less: Net loss attributable to non-controlling interests | | Less: Net loss attributable to non-controlling interests | | — | | | — | | | (56) | |
| Net income attributable to VMware, Inc. | | Net income attributable to VMware, Inc. | | $ | 1,820 | | | $ | 2,058 | | | $ | 6,412 | |
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic(3) | | Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic(3) | | $ | 4.34 | | | $ | 4.90 | | | $ | 15.37 | |
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted(3) | | Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted(3) | | $ | 4.31 | | | $ | 4.86 | | | $ | 15.08 | |
| Weighted-average shares of common stock, basic | | Weighted-average shares of common stock, basic | | 419,504 | | | 419,841 | | | 417,058 | |
| Weighted-average shares of common stock, diluted | | Weighted-average shares of common stock, diluted | | 422,394 | | | 423,240 | | | 425,235 | |
| __________ | | | | | | | | __________ | | |
(1) Adjusted to reflect the retrospective adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”). | |
(2) Includes related party revenue as follows (refer to Note C): | |
| (1) Includes related party revenue as follows (refer to Note D): | | (1) Includes related party revenue as follows (refer to Note D): | | |
| License | $ | 1,226 |
| | $ | 717 |
| | $ | 263 |
| | $ | 12 |
| License | | $ | 1,530 | | | $ | 1,598 | | | $ | 1,569 | |
| Subscription and SaaS | | Subscription and SaaS | | 820 | | | 524 | | | 342 | |
| Services | 981 |
| | 634 |
| | 381 |
| | 39 |
| Services | | 2,470 | | | 1,994 | | | 1,459 | |
(3) Includes stock-based compensation as follows: | | | | | | | | |
| (2) Includes stock-based compensation as follows: | | (2) Includes stock-based compensation as follows: | | |
| Cost of license revenue | $ | 1 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| Cost of license revenue | | $ | 1 | | | $ | 1 | | | $ | 1 | |
| Cost of subscription and SaaS revenue | | Cost of subscription and SaaS revenue | | 21 | | | 19 | | | 13 | |
| Cost of services revenue | 51 |
| | 50 |
| | 52 |
| | 5 |
| Cost of services revenue | | 92 | | | 99 | | | 83 | |
| Research and development | 371 |
| | 355 |
| | 305 |
| | 31 |
| Research and development | | 528 | | | 524 | | | 459 | |
| Sales and marketing | 203 |
| | 197 |
| | 195 |
| | 19 |
| Sales and marketing | | 302 | | | 322 | | | 293 | |
| General and administrative | 105 |
| | 79 |
| | 82 |
| | 7 |
| General and administrative | | 131 | | | 157 | | | 168 | |
(3) Automatically as a result of VMware’s spin-off from Dell on November 1, 2021 (the “Spin-Off”), each share of Class B convertible common stock converted into 1 fully paid and non-assessable share of Class A common stock. Subsequent to the Spin-Off, net income per weighted-average share was attributable to VMware Inc. Class A common stockholders. Prior to the Spin-Off, net income per weighted-average share was attributable to VMware Inc. Class A and Class B common stockholders (Refer to Note H). | | (3) Automatically as a result of VMware’s spin-off from Dell on November 1, 2021 (the “Spin-Off”), each share of Class B convertible common stock converted into 1 fully paid and non-assessable share of Class A common stock. Subsequent to the Spin-Off, net income per weighted-average share was attributable to VMware Inc. Class A common stockholders. Prior to the Spin-Off, net income per weighted-average share was attributable to VMware Inc. Class A and Class B common stockholders (Refer to Note H). |
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
| | | | | | | | | | | | | | | |
| | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018(1) | | 2016(1) | | 2017(1) |
| Net income (loss) | $ | 2,422 |
| | $ | 659 |
| | $ | 1,223 |
| | $ | (5 | ) |
| Other comprehensive income (loss): | | | | | | | |
| Changes in market value of available-for-sale securities: | | | | | | | |
| Unrealized gains (losses), net of tax provision (benefit) of $—, ($5), ($4) and $1 | — |
| | (12 | ) | | (6 | ) | | 2 |
|
| Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $10, $2, $3 and $— | 31 |
| | 3 |
| | 5 |
| | — |
|
| Net change in market value of available-for-sale securities | 31 |
| | (9 | ) | | (1 | ) | | 2 |
|
| Changes in market value of effective foreign currency forward contracts: | | | | | | | |
| Unrealized gains (losses), net of tax provision (benefit) of $— for all periods | 2 |
| | 1 |
| | 1 |
| | 3 |
|
| Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $— for all periods | (1 | ) | | (3 | ) | | (1 | ) | | — |
|
| Net change in market value of effective foreign currency forward contracts | 1 |
| | (2 | ) | | — |
| | 3 |
|
| Total other comprehensive income (loss) | 32 |
| | (11 | ) | | (1 | ) | | 5 |
|
| Total comprehensive income, net of taxes | $ | 2,454 |
| | $ | 648 |
| | $ | 1,222 |
| | $ | — |
|
| __________ | | | | | | | |
(1) Adjusted to reflect the retrospective adoption of Topic 606. | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | For the Year Ended |
| | | | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | | | 2022 | | 2021 | | 2020 |
| Net income | | | | | | | | | $ | 1,820 | | | $ | 2,058 | | | $ | 6,356 | |
| Other comprehensive income (loss): | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Changes in fair value of effective foreign currency forward contracts: | | | | | | | | | | | | | |
| Unrealized gains (losses), net of tax provision (benefit) of $— for all periods | | | | | | | | | (1) | | | (1) | | | — | |
| Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $— for all periods | | | | | | | | | 1 | | | — | | | (2) | |
| Net change in fair value of effective foreign currency forward contracts | | | | | | | | | — | | | (1) | | | (2) | |
| | | | | | | | | | | | | | |
| Total other comprehensive income (loss) | | | | | | | | | — | | | (1) | | | (2) | |
| Comprehensive income, net of taxes | | | | | | | | | 1,820 | | | 2,057 | | | 6,354 | |
| Less: Net loss attributable to the non-controlling interests | | | | | | | | | — | | | — | | | (56) | |
| | | | | | | | | | | | | | |
| Comprehensive income attributable to VMware, Inc. | | | | | | | | | $ | 1,820 | | | $ | 2,057 | | | $ | 6,410 | |
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except per share amounts, and shares in thousands)
|
| | | | | | | |
| | February 1, |
| February 2, |
| | 2019 |
| 2018(1) |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 2,830 |
| | $ | 5,971 |
|
| Short-term investments | 19 |
| | 5,682 |
|
| Accounts receivable, net of allowance for doubtful accounts of $2 and $2 | 1,576 |
| | 1,394 |
|
| Due from related parties, net | 937 |
| | 532 |
|
| Other current assets | 289 |
| | 257 |
|
| Total current assets | 5,651 |
| | 13,836 |
|
| Property and equipment, net | 1,133 |
| | 1,074 |
|
| Other assets | 1,853 |
| | 924 |
|
| Deferred tax assets | 103 |
| | 227 |
|
| Intangible assets, net | 541 |
| | 548 |
|
| Goodwill | 5,381 |
| | 4,597 |
|
| Total assets | $ | 14,662 |
| | $ | 21,206 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 135 |
| | $ | 15 |
|
| Accrued expenses and other | 1,593 |
| | 1,357 |
|
| Unearned revenue | 3,968 |
| | 3,438 |
|
| Total current liabilities | 5,696 |
| | 4,810 |
|
| Notes payable to Dell | 270 |
| | 270 |
|
| Long-term debt | 3,972 |
| | 3,964 |
|
| Unearned revenue | 3,010 |
| | 2,401 |
|
| Income tax payable | 889 |
| | 954 |
|
| Other liabilities | 274 |
| | 183 |
|
| Total liabilities | 14,111 |
| | 12,582 |
|
| Contingencies (refer to Note L) |
| |
|
| Stockholders’ equity: | | | |
| Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 110,715 and 103,776 shares | 1 |
| | 1 |
|
| Class B convertible common stock, par value $0.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares | 3 |
| | 3 |
|
| Additional paid-in capital | 531 |
| | 844 |
|
| Accumulated other comprehensive income (loss) | 2 |
| | (15 | ) |
| Retained earnings | 14 |
| | 7,791 |
|
| Total stockholders’ equity | 551 |
| | 8,624 |
|
| Total liabilities and stockholders’ equity | $ | 14,662 |
| | $ | 21,206 |
|
| __________ | | | |
(1) Adjusted to reflect the retrospective adoption of Topic 606. |
| | | | | | | | | | | |
| | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 3,614 | | | $ | 4,692 | |
| Short-term investments | 19 | | | 23 | |
| Accounts receivable, net of allowance of $10 and $5 | 2,297 | | | 1,929 | |
Due from related parties(1) | 1,438 | | | 1,438 | |
| | | |
| Other current assets | 598 | | | 530 | |
| Total current assets | 7,966 | | | 8,612 | |
| Property and equipment, net | 1,461 | | | 1,334 | |
| Deferred tax assets | 5,906 | | | 5,781 | |
| Intangible assets, net | 714 | | | 993 | |
| Goodwill | 9,598 | | | 9,599 | |
| Due from related parties | 199 | | | — | |
| Other assets | 2,832 | | | 2,697 | |
| Total assets | $ | 28,676 | | | $ | 29,016 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 234 | | | $ | 131 | |
| Accrued expenses and other | 2,806 | | | 2,382 | |
| | | |
| | | |
| Unearned revenue | 6,479 | | | 5,873 | |
Due to related parties(1) | 132 | | | — | |
| Total current liabilities | 9,651 | | | 8,386 | |
| Note payable to Dell | — | | | 270 | |
| Long-term debt | 12,671 | | | 4,717 | |
| Unearned revenue | 4,743 | | | 4,441 | |
| Income tax payable | 242 | | | 805 | |
| Operating lease liabilities | 927 | | | 891 | |
| Due to related parties | 909 | | | — | |
| Other liabilities | 409 | | | 455 | |
| Total liabilities | 29,552 | | | 19,965 | |
| Contingencies (refer to Note E) | 0 | | 0 |
| Stockholders’ equity (deficit): | | | |
| Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 418,808 and 112,082 shares | 4 | | | 1 | |
| Class B convertible common stock, par value $0.01; authorized none and 1,000,000 shares; issued and outstanding none and 307,222 shares | — | | | 3 | |
| Additional paid-in capital | — | | | 1,985 | |
| Accumulated other comprehensive loss | (5) | | | (5) | |
| Retained earnings (accumulated deficit) | (875) | | | 7,067 | |
| Total stockholders’ equity (deficit) | (876) | | | 9,051 | |
| | | |
| | | |
| Total liabilities and stockholders’ equity (deficit) | $ | 28,676 | | | $ | 29,016 | |
| __________ | | | |
(1) As of January 28, 2022, due from related parties and due to related parties were presented separately, as a right of setoff no longer exists subsequent to the Spin-Off. As of January 29, 2021, due from related parties was presented net of due to related parties (refer to Note D). |
| | | |
|
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | For the Year Ended |
| | | | | January 28, | | January 29, | | January 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Operating activities: | | Operating activities: | | | | | | |
| Net income | | Net income | | $ | 1,820 | | | $ | 2,058 | | | $ | 6,356 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | | Depreciation and amortization | | 1,110 | | | 1,025 | | | 873 | |
| Stock-based compensation | | Stock-based compensation | | 1,075 | | | 1,122 | | | 1,017 | |
| | Deferred income taxes, net | | Deferred income taxes, net | | (80) | | | (152) | | | (5,284) | |
| (Gain) loss on equity securities and disposition of assets, net | | (Gain) loss on equity securities and disposition of assets, net | | 33 | | | (148) | | | (35) | |
| | | | | | | | Transition Period | |
| | For the Year Ended | | January 1 to | |
| | February 1, | | February 2, | | December 31, | | February 3, | |
| Loss on extinguishment of debt | | Loss on extinguishment of debt | | 21 | | | 8 | | | — | |
| | 2019 | | 2018(1) | | 2016(1) | | 2017(1) | |
| Operating activities: | | | | | | | | |
| Net income (loss) | $ | 2,422 |
| | $ | 659 |
| | $ | 1,223 |
| | $ | (5 | ) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | 630 |
| | 565 |
| | 542 |
| | 46 |
| |
| Stock-based compensation | 731 |
| | 683 |
| | 636 |
| | 62 |
| |
| Excess tax benefits from stock-based compensation | — |
| | — |
| | (15 | ) | | (5 | ) | |
| Deferred income taxes, net | 113 |
| | 310 |
| | (15 | ) | | (258 | ) | |
| Unrealized (gain) loss on equity securities, net | (799 | ) | | — |
| | — |
| | — |
| |
| Loss on disposition | 7 |
| | 95 |
| | — |
| | — |
| |
| (Gain) loss on disposition of assets, revaluation and impairment, net | 6 |
| | (45 | ) | | 30 |
| | — |
| |
| Gain on extinguishment of debt | — |
| | (6 | ) | | — |
| | — |
| |
| (Gain) loss on Dell stock purchase | — |
| | 2 |
| | (8 | ) | | (1 | ) | |
| | Other | 7 |
| | 3 |
| | (2 | ) | | — |
| Other | | 10 | | | (1) | | | 9 | |
| Changes in assets and liabilities, net of acquisitions: | | | | | | | | Changes in assets and liabilities, net of acquisitions: | | |
| Accounts receivable | (178 | ) | | (102 | ) | | (216 | ) | | 651 |
| Accounts receivable | | (379) | | | (37) | | | (119) | |
| Other current assets and other assets | (350 | ) | | (446 | ) | | (475 | ) | | 197 |
| Other current assets and other assets | | (852) | | | (879) | | | (668) | |
| Due to/from related parties, net | (405 | ) | | (440 | ) | | (54 | ) | | 39 |
| |
Due from related parties(1) | | Due from related parties(1) | | 95 | | | 19 | | | (374) | |
| Accounts payable | 104 |
| | (35 | ) | | (9 | ) | | (68 | ) | Accounts payable | | 98 | | | (69) | | | 35 | |
| Accrued expenses and other liabilities | 281 |
| | 330 |
| | 223 |
| | (52 | ) | Accrued expenses and other liabilities | | 487 | | | 518 | | | 417 | |
| | Income taxes payable | (40 | ) | | 660 |
| | (15 | ) | | 38 |
| Income taxes payable | | 28 | | | (68) | | | (23) | |
| Unearned revenue | 1,134 |
| | 985 |
| | 534 |
| | (283 | ) | Unearned revenue | | 908 | | | 1,013 | | | 1,668 | |
Due to related parties(1) | | Due to related parties(1) | | (17) | | | — | | | — | |
| Net cash provided by operating activities | 3,663 |
| | 3,218 |
| | 2,379 |
| | 361 |
| Net cash provided by operating activities | | 4,357 | | | 4,409 | | | 3,872 | |
| Investing activities: | | | | | | | | Investing activities: | | | | | | |
| Additions to property and equipment | (245 | ) | | (263 | ) | | (153 | ) | | (18 | ) | Additions to property and equipment | | (386) | | | (329) | | | (279) | |
| Purchases of available-for-sale securities | (780 | ) | | (4,269 | ) | | (3,725 | ) | | (38 | ) | |
| Sales of available-for-sale securities | 3,999 |
| | 2,195 |
| | 2,227 |
| | 43 |
| |
| Maturities of available-for-sale securities | 2,393 |
| | 1,573 |
| | 1,307 |
| | 20 |
| |
| | Sales of investments in equity securities | | Sales of investments in equity securities | | 77 | | | 26 | | | — | |
| | Purchases of strategic investments | (8 | ) | | (37 | ) | | (49 | ) | | — |
| Purchases of strategic investments | | (11) | | | (29) | | | (30) | |
| Proceeds from disposition of assets | 38 |
| | 13 |
| | 4 |
| | — |
| Proceeds from disposition of assets | | 14 | | | 28 | | | 22 | |
| Business combinations, net of cash acquired, and purchases of intangible assets | (938 | ) | | (671 | ) | | (74 | ) | | — |
| Business combinations, net of cash acquired, and purchases of intangible assets | | (23) | | | (409) | | | (2,437) | |
| Net cash paid on disposition of a business | (12 | ) | | (53 | ) | | — |
| | — |
| Net cash paid on disposition of a business | | — | | | — | | | (4) | |
| Net cash provided by (used in) investing activities | 4,447 |
| | (1,512 | ) | | (463 | ) | | 7 |
| |
| | Net cash used in investing activities | | Net cash used in investing activities | | (329) | | | (713) | | | (2,728) | |
| Financing activities: | | | | | | | | Financing activities: | | | | | | |
| | Proceeds from issuance of common stock | 188 |
| | 122 |
| | 109 |
| | 61 |
| Proceeds from issuance of common stock | | 270 | | | 273 | | | 308 | |
| Net proceeds from issuance of long-term debt | — |
| | 3,961 |
| | — |
| | — |
| |
| Repayment of notes payable to Dell | — |
| | (1,225 | ) | | — |
| | — |
| |
| Payment to acquire non-controlling interests | — |
| | — |
| | (4 | ) | | — |
| |
| Proceeds from issuance of senior notes, net of issuance costs | | Proceeds from issuance of senior notes, net of issuance costs | | 5,944 | | | 1,979 | | | — | |
| Borrowings under term loan, net of issuance costs | | Borrowings under term loan, net of issuance costs | | 3,998 | | | — | | | 3,393 | |
| | Repayment of term loan | | Repayment of term loan | | (500) | | | (1,500) | | | (1,900) | |
| Repayment of current portion of senior notes | | Repayment of current portion of senior notes | | (1,519) | | | (1,257) | | | — | |
| | Repayment of note payable to Dell | | Repayment of note payable to Dell | | (270) | | | — | | | — | |
| Repurchase of common stock | (42 | ) | | (1,449 | ) | | (1,575 | ) | | — |
| Repurchase of common stock | | (1,169) | | | (945) | | | (1,334) | |
| Excess tax benefits from stock-based compensation | — |
| | — |
| | 15 |
| | 5 |
| |
| | Shares repurchased for tax withholdings on vesting of restricted stock | (357 | ) | | (351 | ) | | (164 | ) | | (4 | ) | Shares repurchased for tax withholdings on vesting of restricted stock | | (385) | | | (412) | | | (534) | |
| Payment for Special Dividend | (11,000 | ) | | — |
| | — |
| | — |
| Payment for Special Dividend | | (11,499) | | | — | | | — | |
| Payment for common control transaction with Dell | (8 | ) | | — |
| | — |
| | — |
| |
| Net cash provided by (used in) financing activities | (11,219 | ) | | 1,058 |
| | (1,619 | ) | | 62 |
| |
| Payment to acquire non-controlling interests | | Payment to acquire non-controlling interests | | — | | | (91) | | | (1,666) | |
| Contribution from Dell | | Contribution from Dell | | — | | | — | | | 27 | |
| | Principal payments on finance lease obligations | | Principal payments on finance lease obligations | | (5) | | | (4) | | | (1) | |
| Net cash used in financing activities | | Net cash used in financing activities | | (5,135) | | | (1,957) | | | (1,707) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | — | | | — | | | (2) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (3,109 | ) | | 2,764 |
| | 297 |
| | 430 |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | (1,107) | | | 1,739 | | | (565) | |
| Cash, cash equivalents and restricted cash at beginning of the period | 6,003 |
| | 3,239 |
| | 2,512 |
| | 2,809 |
| Cash, cash equivalents and restricted cash at beginning of the period | | 4,770 | | | 3,031 | | | 3,596 | |
| Cash, cash equivalents and restricted cash at end of the period | $ | 2,894 |
| | $ | 6,003 |
| | $ | 2,809 |
| | $ | 3,239 |
| Cash, cash equivalents and restricted cash at end of the period | | $ | 3,663 | | | $ | 4,770 | | | $ | 3,031 | |
| Supplemental disclosures of cash flow information: | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | |
| Issuance of VMware Class B common stock for Pivotal Class B common stock held by Dell | | Issuance of VMware Class B common stock for Pivotal Class B common stock held by Dell | | $ | — | | | $ | — | | | $ | 1,101 | |
| Cash paid for interest | $ | 129 |
| | $ | 21 |
| | $ | 29 |
| | $ | — |
| Cash paid for interest | | 200 | | | 200 | | | 134 | |
| Cash paid for taxes, net | 398 |
| | 177 |
| | 467 |
| | 3 |
| Cash paid for taxes, net | | 331 | | | 543 | | | 369 | |
| Non-cash items: | | | | | | | | Non-cash items: | | |
| Changes in capital additions, accrued but not paid | $ | 9 |
| | $ | 10 |
| | $ | (7 | ) | | $ | (6 | ) | Changes in capital additions, accrued but not paid | | $ | 4 | | | $ | (10) | | | $ | 18 | |
| Changes in tax withholdings on vesting of restricted stock, accrued but not paid | 17 |
| | (4 | ) | | 3 |
| | 3 |
| Changes in tax withholdings on vesting of restricted stock, accrued but not paid | | (7) | | | 1 | | (13) | |
| __________ | | | | | | | | |
(1) Adjusted to reflect the retrospective adoption of Topic 606 and Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The adoption of Topic 606 had no impact to net cash provided by or used in operating, investing and financing activities. | |
| _________ | | _________ |
(1) Subsequent to the Spin-Off, due from related parties and due to related parties were presented separately, as a right of setoff no longer exists. Prior to the Spin-Off, due from related parties was presented net of due to related parties. | | (1) Subsequent to the Spin-Off, due from related parties and due to related parties were presented separately, as a right of setoff no longer exists. Prior to the Spin-Off, due from related parties was presented net of due to related parties. |
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY (DEFICIT)
(in millions)
| | | | Class A
Common Stock | | Class B
Convertible
Common Stock | | Additional
Paid-in
Capital | | Retained
Earnings (Accumulated Deficit) | | Accumulated
Other
Comprehensive
Loss | | Non-controlling Interests | | Stockholders’
Equity (Deficit) |
| Shares | | Par
Value | | Shares | | Par
Value | |
| Balance, February 1, 2019 | | Balance, February 1, 2019 | 111 | | | $ | 1 | | | 300 | | | $ | 3 | | | $ | 2,959 | | | $ | (1,096) | | | $ | (2) | | | $ | 1,026 | | | $ | 2,891 | |
| Cumulative effect of adoption of new accounting pronouncements | | Cumulative effect of adoption of new accounting pronouncements | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
| Proceeds from issuance of common stock | | Proceeds from issuance of common stock | 2 | | | — | | | — | | | — | | | 203 | | | — | | | — | | | — | | | 203 | |
| Issuance of stock-based awards in acquisition | | Issuance of stock-based awards in acquisition | — | | | — | | | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | |
| Repurchase and retirement of common stock | | Repurchase and retirement of common stock | (8) | | | — | | | — | | | — | | | (1,024) | | | (310) | | | — | | | — | | | (1,334) | |
| Issuance of restricted stock | | Issuance of restricted stock | 8 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for tax withholdings on vesting of restricted stock | | Shares withheld for tax withholdings on vesting of restricted stock | (3) | | | — | | | — | | | — | | | (521) | | | — | | | — | | | — | | | (521) | |
| Stock-based compensation | | Stock-based compensation | — | | | — | | | — | | | — | | | 921 | | | — | | | — | | | 96 | | | 1,017 | |
| Credit from tax sharing arrangement | | Credit from tax sharing arrangement | — | | | — | | | — | | | — | | | 85 | | | — | | | — | | | — | | | 85 | |
| Investment from Dell, net | | Investment from Dell, net | — | | | — | | | — | | | — | | | 13 | | | — | | | — | | | 9 | | | 22 | |
| Total other comprehensive income (loss) | | Total other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
| | Transactions with Pivotal's non-controlling stockholders | | Transactions with Pivotal's non-controlling stockholders | — | | | — | | | — | | | — | | | (649) | | | — | | | — | | | (1,075) | | | (1,724) | |
| Issuance of VMware's Class B common stock issued to Dell | | Issuance of VMware's Class B common stock issued to Dell | — | | | — | | | 7 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income (loss) | | Net income (loss) | — | | | — | | | — | | | — | | | — | | | 6,412 | | | — | | | (56) | | | 6,356 | |
| Balance, January 31, 2020 | | Balance, January 31, 2020 | 110 | | | 1 | | | 307 | | | 3 | | | 2,000 | | | 5,009 | | | (4) | | | — | | | 7,009 | |
| | | | Class A Common Stock | | Class B Convertible Common Stock | | Additional Paid-in Capital | | Retained Earnings(1) | | Accumulated Other Comprehensive Income (Loss) | | Non-controlling Interests | | Stockholders’ Equity(1) | |
| Shares | | Par Value | | Shares | | Par Value | | |
| Balance, January 1, 2016 | 122 |
| | $ | 1 |
| | 300 |
| | $ | 3 |
| | $ | 2,728 |
| | $ | 5,914 |
| | $ | (8 | ) | | $ | 4 |
| | $ | 8,642 |
| |
| | Proceeds from issuance of common stock | 3 |
| | — |
| | — |
| | — |
| | 109 |
| | — |
| | — |
| | — |
| | 109 |
| Proceeds from issuance of common stock | 3 | | | — | | | — | | | — | | | 273 | | | — | | | — | | | — | | | 273 | |
| | Repurchase and retirement of common stock | (21 | ) | | — |
| | — |
| | — |
| | (1,575 | ) | | — |
| | — |
| | — |
| | (1,575 | ) | Repurchase and retirement of common stock | (7) | | | — | | | — | | | — | | | (945) | | | — | | | — | | | — | | | (945) | |
| Issuance of restricted stock, net of cancellations | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Shares withheld for tax withholdings on vesting of restricted stock | (3 | ) | | — |
| | — |
| | — |
| | (167 | ) | | — |
| | — |
| | — |
| | (167 | ) | |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 636 |
| | — |
| | — |
| | — |
| | 636 |
| |
| Tax shortfall from stock-based compensation | — |
| | — |
| | — |
| | — |
| | (24 | ) | | — |
| | — |
| | — |
| | (24 | ) | |
| Credit from tax sharing arrangement | — |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| | — |
| | — |
| | 15 |
| |
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Activities with non-controlling interests | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (4 | ) | | (5 | ) | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 1,223 |
| | — |
| | — |
| | 1,223 |
| |
| Balance, December 31, 2016 | 108 |
| | 1 |
| | 300 |
| | 3 |
| | 1,721 |
| | 7,137 |
| | (9 | ) | | — |
| | 8,853 |
| |
| Proceeds from issuance of common stock | 2 |
| | — |
| | — |
| | — |
| | 61 |
| | — |
| | — |
| | — |
| | 61 |
| |
| Shares withheld for tax withholdings on vesting of restricted stock | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | — |
| | (7 | ) | |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 62 |
| | — |
| | — |
| | — |
| | 62 |
| |
| Excess tax benefits from stock-based compensation | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
| |
| Credit from tax sharing arrangement | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
| |
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) | |
| Balance, February 3, 2017 | 110 |
| | 1 |
| | 300 |
| | 3 |
| | 1,843 |
| | 7,132 |
| | (4 | ) | | — |
| | 8,975 |
| |
| Proceeds from issuance of common stock | 2 |
| | — |
| | — |
| | — |
| | 122 |
| | — |
| | — |
| | — |
| | 122 |
| |
| Issuance of stock-based awards in acquisition | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
| |
| Repurchase and retirement of common stock | (14 | ) | | — |
| | — |
| | — |
| | (1,456 | ) | | — |
| | — |
| | — |
| | (1,456 | ) | |
| Issuance of restricted stock, net of cancellations | 9 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Issuance of restricted stock | | Issuance of restricted stock | 9 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for tax withholdings on vesting of restricted stock | (3 | ) | | — |
| | — |
| | — |
| | (348 | ) | | — |
| | — |
| | — |
| | (348 | ) | Shares withheld for tax withholdings on vesting of restricted stock | (3) | | | — | | | — | | | — | | | (413) | | | — | | | — | | | — | | | (413) | |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 683 |
| | — |
| | — |
| | — |
| | 683 |
| Stock-based compensation | — | | | — | | | — | | | — | | | 1,116 | | | — | | | — | | | — | | | 1,116 | |
| Amount due from tax sharing arrangement | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) | Amount due from tax sharing arrangement | — | | | — | | | — | | | — | | | (46) | | | — | | | — | | | — | | | (46) | |
| | Total other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) | Total other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 659 |
| | — |
| | — |
| | 659 |
| Net income | — | | | — | | | — | | | — | | | — | | | 2,058 | | | — | | | — | | | 2,058 | |
| Balance, February 2, 2018 | 104 |
| | 1 |
| | 300 |
| | 3 |
| | 844 |
| | 7,791 |
| | (15 | ) | | — |
| | 8,624 |
| |
| Cumulative effect of adoption of new accounting pronouncements | — |
| | — |
| | — |
| | — |
| | — |
| | (15 | ) | | (15 | ) | | — |
| | (30 | ) | |
| Balance, January 29, 2021 | | Balance, January 29, 2021 | 112 | | | 1 | | | 307 | | | 3 | | | 1,985 | | | 7,067 | | | (5) | | | — | | | 9,051 | |
| | | | | | | | | | Proceeds from issuance of common stock | 3 |
| | — |
| | — |
| | — |
| | 188 |
| | — |
| | — |
| | — |
| | 188 |
| Proceeds from issuance of common stock | 3 | | | — | | | — | | | — | | | 270 | | | — | | | — | | | — | | | 270 | |
| Issuance of stock-based awards in acquisition | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| |
| | Repurchase and retirement of common stock | — |
| | — |
| | — |
| | — |
| | (42 | ) | | — |
| | — |
| | — |
| | (42 | ) | Repurchase and retirement of common stock | (8) | | | — | | | — | | | — | | | (983) | | | (186) | | | — | | | — | | | (1,169) | |
| Issuance of restricted stock, net of cancellations | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Issuance of restricted stock | | Issuance of restricted stock | 8 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for tax withholdings on vesting of restricted stock | (3 | ) | | — |
| | — |
| | — |
| | (373 | ) | | — |
| | — |
| | — |
| | (373 | ) | Shares withheld for tax withholdings on vesting of restricted stock | (3) | | | — | | | — | | | — | | | (378) | | | — | | | — | | | — | | | (378) | |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 731 |
| | — |
| | — |
| | — |
| | 731 |
| Stock-based compensation | — | | | — | | | — | | | — | | | 1,096 | | | — | | | — | | | — | | | 1,096 | |
| Credit from tax sharing arrangement | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
| |
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
| |
| Common control transaction with Dell | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) | |
| | Amount due from tax sharing arrangement | | Amount due from tax sharing arrangement | — | | | — | | | — | | | — | | | (67) | | | — | | | — | | | — | | | (67) | |
| Conversion of Class B convertible common stock to Class A common stock | | Conversion of Class B convertible common stock to Class A common stock | 307 | | | 3 | | | (307) | | | (3) | | | — | | | — | | | — | | | — | | | — | |
| | Special Dividend | — |
| | — |
| | — |
| | — |
| | (822 | ) | | (10,178 | ) | | — |
| | — |
| | (11,000 | ) | Special Dividend | — | | | — | | | — | | | — | | | (1,923) | | | (9,576) | | | — | | | — | | | (11,499) | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 2,422 |
| | — |
| | — |
| | 2,422 |
| Net income | — | | | — | | | — | | | — | | | — | | | 1,820 | | | — | | | — | | | 1,820 | |
| Balance, February 1, 2019 | 111 |
| | $ | 1 |
| | 300 |
| | $ | 3 |
| | $ | 531 |
| | $ | 14 |
| | $ | 2 |
| | $ | — |
| | $ | 551 |
| |
| __________ | | | | | | | | | | | | | | | | | | |
(1) Adjusted to reflect the retrospective adoption of Topic 606.
| |
| Balance, January 28, 2022 | | Balance, January 28, 2022 | 419 | | | $ | 4 | | | — | | | $ | — | | | $ | — | | | $ | (875) | | | $ | (5) | | | $ | — | | | $ | (876) | |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Overview and Basis of Presentation
Company and Background
VMware, Inc. (“VMware” or the “Company”) originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware.hardware, and then evolved to become the private cloud and mobility management leader. Building upon that leadership, VMware is focused on becoming the multi-cloud leader. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. Organizations’ IT isdepartments and corporate divisions are working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses and their businessproduct teams through a digital transformation. To take on these challenges, VMwarethe Company is working withhelping customers indrive their multi-cloud strategy by providing the areas of hybrid cloud, multi-cloud modernplatform for all applications, networkingenabling digital innovation and security, and digital workspaces. VMware’s software provides a flexible digital foundation to help enable customers in their digital transformation.enterprise control.
Accounting Principles
VMware adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”) and ASU 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230) (“ASU 2016-18”), effective February 3, 2018 using the full retrospective adoption method. As part of the adoption, certain prior period amounts have been adjusted or reclassified within the consolidated financial statements.
Basis of PresentationPresentation
The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”(“SEC”) for annual financial reporting.
Effective September7, 2016,On November 1, 2021, VMware’s Spin-Off from Dell Technologies Inc. (“Dell”) (formerly Denali Holding Inc.) acquired EMC Corporation (“EMC”was completed, and, in accordance with the Separation and Distribution Agreement, effective as of April 14, 2021 (the “Separation Agreement”), VMware’s parent company, including EMC’s majority controlupon the satisfaction of all conditions and immediately prior to the Spin-Off, VMware (the “Dell Acquisition”). As of February 1, 2019, Dell controlled 80.5% of VMware’s outstanding common stock and 97.4%paid an $11.5 billion cash dividend, pro rata, to each of the combined voting powerholders of VMware’s outstanding common stock, including 31 million shares of VMware’s Class A common stock (“Class A Stock”) and allClass B convertible common stock (“Class B Stock”), including Dell (the “Special Dividend”) as of October 29, 2021 (the “Record Date”). VMware funded the Special Dividend in part through the $10.0 billion of indebtedness incurred during fiscal 2022, including $6.0 billion in the senior notes that VMware issued in August 2021 and $4.0 billion in aggregate drawdowns on its senior unsecured term loan facilities on November 1, 2021. Automatically as a result of the Spin-Off, each share of Class B Stock converted into 1 fully paid and non-assessable share of Class A Stock.
As a result of the Spin-Off, VMware became a standalone company and entities affiliated with Michael Dell (the “MSD Stockholders”), who serves as VMware’s Chairman of the Board and chairman and chief executive officer of Dell, and entities affiliated with Silver Lake Partners (the “SLP Stockholders”), of which Egon Durban, a VMware director, is a managing partner, became owners of direct interests in VMware representing 40.4% and 10.0%, respectively, of VMware’s ClassB common stock.outstanding stock, based on the shares outstanding as of January 28, 2022. Due to the MSD Stockholders’ and SLP Stockholders’ direct ownership in both VMware and Dell, as well as Mr. Dell’s executive position with Dell, transactions with Dell continue to be considered related party transactions following the Spin-Off.
AsThe fiscal year for VMware is a majority-owned and controlled subsidiary of Dell, its results of operations and financial position are consolidated with Dell’s financial statements. Transactions prior to the effective date of the Dell Acquisition represent transactions only with EMC and its consolidated subsidiaries.
Effective January 1, 2017, VMware’s fiscal year changed from a fiscal year ending on December 31 of each calendar year to a fiscal year consisting of a 52-52 or 53-week period53 weeks ending on the Friday nearest to January 31 of each year. The period that began onCompany refers to its fiscal years ended January 1, 201728, 2022, January 29, 2021 and ended on February 3, 2017 is reflectedJanuary 31, 2020 as a transition period (the “Transition Period”). VMware’s first full“fiscal 2022,” “fiscal 2021,” and “fiscal 2020,” respectively. Fiscal 2022, fiscal year 2018 under the revised2021 and fiscal calendar was a2020 were each 52-week year that began on February 4, 2017 and ended on February 2, 2018. The Company has included its audited consolidated financial statements for the Transition Period in this Annual Report on Form 10-K. Prior-period financial statements have not been recast.fiscal years.
Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the amounts recorded for VMware’s related party transactions with Dell and its consolidated subsidiaries may not be considered arm’s length with an unrelated third party. Therefore, the consolidated financial statements included herein may not necessarily reflect the results of operations, financial position and cash flows had VMware engaged in such transactions with an unrelated third party during all periods presented. Accordingly, VMware’s historical financial information is not necessarily indicative of what the Company’s results of operations, financial position and cash flows will be in the future, if and when VMware contracts at arm’s length with unrelated third parties for products and services the Company receives from and provides to Dell.
Retrospective Combination of Historical Financial Statements
In December 2019, VMware completed the acquisition of Pivotal Software, Inc. (“Pivotal”), which was, at the time, a subsidiary of VMware’s former parent company, Dell. The purchase of the controlling interest in Pivotal from Dell was accounted for as a transaction between entities under common control in accordance with Accounting Standards Codification (“ASC”) 805-50, Business Combination - Related Issues, which requires retrospective combination of entities for all periods presented, as if the combination had been in effect since the inception of common control. The consolidated financial statements of VMware, during the year ended January 31, 2020, and notes thereto were presented on a combined basis, as both
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware and Pivotal were under common control during the year ended January 31, 2020. Refer to Note B for more information on VMware’s acquisition of Pivotal.
Principles of Consolidation
The consolidated financial statements include the accounts of VMware and subsidiaries in which VMware has a controlling financial interest. The portion of results of operations attributable to the non-controlling interests is eliminatedfor Pivotal prior to the acquisition was included in other income (expense), net loss attributable to non-controlling interests on the consolidated statements of income (loss)during the year ended January 31, 2020. As part of the acquisition of Pivotal, VMware acquired the non-controlling interests in Pivotal from the holders of Pivotal Class A stock and is not presented separately ashas held 100% of the amount was not material for the periods presented.controlling financial interest in Pivotal since December 2019.
All intercompany transactions and account balances between VMware and its subsidiaries have been eliminated in consolidation. Transactions with Dell and its consolidated subsidiaries are generally settled in cash and are classified on the consolidated statements of cash flows based upon the nature of the underlying transaction.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, trade receivable valuation, marketing development funds, expected period of benefit for deferred commissions, useful lives assigned to fixed assets and intangible assets, valuation of goodwill and definite-lived intangibles, income taxes, stock-based compensation and contingencies. Actual results could differ from those estimates. To the extent the Company’s actual results differ materially from those estimates and assumptions, VMware’s future financial statements could be affected.
Revenue Recognition
VMware derives revenue primarily from licensing software under perpetual licenses orand consumption-based contracts and related software maintenance and support, subscriptions, hosted services, training consulting services and hostedconsulting services. VMware accounts for a contract with a customer if all criteria defined by TopicASC 606, Revenue from Contracts with Customers are met, including that collectibilitycollectability of the consideration is probable. At inception of a contract with a customer, the Company evaluates whether the promised products and services represent distinct performance obligations within the context of the contract. Performance obligations that are both capable of being distinct on their own and distinct within the context of the contract are recognized on their own as distinct performance obligations. Performance obligations under which both of these two criteria are not met are recognized as a combined, single performance obligation. Determining whether the Company’s licenses, subscriptions and services are considered distinct performance obligations that should be accounted for separately or together often involves assumptions and significant judgments that can have a significant impact on the timing and amount of revenue recognized.
Revenue is recognized upon transfer of control of licenses, subscriptions or services to the customer in an amount that reflects the consideration VMware expects to receive in exchange for those licenses, services or services.subscriptions. Control of a promised goodlicense, subscription or service may be transferred to a customer either at a point in time or over time, which affects the timing of revenue recognition. VMware’s contracts with customers may include a combination of licenses, subscriptions and services that are accounted for as distinct performance obligations. Licenses that represent distinct performance obligations are recognized at a point in time when the software license keys have been made available to the customer. Licenses sold as part of the Company’s subscriptions that do not represent distinct performance obligations are recognized over time along with the associated services that form a combined performance obligation with the software. Management assesses relevant contractual terms in contracts with customers and applies significant judgment in identifying and accounting for all terms and conditions in certain contracts. Certain contracts include third-party offerings and revenue that may be recognized net of the third-party costs, based upon an assessment as to whether VMware had control of the underlying third-party offering. Revenue is recognized net of any taxes invoiced to customers, which are subsequently remitted to governmental authorities.
From time to time, VMware may enter into revenue and purchase contracts with the same customer within a short period of time. VMware evaluates the underlying economics and fair value of the consideration payable to the customer to determine if any portion of the consideration payable to the customer exceeds the fair value of the goods and services received and should be accounted for as a reduction of the transaction price of the revenue contract.
License Revenue
VMware generally sells its license software through distributors, resellers, system vendors, systems integrators and its direct sales force. Performance obligations related to license revenue, including the license portion of term licenses, represent functional intellectual property under which a customer has the legal right to the on-premises license. The license provides
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
significant standalone functionality and is a separate performance obligation from the maintenance and support and professional services sold by VMware. On-premises license revenue is recognized at a point in time, upon delivery and transfer of control of the underlying license to the customer.
License revenue from on-premises license software licenses sold to original equipment manufacturers (“OEMs”) is recognized when the sale to the end user occurs. Revenue is recognized upon reporting by the OEMs of their sales, and for the period where information of the underlying sales has not been made available, revenue is recognized based upon estimated sales.
VMware Cloud Provider ProgramSubscription and SaaS Revenue
VMware’s subscription and software-as-a-service (“VCPP”SaaS”) revenue consists of hosted services, consumption based licensing under VCPP offerings and certain license sales of its software platform with open source licenses or offerings under which licenses and services are accounted for as combined performance obligations.
VMware’s hosted services consist of certain software offerings sold as a service-based technology without the customer’s ability to take possession of the software over the subscription term. Hosted services are recognized as SaaS revenue over time as customers consume the services or ratably over the contract term, commencing upon provisioning of the service.
VCPP partners rentlicense on-premises licensessoftware from VMware and the rental fee is recognized as license revenue upon consumption.on a monthly basis under a usage-based model. Generally, contracts with VCPP partners include cancellation rights. License revenueRevenue recognition is based uponon fees associated with reported license consumption by the VCPP partners and includes estimates for the period when consumption information has not been made available.
LicenseSubscription sales of the Company’s software platform offering provides customers with a license to its platform over a period of time, which includes, among other items, open-source software, support, enhancements, upgrades and compatibility to certified systems, all of which are offered on an if-and-when available basis. Subscription revenue also includes an allocated portion of hosted services, which is recognized asratably over the contract term beginning on the date that the Company’s platform is made available to the customer.
Subscription sales also include offerings with licenses that provide customers with access to and the right to utilize the threat intelligence capabilities and ongoing support over a period of time. VMware considers the software license and access to critical threat intelligence capabilities to be a single performance obligation. Subscription revenue is recognized ratably over time as the hosted servicescontract term beginning on the date the software is delivered to the customer.
Subscription and SaaS offerings generally have a duration of one month, one-year, or three-years and are consumed.invoiced to the customers either upfront, annually, quarterly or monthly.
Services Revenue
VMware’s services revenue generally consists of software maintenance and support professional services and an allocated portion of hostedprofessional services. Software maintenance and support offerings entitle customers to receive major and minor product upgrades, on a when-and-if-available basis, and technical support. Maintenance and support services are comprised of multiple performance obligations including updates, upgrades to licenses and technical support. While separate performance obligations are identified within maintenance and support services, the underlying performance obligations generally have a consistent continuous pattern of transfer to a customer during the term of a contract. Maintenancecontract and therefore, maintenance and support services revenue is recognized over time on a ratable basisratably over the contract duration.
Professional services include design, implementation, training and consulting services. Professional services performed by VMware represent distinct performance obligations as they do not modify or customize licenses sold. These services are not highly interdependent or highly interrelated to licenses sold such that a customer would not be able to use the licenses without the professional services. Revenue from fixed fee professional services engagements is recognized based on progress made
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
toward the total project effort, which can be reasonably estimated. As a practical expedient, VMware recognizes revenue from professional services engagements invoiced on a time and materials basis as the hours are incurred based on VMware’s right to invoice amounts for performance completed to date.
VMware’s hosted services consist of certain software offerings sold as a service-based technology without the customer’s ability to take possession of the software over the subscription term. Currently, hosted services are recognized as revenue equally in both license and services over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
Contracts with Multiple Performance Obligations
VMware enters into revenue contracts with multiple performance obligations in which a customer may purchase combinations of licenses, maintenance and support, subscriptions, hosted services, training, consulting services, hosted services and rights to future products and services. For contracts with multiple performance obligations, VMware allocates total transaction value to the identified underlying performance obligations based on relative standalone selling price (“SSP”). VMware typically estimates SSP of servicesperformance obligations based on observable transactions when the servicesobligations are sold on a standalone basis and those prices fall within a reasonable range. VMware utilizes the residual approach to estimate SSP of license as the licenses are not sold standalone and the same products areprimarily for offerings when sold to different customers at a broad rangehighly variable pricing.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Rebates and Marketing Development Funds
Rebates, which are offered to certain channel partners and represent a form of variable consideration, are accounted for as a reduction to the transaction price on eligible contracts.
Rebates are determined based on eligible sales during the quarter or based on actual achievement to quarterly target sales. The reduction of the aggregate transaction price against eligible contracts is allocated to the applicable performance obligations. The difference between the estimated rebates recognized and the actual amounts paid has not been material to date.
Certain channel partners are also reimbursed for direct costs related to marketing or other services that are defined under the terms of the marketing development programs. Estimated reimbursements for marketing development funds are accounted for as consideration payable to a customer, reducing the transaction price of the underlying contracts. The most likely amount method is used to estimate the marketing fund reimbursements at the end of the quarter and the reduction of transaction price is allocated to the applicable performance obligations. The difference between the estimated reimbursement and the actual amount paid to channel partners has not been material to date.
Returns Reserves
With limited exceptions, VMware’s return policy does not allow product returns for a refund. VMware estimates and records reserves for product returns at the time of sale based on historical return rates. Amounts are recorded as a reduction of revenue or unearned revenue. Returns reserves were not material for all periods presented.
Deferred Commissions
Sales commissions, including the employer portion of payroll taxes, earned by VMware’s sales force are considered incremental and recoverable costs of obtaining a contract and are deferred and generally amortized on a straight-line basis over the expected period of benefit. The expected period of benefit is generally determined using the contract term or underlying technology life, if renewals are expected and the renewal commissions are not commensurate with the initial commissions. Sales commissions related to software maintenance and support renewals are deferred and amortized on a straight-line basis over the contractual renewal period.
Foreign Currency Remeasurement and Translation
The United States (“U.S.”) dollar is the functional currency of VMware’s foreign subsidiaries.subsidiaries during the year ended January 28, 2022. During the year ended January 31, 2020, the U.S. dollar was the functional currency for the majority of VMware’s foreign subsidiaries, except for certain Pivotal foreign subsidiaries, many of which were wound down during fiscal 2021. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. VMware records net gains and losses resulting from foreign exchange transactions as a component of foreign currency exchange gains and losses in other income (expense), net on the consolidated statements of income (loss).income. These gains and losses are net of those recognized on foreign currency forward contracts (“forward contracts”) not designated as hedges that VMware enters into to partially mitigate its exposure to foreign currency fluctuations. Net gains and losses recognized during the years ended February 1, 2019 and December 31, 2016 and the Transition Period were not significant. A net gain of $10 million was recognized during the year ended February 2, 2018.
Cash and Cash Equivalents Short-Term Investments, and Restricted Cash
VMware invests primarily inCash equivalents consist of money market funds highly liquid debt instruments of the U.S. government and its agencies and U.S. and foreign corporate debt securities. All highly liquid investmentstime deposits with maturities of 90 days or less from date of
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
purchase are classified as cash equivalents and all highly liquid investments with maturities of greater than 90 days from date of purchase as short-term investments. Short-term investments are classified as available-for-sale securities. VMware may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions and strategic investments.
Fixed income investments are reported at market value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains or losses are included on the consolidated statements of income (loss). Gains and losses on the sale of fixed income securities issued by the same issuer and of the same type are determined using the first-in first-out method. When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included on the consolidated statements of income (loss). purchase.
Cash balances that are restricted pursuant to the terms of various agreements are classified as restricted cash and included in other current assets and other assets in the accompanying consolidated balance sheets. Refer to Note GI for more information.
Investments in Equity Securities
VMware holds equity securities in publicly and privately held companies. During January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires equity investments with readily determinable fair values (other than those accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in fair value for certain equity investments recognized in other income (expenses), net on the consolidated statements of income (loss). Upon adoption of ASU 2016-01, VMware elected to measure securities in privately held companies at cost less impairment, if any, adjusted for observable price changes in orderly transactions for the identical or a similar security of the same issuer.
Upon adoption of ASU 2016-01, VMware’s securities in publicly held companies are generally measured at fair value using quoted prices for identical assets in an active market. For certain investmentAll gains and losses on these securities, whether realized or unrealized, are recognized in equity securities, VMware has electedother income (expense), net on the fair value optionconsolidated statements of accounting because it believes that fair value is the most relevant measurement for such investments. Refer to Note I for more information.income.
Allowance for Doubtful AccountsCredit Losses
VMware maintains an allowance for doubtful accountscredit losses for estimated losses on uncollectible accounts receivable. TheVMware determines the allowance for doubtful accounts considersbased on various factors such factors as creditworthiness of VMware’s customers, historical experience, the age of the receivable and current economic conditions.conditions that may affect customers’ ability to pay. The allowance for doubtful accountscredit losses was not significant for all periods presented.as of January 28, 2022 and January 29, 2021.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property and Equipment, Net
Property and equipment, net is recorded at cost. Depreciation commences upon placing the asset in service and is recognized on a straight-line basis over the estimated useful life of the assets, as follows:
|
| | | | | | | | | |
| Buildings | | Term of underlying land lease | |
| Land improvements | | 15 years | | |
| Furniture and fixtures | | 7 years | | |
| Equipment | | 3 to 6 years | | |
| Software | | 3 to 8 years | | |
| Leasehold improvements | | 20 years, not to exceed the shorter of the estimated useful life or remaining lease term | | |
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized on the consolidated statements of income (loss).income. Repair and maintenance costs that do not extend the economic life of the underlying assets are expensed as incurred.
Capitalized Software Development Costs
Costs associated with internal-use software, systems, including those used to provide hosted services, during the application development stage are capitalized. Capitalization of costs begins when the preliminary project stage is completed, management has committed to funding the project, and it is probable that the project will be completed and the software will be used to
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
perform the function intended. Capitalization ceases, and depreciation begins, at the point when the project is substantially complete and is ready for its intended purpose. The capitalized amounts are included in property and equipment, net on the consolidated balance sheets.
Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when technological feasibility for the product has been established and ending when the product is available for general release. During the years presented, software development costs incurred for products during the time period between reaching technological feasibility and general release were not material and accordingly were expensed as incurred.
Business Combinations
For business combinations, with the exception of acquisitions of entities under common control, VMware recognizes the identifiable assets acquired, the liabilities assumed and any non-controlling interests in an acquiree, which are measured based on the acquisition date fair value. Goodwill is measured as the excess of consideration transferred over the net amounts of the identifiable tangible and intangible assets acquired and the liabilities assumed at the acquisition date.
VMware uses significant estimates and assumptions including fair value estimates, to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the acquisition date.
When those estimates are provisional, VMware refines them as necessary during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which VMware may gather and analyze the necessary information about facts and circumstances that existed as of the acquisition date to adjust the provisional amounts recognized. Measurement period adjustments are recorded during the period in which the adjustment amount is determined. All other adjustments are recorded to the consolidated statements of income (loss).income.
Acquisitions of entities under common control requires retrospective combination of entities for all periods presented, as if the combination had been in effect since the inception of common control. Assets and liabilities transferred are recorded at their historical carrying amounts on the date of the transfer. The difference between purchase consideration and historical value of the net assets on the date of the transfer are recognized in total stockholders’ equity on the consolidated balance sheets.
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income (loss) as the expenses are incurred. Gains recognized for the remeasurement of ownership interest to fair value upon completion of a step acquisition are recorded in other income (expense), net on the consolidated statements of income (loss).
Purchased Intangible Assets and Goodwill
Goodwill is evaluated for impairment during the third quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. VMware elected to perform a quantitative assessment of goodwill with respect to its one1 reporting unit. In doing so, VMware compared the enterprise fair value to the carrying amount of the reporting unit, including goodwill. VMware concluded that, to date, there have been no impairments of goodwill.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Purchased intangible assets with finite lives are generally amortized over their estimated useful lives using the straight-line method. VMware reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.
Derivative Instruments and Hedging Activities
Derivative instruments are measured at fair value and reported as current assets and current liabilities on the consolidated balance sheets, as applicable.
To manage VMware’s exposure to foreign currency fluctuations, VMware enters into forward contracts to hedge a portion of VMware’s net outstanding monetary asset or liability positions. These forward contracts are generally entered into on a monthly basis, with a typical contractual term of one month. These forward contracts are not designated as hedging instruments under applicable accounting guidance and therefore are adjusted to fair value through other income (expense), net on the consolidated statements of income (loss).income.
Additionally, VMware enters into forward contracts, which it designates as cash flow hedges to manage the volatility of cash flows that relate to operating expenses denominated in certain foreign currencies. These forward contracts are entered into annually, have maturities of twelvefourteen months or less, and are adjusted to fair value through accumulated other comprehensive income (loss),loss, net of tax, on the consolidated balance sheets. When the underlying expense transaction occurs, the gains or losses on the forward contract are subsequently reclassified from accumulated other comprehensive income (loss)loss to the related operating expense line item on the consolidated statements of income (loss).income.
The Company does not, and does not intend to, use derivative financial instruments for trading or speculative purposes.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employee Benefit Plans
The Company has a defined contribution program for U.S. employees that complies with Section 401(k) of the Internal Revenue Code. In addition, the Company offers defined contribution plans to employees in certain countries outside the U.S.
During the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 2016 and the Transition Period,2020, the Company contributed $113$227 million, $98 million, $86$176 million and $12$169 million, respectively, to its defined contribution plans.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $28$35 million, $36$33 million and $21$25 million during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 2016,2020, respectively. Advertising expense during the Transition Period was not significant.
Income Taxes
Income taxes as presented herein are calculated on a separate tax return basis,Prior to the Spin-Off, although VMware isVMware’s financial results were included in the Dell consolidated tax return of Dell. However, underfor U.S. federal income tax purposes, VMware’s income tax provision or benefit was calculated primarily as though the Company was a separate taxpayer, with certain circumstances, transactions between VMwarethe Company and Dell arebeing assessed using consolidated tax return rules. DeferredAs a result of the Spin-Off, VMware is no longer a member of the Dell consolidated tax assetsgroup and liabilities are recognized for the expected futureCompany’s U.S. income tax consequenceswill be reported separately from that of events that have been included in the financial statements orDell consolidated tax returns.group. Deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax credits are generally recognized as reductions of income tax provisions in the year in which the credits arise. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
During the fourth quarter of fiscal 2020, VMware completed the acquisition of Pivotal. Pivotal filed and will continue to file, for the periods prior to the Spin-Off, its separate tax return for U.S. federal income tax purposes as it left the Dell consolidated tax group at the time of Pivotal’s initial public offering (“IPO”) in April 2018. Pivotal had continued to be included on Dell’s unitary state tax returns until the Spin-Off. Subsequent to the Spin-Off, Pivotal will be included in VMware’s consolidated tax group for U.S. income tax purposes.
The U.S. Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Tax Act”) introduced significant changes to U.S. income tax law. During December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allowed for the recognition of provisional tax amounts during a measurement period not to extend beyond one year of the enactment date. Provisional taxes relating to the effect of the tax law changes, including the estimated transition tax and the remeasurement of U.S. deferred tax assets and liabilities, among others, were recognized during fiscal 2018. The Company completed its analysis of the impact of the 2017 Tax Act and recorded immaterial adjustments during the fourth quarter of fiscal 2019.
The Global Intangible Low-Taxed Income (“GILTI”) provisions of the 2017 Tax Act require VMware to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. GAAP allows the Company to choose between an accounting policy whichthat treats the U.S. tax under GILTI provisions as either a current expense, as incurred, or as a component of the Company’s measurement of deferred taxes. VMware has elected to record impacts of GILTI as period costs and recognized the tax impacts associated with GILTI as a current expense on its consolidated statementscosts.
The difference between the income taxes payable or receivable that is calculated on a separate return basis and the amount paid to or received from Dell pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital, generally in the period in which the consolidated return is filed. Refer to Note O for further information.VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated using the weighted-average number of shares of VMware’s common stock outstanding during the period. Diluted net income (loss) per share is calculated using the weighted-average number of shares of common shares,stock, including the dilutive effect of equity awards as determined under the treasury stock method. Prior to the Spin-Off, VMware has two classes of common stock, Classes A and B. For purposes of calculatingused the two-class method to calculate net income (loss) per share, VMware uses the two-class method. Asshare. Since both classes shareshared the same rights in dividends, basic and diluted net income (loss)earnings per share arewere the same for both classes.Class A Stock and Class B Stock. Automatically as a result of the Spin-Off, each share of Class B Stock converted into 1 share of Class A Stock and Class A Stock became, and remains, the sole outstanding class of VMware common stock, and, as a result, the two-class method is no longer applicable to the Company’s calculation of net income per share.
Concentrations of Risks
Financial instruments, which potentially subject VMware to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash on deposit with banks may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand. VMware places cash and cash equivalents and short-term investments primarily in money market funds and fixed income securities and limits the amount of investment with any single issuer and any single financial institution. VMware held a diversified portfolio of money market funds and fixed income securities, which primarily consisted of various highly liquid debt instruments of the U.S. government and its agencies and U.S. and foreign corporate debt securities. VMware’s fixed income investment portfolio was denominated in U.S. dollars and consisted of securities with various maturities.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware manages counterparty risk through necessary diversification of the investment portfolio among various financial institutions and by entering into derivative contracts with financial institutions that are of high credit quality.
VMware provides credit to its customers, including distributors, OEMs, resellers and end-user customers, in the normal course of business. To reduce credit risk, VMware performs periodic credit evaluations, which consider the customer’s payment history and financial stability.
As of February 1, 2019 and February 2, 2018, oneOne distributor accounted for 14% and 18%, respectively,12% of VMware’s accounts receivable balance and aas of January 28, 2022. A second distributor accounted for 13%11% and 16%, respectively,12% of VMware’s accounts receivable balance. Anotherbalance, respectively, as of January 28, 2022 and January 29, 2021. A third distributor accounted for 11% of VMware’s accounts receivable balance as of February 1, 2019 and February 2, 2018.
OneJanuary 28, 2022. Another distributor accounted for 14%13% of VMware’s accounts receivable balance as of January 29, 2021.
Dell accounted for 38%, 35% and 31% of revenue during the years ended January 28, 2022, January 29, 2021 and January 31, 2020, respectively. In addition to Dell, one distributor accounted for 11% and 12% of revenue during the years ended January 29, 2021 and January 31, 2020, respectively. Another distributor accounted for 10% of revenue during the year ended February 1, 2019, 15% of revenue in each of the years ended February 2, 2018 and DecemberJanuary 31, 2016, respectively, and 16% of revenue during the Transition Period. Another distributor accounted for 13% and 11% of revenue in each of the years ended February 1, 2019 and February 2, 2018, respectively, and 12% of revenue for the year ended December 31, 2016 and the Transition Period, respectively. A third distributor accounted for 10% of revenue for each of the years ended February 2, 2018 and December 31, 2016 and the Transition Period.2020.
Accounting for Stock-Based Compensation
VMware restricted stock, including performance stock unit (“PSU”) awards, are valued based on the Company’s stock price on the date of grant. For those awards expected to vest, which only contain a service vesting feature, compensation cost is recognized on a straight-line basis over the awards’ requisite service periods.
PSU awards will vest if certain VMware-designated performance targets, including in certain cases a time-based or market-based vesting component, are achieved. All PSU awards also include a time-based vesting component. If minimum performance thresholds are achieved, each PSU award will convert into VMware’s Class A common stockStock at a defined ratio depending on the degree of achievement of the performance target designated by each individual award. If minimum performance thresholds are not achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is recognized on a straight-line basis over the PSUs’PSU awards’ requisite service periods. The expected levels of achievement are reassessed over the requisite service periods and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted and recorded on the consolidated statements of income (loss) and the remaining unrecognized stock-based compensation is recognized over the remaining requisite service period.
TheWith the exception of stock options assumed as a part of transactions under common control, the Black-Scholes option-pricing model is used to determine the fair value of VMware’s stock option awardsoptions and Employee Stock Purchase Plan shares. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected term and risk-free interest rates. These assumptions reflect the Company’s best estimates, but these items involve uncertainties based on market and other conditions outside of the Company’s control.
NewFor outstanding equity awards assumed as a part of a transaction between entities under common control, equity awards are converted to VMware’s Class A Stock and valued at historical carrying amounts.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Leases
VMware adopted Accounting Pronouncements
ASU 2016-02, Leases
During February 2016, the FASB issued ASUStandards Update (“ASU”) No. 2016-02, Leases (Topic 842). The updated standard requires the recognition of a liability for lease obligations and corresponding right-of-use assets on the balance sheet, and disclosures of key information regarding leasing arrangements. The standard may be early adopted and is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption with the option of applying the requirements of the standard either (1) retrospectively to each prior comparative reporting period presented, or (2) retrospectively at the beginning of the period of adoption. VMware will adopt this standard beginning with its first quarter of(“Topic 842”) during fiscal 2020 and will applyapplied it retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. UponThe Company elected to apply practical expedients upon transition to this standard, which allowed the Company to use the beginning of the period of adoption as the date of initial application, and to not reassess lease classification, treatment of initial direct costs, or whether an existing or expired contract contained a lease. Prior period amounts were not recast under this standard.
VMware expectsdetermines if an arrangement contains a lease at inception by evaluating whether the arrangement conveys the right to recognizeuse an identified asset and whether the Company obtains substantially all economic benefits from and has the ability to direct the use of the asset. Right-of-use (“ROU”) assets resulting from operating leases are included in other assets, and operating lease liabilities are included in accrued expenses and other and operating lease liabilities on the consolidated balance sheets. ROU assets resulting from finance leases are included in property and equipment, net, and finance lease liabilities are included in accrued expenses and other and other liabilities on the consolidated balance sheets.
Lease assets and liabilities are measured at the present value of the future minimum lease payments over the lease term at commencement date using the incremental borrowing rate. The incremental borrowing rate is generally determined using factors such as the Treasury yields, the Company’s credit rating and interest rates of similar debt instruments with comparable credit ratings, among others.
The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that VMware will exercise that option. Lease expense resulting from the minimum lease payments is amortized on a liabilitystraight-line basis over the remaining lease term. VMware elected the practical expedient to exclude leasing arrangements with a duration of less than twelve months.
The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. Certain lease agreements may contain lease and non-lease components, such as common-area maintenance costs. The Company elected to account for these components as a single lease obligations between $625 millioncomponent in determining the lease liability. Variable lease payments, which are primarily comprised of common-area maintenance, utilities and $635 million, right-of-usereal estate taxes that are passed on from the lessor in proportion to the space leased by the Company, are recognized in operating expenses in the period in which the obligation for those payments are incurred.
Recently Adopted Accounting Standards
In October 2021, the Financial Accounting Standard Board issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This update requires contract assets between $660 million and $670 millioncontract liabilities acquired in a business combination to be recognized and measured by an immaterial cumulative-effect adjustmentacquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. The new standard is effective for interim and annual periods beginning after December 15, 2022, but may be early adopted. The adoption of the ASU will be applied prospectively to retained earnings.business combinations occurring on or after the effective date of the ASU. If the new standard is early adopted in an interim period, it should be applied retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. VMware doesearly adopted this standard during the fourth quarter of fiscal 2022. The standard did not expecthave an impact on business combinations occurring during the updatedyear ended January 28, 2022.
Effective January 30, 2021, VMware adopted, on a modified retrospective basis, ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This update simplifies the accounting for convertible instruments and contracts in an entity’s own equity and amends the diluted earnings per share guidance for greater consistency within the standard. The standard todid not have an impact on the Company’s consolidated financial statements except for the calculation of the year-to-date weighted-average diluted share count, which did not have a material impact on the consolidated statements ofCompany’s diluted net income (loss) or net cash provided by or used in operating, investing and financing activitiesper share during the year ended January 28, 2022.
Effective January 30, 2021, VMware adopted ASU No. 2019-12, Income Taxes (Topic 740), simplifying the accounting for income taxes. The standard did not have a material impact on the consolidated statements of cash flows.
VMware is continuing to evaluate the effect that the updated standard will have on itsCompany’s consolidated financial statements.
New Accounting Pronouncement
In preparationNovember 2021, the Financial Accounting Standards Board issued ASU 2021-10, Government Assistance (Topic 832), requiring annual disclosures about transactions with a government that are accounted for the adoption of the updatedby applying a grant or contribution accounting model by analogy. The new standard VMware implemented a new lease accounting software to facilitate the preparation of financial information related to the standard and is in the process of implementing internal controls. The preliminary impact under the updated standardeffective for annual periods beginning after December 15, 2021, but may differ from the final impact to the consolidated financial statements upon adoption.be
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
early adopted. The Company does not expect the adoption of the ASU to have a material impact on the Company’s consolidated financial statements and plans to adopt the standard during fiscal 2023 on a prospective basis.
B. RevenuePivotal Acquisition
Full Retrospective AdoptionIn December 2019, VMware completed the acquisition of Topic 606
Pivotal, which was, at the time, a subsidiary of VMware’s former parent company, Dell, at a blended price per share of $11.71 and an aggregate purchase consideration of $2.9 billion. The adoptionpurchase consideration of Topic 606 impacted$2.9 billion was comprised of $15.00 per share or $1.7 billion of cash paid to the non-controlling interest holders of Pivotal’s Class A stock, the exchange of $1.1 billion of VMware’s previously reported results as follows (tablesClass B Stock for Pivotal’s Class B common stock held by Dell, at an exchange ratio of 0.055 VMware shares for each Pivotal share, and a $155 million accrual for amounts potentially owed to dissenting shareholders in millions):
|
| | | | | | | | | | | |
| | For the Year Ended February 2, 2018 |
| | As Reported | | Topic 606 Adjustments | | As Adjusted |
| Selected Captions from the Consolidated Statements of Income (Loss) | | | | | |
| Revenue: | | | | | |
| License | $ | 3,195 |
| | $ | 5 |
| | $ | 3,200 |
|
| Services | 4,727 |
| | (65 | ) | | 4,662 |
|
| Total revenue | 7,922 |
| | (60 | ) | | 7,862 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 2,593 |
| | (87 | ) | | 2,506 |
|
| Realignment and loss on disposition | 90 |
| | 14 |
| | 104 |
|
| Operating income | 1,689 |
| | 13 |
| | 1,702 |
|
| Income before income tax | 1,801 |
| | 13 |
| | 1,814 |
|
| Income tax provision | 1,231 |
| | (76 | ) | | 1,155 |
|
| Net income | 570 |
| | 89 |
| | 659 |
|
|
| | | | | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | As Reported | | Topic 606 Adjustments | | As Adjusted |
| Selected Captions from the Consolidated Statements of Income (Loss) | | | | | |
| Revenue: | | | | | |
| License | $ | 2,794 |
| | $ | 5 |
| | $ | 2,799 |
|
| Services | 4,299 |
| | (25 | ) | | 4,274 |
|
| Total revenue | 7,093 |
| | (20 | ) | | 7,073 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 2,357 |
| | (50 | ) | | 2,307 |
|
| Operating income | 1,439 |
| | 30 |
| | 1,469 |
|
| Income before income tax | 1,473 |
| | 30 |
| | 1,503 |
|
| Income tax provision | 287 |
| | (7 | ) | | 280 |
|
| Net income | 1,186 |
| | 37 |
| | 1,223 |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | |
| | Transition Period |
| | January 1 to February 3, 2017 |
| | As Reported | | Topic 606 Adjustments | | As Adjusted |
| Selected Captions from the Consolidated Statements of Income (Loss) | | | | | |
| Revenue: | | | | | |
| License | $ | 125 |
| | $ | 9 |
| | $ | 134 |
|
| Services | 371 |
| | 7 |
| | 378 |
|
| Total revenue | 496 |
| | 16 |
| | 512 |
|
| Operating expenses: | | |
| | |
| Sales and marketing | 231 |
| | 17 |
| | 248 |
|
| Operating income (loss) | (41 | ) | | (1 | ) | | (42 | ) |
| Income (loss) before income tax | (34 | ) | | (1 | ) | | (35 | ) |
| Income tax provision (benefit) | (26 | ) | | (4 | ) | | (30 | ) |
| Net income (loss) | (8 | ) | | 3 |
| | (5 | ) |
|
| | | | | | | | | | | |
| | February 2, 2018 |
| | As Reported | | Topic 606 Adjustments | | As Adjusted |
| Selected Captions from the Consolidated Balance Sheets | | | | | |
| Accounts receivable, net of allowance for doubtful accounts | $ | 1,312 |
| | $ | 82 |
| | $ | 1,394 |
|
| Other current assets | 237 |
| | 20 |
| | 257 |
|
| Total current assets | 13,734 |
| | 102 |
| | 13,836 |
|
| Other assets | 323 |
| | 601 |
| | 924 |
|
| Deferred tax assets | 346 |
| | (119 | ) | | 227 |
|
| Total assets | 20,622 |
| | 584 |
| | 21,206 |
|
| Accrued expenses and other | 1,241 |
| | 116 |
| | 1,357 |
|
| Unearned revenue | 3,777 |
| | (339 | ) | | 3,438 |
|
| Total current liabilities | 5,033 |
| | (223 | ) | | 4,810 |
|
| Unearned revenue | 2,473 |
| | (72 | ) | | 2,401 |
|
| Other liabilities | 152 |
| | 31 |
| | 183 |
|
| Total liabilities | 12,846 |
| | (264 | ) | | 12,582 |
|
| Retained earnings | 6,943 |
| | 848 |
| | 7,791 |
|
| Total stockholders’ equity | 7,776 |
| | 848 |
| | 8,624 |
|
| Total liabilities and stockholders’ equity | 20,622 |
| | 584 |
| | 21,206 |
|
Retained earningsconnection with the acquisition, which was recorded in accrued expenses and other on the consolidated balance sheets as of January 1, 2016 included31, 2020. In recording the repurchase of the non-controlling interest, the Company recognized a cumulative-effect adjustmentreduction of $719additional paid in capital of $649 million, resulting fromwhich corresponds to the adoptionexcess of Topic 606. the purchase consideration of $1.8 billion that was paid and accrued, over the carrying value of the non-controlling interest of $1.2 billion. In the aggregate, this transaction resulted in a cash payout, net of cash acquired, of $838 million and the issuance of 7.2 million shares of VMware’s Class B Stock to Dell. Pivotal’s Class B common stock previously held by VMware was canceled. Following the completion of the acquisition, shares of Pivotal Class A stock ceased to be listed on the New York Stock Exchange and registration of the Pivotal Class A stock under the Exchange Act was terminated.
During the second quarter of fiscal 2021, VMware paid $91 million to dissenting stockholders of Pivotal, representing a portion of the amount accrued as of January 31, 2020.
The adoptionpurchase was accounted for as a transaction between entities under common control. Assets and liabilities transferred were recorded at historical carrying amounts of Topic 606 had no impact toPivotal on the date of the transfer, except for certain goodwill and intangible assets that were recorded in the amounts previously recognized by Dell for Pivotal in connection with Dell’s acquisition of EMC Corporation (“EMC”) during fiscal 2016. VMware’s previous investment in Pivotal, including any unrealized gain or loss previously recognized in other income (expense), net cash provided by or used in operating, investing and financing activities on VMware’sthe consolidated statements of cash flowsincome, were derecognized. Transactions with Pivotal that were previously accounted for as transactions between related parties were eliminated in the consolidated financial statements for all periods presented. All intercompany transactions and account balances between VMware and Pivotal have been eliminated upon consolidation during the yearsyear ended February 2, 2018January 31, 2020.
C. Revenue, Unearned Revenue and December 31, 2016 and the Transition Period.Remaining Performance Obligations
Revenue
Receivables
VMware records a receivable when an unconditional right to consideration exists and transfer of control has occurred, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of invoicing to customers.
Payment terms vary based on license, subscription or service offerings and payment is generally required within 30 to 45 days from date of invoicing. Certain performance obligations may require payment before delivery of the license or service to the customer.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contract Assets
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets include fixed fee professional services where transfer of services has occurred in advance of the Company'sCompany’s right to invoice. Contract assets are classified as accounts receivables upon invoicing. Contract assets are included in other current assets on the consolidated balance sheets. Contract assets were $24$36 million and $27$43 million as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively. Contract asset balances will fluctuate based upon the timing of the transfer of services, billings and customers’ acceptance of contractual milestones.
Contract Liabilities
Contract liabilities consist of unearned revenue, which is generally recorded when VMware has the right to invoice or payments have been received for undelivered products or services. Refer to Note N for further information.
Customer Deposits
Customer deposits include prepayments from customers related to amounts received for contracts that include certain cancellation rights. Purchased credits eligible for redemption of VMware’s hosted services (“cloud credits”) are included in
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
customer deposits until the cloud credit is consumed or is contractually committed to a specific hosted service. Cloud credits are redeemable by the customer for the gross value of the hosted offering. Upon contractual commitment for a hosted service, the net value of the cloud credits that are expected to be recognized as revenue when the obligation is fulfilled will be classified as unearned revenue.
As of February 1, 2019,January 28, 2022, customer deposits related to customer prepayments and cloud credits of $238$470 million were included in accrued expenses and other and $60$166 million were included in other long-term liabilities on the consolidated balance sheets. As of February 2, 2018,January 29, 2021, customer deposits related to customer prepayments were $126and cloud credits of $294 million and were included in accrued expenses and other and $163 million were included in other liabilities on the consolidated balance sheets.
Deferred Commissions
Deferred commissions are classified as current or non-current based on the duration of the expected period of benefit. Deferred commissions, including the employer portion of payroll taxes, included in other current assets as of February 1, 2019January 28, 2022 and February 2, 2018January 29, 2021 were not significant.$17 million and $31 million, respectively. Deferred commissions included in other assets were $756 million$1.2 billion and $638 million$1.1 billion as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively.
Amortization expense for deferred commissions was included in sales and marketing on the consolidated statements of income (loss) and was $261$517 million, $230 million, $197$437 million and $17$354 million during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 20162020, respectively.
Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
| | | | | | | | | | | | | |
| January 28, | | | | January 29, |
| 2022 | | | | 2021 |
| Unearned license revenue | $ | 19 | | | | | $ | 15 | |
| Unearned subscription and SaaS revenue | 2,669 | | | | | 1,998 | |
| Unearned software maintenance revenue | 7,208 | | | | | 7,092 | |
| Unearned professional services revenue | 1,326 | | | | | 1,209 | |
| Total unearned revenue | $ | 11,222 | | | | | $ | 10,314 | |
Unearned subscription and SaaS revenue is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized ratably over the contract duration. The weighted-average remaining contractual term as of January 28, 2022 was approximately two years. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.
Total billings and revenue recognized during the year ended January 28, 2022 were $9.1 billion and $8.2 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses.
Total billings and revenue recognized during the year ended January 29, 2021 were $8.4 billion and $7.4 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses. During the year ended January 29, 2021, VMware also assumed $33 million in unearned revenue
in connection with business combinations.
Revenue recognized during the year ended January 31, 2020 was $6.4 billion, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses.
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted non-cancellable customer contracts at the end of any given period.
As of January 28, 2022, the aggregate transaction price allocated to remaining performance obligations was $12.0 billion, of which approximately 57% is expected to be recognized as revenue over the next twelve months and the Transition Period, respectively.remainder thereafter. As of January 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.3 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2022, and the remainder thereafter.
VMware, recognized an impairment on its deferred commissions of approximately $13 million duringInc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
D. Related Parties
Transactions with Dell continue to be considered related party transactions following the first quarter of fiscal 2018, relatingSpin-Off due to the salesMSD Stockholders’ and SLP Stockholders’ direct ownership in both VMware and Dell, as well as Mr. Dell’s executive position with Dell.
On November 1, 2021, in connection with the Spin-Off, VMware and Dell entered into the Commercial Framework Agreement to provide a framework under which the Company and Dell will continue their strategic commercial relationship, particularly with respect to projects mutually agreed by the parties as having the potential to accelerate the growth of VMware vCloud Air offerings.an industry, product, service, or platform that may provide the parties with a strategic market opportunity. The impairment was included in realignmentCommercial Framework Agreement has an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and loss on disposition on the consolidated statements of income (loss). VMware completed the sale of its vCloud Air business (“vCloud Air”) to OVH US LLC (“OVH”) during the second quarter of fiscal 2018.
C. Related Partiesconditions.
The information provided below includes a summary of the transactions entered into with Dell and Dell’s consolidated subsidiaries, including EMC (collectively, “Dell”) from the effective date of the Dell Acquisition through February 1, 2019. Transactions prior to the effective date of the Dell Acquisition reflect transactions with EMC and its consolidated subsidiaries.Dell.
Transactions with Dell
VMware and Dell engaged in the following ongoing related party transactions, which resulted in revenue and receipts, and unearned revenue for VMware:
•Pursuant to OEMoriginal equipment manufacturer (“OEM”) and reseller arrangements, Dell integrates or bundles VMware’s products and services with Dell’s products and sells them to end users. Dell also acts as a distributor, purchasing VMware’s standalone products and services for resale to end-user customers through VMware-authorized resellers. Revenue under these arrangements is presented net of related marketing development funds and rebates paid to Dell. In addition, VMware provides professional services to end users based upon contractual agreements with Dell.
•Dell purchases products and services from VMware for its internal use.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pursuant to an ongoing distribution agreement, VMware acts as the selling agent for certain products and services of Pivotal Software, Inc. (“Pivotal”), a subsidiary of Dell, in exchange for an agency fee. Under this agreement, cash is collected from the end user by VMware and remitted to Pivotal, net of the contractual agency fee.
•From time to time, VMware and Dell enter into agreements to collaborate on technology projects, and Dell pays VMware for services or reimburses VMware for costs incurred by VMware, in connection with such projects.
During the years ended January 28, 2022, January 29, 2021 and January 31, 2020, revenue from Dell accounted for 38%, 35% and 31% of VMware’s consolidated revenue, respectively. During the years ended January 28, 2022, January 29, 2021 and January 31, 2020, revenue recognized on transactions where Dell acted as an OEM accounted for 13%, 12% and 12% of total revenue from Dell, respectively, or 5%, 4% and 4% of VMware’s consolidated revenue, respectively.
Dell purchases VMware products and services directly from VMware, as well as through VMware’s channel partners. Information about VMware’s revenue and receipts, and unearned revenue from such arrangements, for the periods presented consisted of the following (table in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue and Receipts | | | Unearned Revenue |
| | | | For the Year Ended | | | As of |
| | | | | | | | January 28, | | January 29, | | January 31, | | | January 28, | | January 29, |
| | | | | | | | 2022 | | 2021 | | 2020 | | | 2022 | | 2021 |
| Reseller revenue | | | | | | | | $ | 4,764 | | | $ | 4,053 | | | $ | 3,288 | | | | $ | 5,550 | | | $ | 4,952 | |
| Internal-use revenue | | | | | | | | 56 | | | 63 | | | 82 | | | | 39 | | | 45 | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue and Receipts |
|
|
|
|
| Transition Period |
| Unearned Revenue |
| For the Year Ended |
| January 1 to |
| As of |
| February 1, |
| February 2, |
| December 31, |
| February 3, |
| February 1, |
| February 2, |
| 2019 |
| 2018 |
| 2016 |
| 2017 |
| 2019 |
| 2018 |
| Reseller revenue | $ | 2,180 |
|
| $ | 1,315 |
|
| $ | 612 |
|
| $ | 44 |
|
| $ | 2,375 |
|
| $ | 1,236 |
|
| Internal-use revenue | 22 |
|
| 34 |
|
| 28 |
|
| 7 |
|
| 13 |
|
| 12 |
|
| Agency fee revenue | 5 |
|
| 2 |
|
| 4 |
|
| — |
|
| — |
|
| — |
|
| Collaborative technology project receipts | 4 |
|
| — |
|
| — |
|
| — |
|
| n/a |
|
| n/a |
|
Customer deposits resulting from transactions with Dell were $85$298 million and $37$214 million as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively.
VMware and Dell engaged in the following ongoing related party transactions, which resulted in costs to VMware:
•VMware purchases and leases products and purchases services from Dell.
•From time to time, VMware and Dell enter into agreements to collaborate on technology projects, and VMware pays Dell for services provided to VMware by Dell related to such projects.
•In certain geographic regions where VMware does not have an established legal entity, VMware contracts with Dell subsidiaries for support services and support from Dell personnel who are managed by VMware. The costs incurred by Dell on VMware’s behalf related to these employees are charged to VMware with a mark-up intended to approximate costs that would have been incurred had VMware contracted for such services with an unrelated third party. These
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
costs are included as expenses on VMware’sVMware’s consolidated statements of income (loss) and primarily include salaries, benefits, travel and occupancy expenses. Dell also incurs certain administrative costs on VMware’s behalf in the U.S. that are recorded as expenses on VMware’s consolidated statements of income (loss).income.
In•Prior to the Spin-Off, in certain geographic regions, Dell filesfiled a consolidated indirect tax return, which includesincluded value added taxes and other indirect taxes collected by VMware from its customers. VMware remitsremitted the indirect taxes to Dell, and Dell remitsremitted the tax payment to the foreign governments on VMware’s behalf.
•From time to time, VMware invoices end users on behalf of Dell for certain services rendered by Dell. Cash related to these services is collected from the end user by VMware and remitted to Dell.
•From time to time, VMware enters into agency arrangements with Dell that enable VMware to sell its subscriptions and services, leveraging the Dell enterprise relationships and end customer contracts.
Information about VMware’s payments fromfor such arrangements during the periods presented consisted of the following (table in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the Year Ended |
| | | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | | 2022 | | 2021 | | 2020 |
Purchases and leases of products and purchases of services(1) | | | | | | | | | $ | 228 | | | $ | 206 | | | $ | 242 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Dell subsidiary support and administrative costs | | | | | | | | | 38 | | | 74 | | | 119 | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
Purchases and leases of products and purchases of services(1) | $ | 198 |
| | $ | 142 |
| | $ | 97 |
| | $ | 14 |
|
| Dell subsidiary support and administrative costs | 106 |
| | 123 |
| | 105 |
| | 13 |
|
(1) Amount includes indirect taxes that were remitted to Dell during the periods presented.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
presented.
VMware also purchases Dell products through Dell’s channel partners. Purchases of Dell products through Dell’s channel partners were not significant during the periods presented.
From time to time, VMware and Dell also enter into joint marketing, sales, branding and product development arrangements, for which both parties may incur costs.
During the thirdfourth quarter of fiscal 2019,2020, VMware acquiredentered into an arrangement with Dell to transfer approximately 250 professional services employees from Dell to VMware. These employees are experienced in providing professional services that deliver VMware technology and employees relatedthis transfer centralizes these resources within the Company in order to serve its customers more efficiently and effectively. The transfer was substantially completed during the Dell EMC Service Assurance Suite, which provides root cause analysis management software for communications service providers, from Dell. The purchase of the Dell EMC Service Assurance Suite was accounted for as a transaction by entities under common control. The amount of the purchase price in excess of the historical cost of the acquired assets was recognized as a reduction to retained earnings on the consolidated balance sheets. Transition services are to be provided by Dell over a period of 18 months, starting from the date of the acquisition. Payments for transition services are not expected to be significant.
During the secondfourth quarter of fiscal 2018,2020 and did not have a material impact to the consolidated financial statements. VMware acquired Wavefront, Inc. (“Wavefront”). Upon closing of the acquisition,also expects that Dell was paid $20 million in cash for its non-controlling ownership interest in Wavefront.will continue to resell VMware consulting solutions.
Dell Financial Services (“DFS”)
DFS providedprovides financing to certain of VMware’s end users at the end users’ discretion. Upon acceptance of the financing arrangement by both VMware’s end userusers and DFS, amounts classified as trade accounts receivable are reclassified to the current portion of due from related parties net on thethe consolidated balance sheets.sheets. Revenue recognized on transactions financed through DFS was recorded net of financing fees. Financing fees whichon arrangements accepted by both parties were $40$29 million, $60 million and $25$66 million during the yearyears ended February 1, 2019January 28, 2022, January 29, 2021 and February 2, 2018,January 31, 2020, respectively. Financing fees during the Transition Period were not significant.
Due To/From Related Parties Net
AmountsAs of January 28, 2022, the current and non-current amounts due from and due to andrelated parties were presented separately on the consolidated balance sheets, as a right of setoff no longer exists subsequent to the Spin-Off. As of January 29, 2021, the current portion of due from related parties was presented net of the current portion of due to related parties on the consolidated balance sheets.
The following table summarizes the current portion of due from and due to related parties as of the periods presented consisted of the followingJanuary 29, 2021 (table in millions):
| | | | | | | | | |
| | | |
| | | |
| Due from related parties | | | $ | 1,558 | |
Due to related parties(1) | | | 120 | |
| | | |
| | | |
| Current portion of due from related parties | | | $ | 1,438 | |
| | | |
| | | |
| | | |
(1) Included an immaterial amount related to the Company’s current operating lease liabilities due to Dell.
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Due from related parties | $ | 1,079 |
| | $ | 638 |
|
| Due to related parties | 142 |
| | 106 |
|
| Due from related parties, net | $ | 937 |
|
| $ | 532 |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts included in the current and non-current portions of due from related parties net, excludingand due to related parties on the consolidated balance sheets as of January 28, 2022 included amounts due to Dell pursuant to the Tax Matters Agreement entered concurrently with the Separation Agreement, effective April 14, 2021 (the “Tax Matters Agreement”). Refer to Note P for more information.
Amounts included in the current portion of due from related parties, with the exception of DFS and tax obligations,obligations, are generally settled in cash within 60 days of each quarter-end.
Special Dividend
On JulyNovember 1, 2018, VMware’s board2021, VMware paid an $11.5 billion Special Dividend, pro rata, to each of directors declared a conditional $11 billion one-time special cash dividend (the “Special Dividend”), payable pro-rata to VMware stockholdersthe holders of Class A Stock and Class B Stock, including Dell, as of the record date. The Special Dividend was paid on December 28, 2018 to stockholdersRecord Date. Based upon the number of recordshares of common stock held by Dell as of the close of business on December 27, 2018 in the amount of $26.81 per outstanding share of VMware common stock. Dell was paidRecord Date, approximately $9$9.3 billion in cash as a resultwas paid to Dell. Refer to Note A for more information regarding the Spin-Off.
Notes Payable to Dell
As of its financial interestJanuary 29, 2021, VMware had an outstanding promissory note payable to Dell in VMware’s common stock asthe principal amount of $270 million due December 1, 2022. VMware repaid the outstanding balance of $270 million during the third quarter of fiscal 2022. During each of the record date.years ended January 28, 2022, January 29, 2021 and January 31, 2020, interest expense on the note payable to Dell was not significant.
E. Commitments and Contingencies
Litigation
On March 5, 2020, 2 purported Pivotal stockholders filed a petition for appraisal in the Delaware Court of Chancery (the “Court”) seeking a judicial determination of the fair value of an aggregate total of 10,000,100 Pivotal shares (the “Appraisal Action”). Separately, on June 4, 2020, purported Pivotal stockholder Kenia Lopez filed a lawsuit in the Court against Dell, VMware, Michael Dell, Robert Mee and Cynthia Gaylor (the “Lopez Action”), which alleges breach of fiduciary duty and aiding and abetting, all tied to VMware’s acquisition of Pivotal. On July 16, 2020, purported Pivotal stockholder Stephanie Howarth filed a similar lawsuit against the same defendants asserting similar claims (the “Howarth Action”). On August 14, 2020, the Court entered an order consolidating the Appraisal Action, the Lopez Action and the Howarth Action into a single action (the “Consolidated Action”) for all purposes including pretrial discovery and trial. On June 23, 2020, the Company made a payment of $91 million to the petitioners in the Appraisal Action, which reduces the Company’s exposure to accumulating interest. The Special Dividend was paidparties are now in the expert discovery and pretrial preparation stages of the lawsuit, with the trial currently scheduled to begin on July 6, 2022. The Company is unable at this time to assess whether or to what extent it may be found liable and, if found liable, what the damages may be and believes a loss is not probable and reasonably estimable. The Company intends to vigorously defend itself in connection with the closing of a transaction by Dell pursuant to which holders of Dell Class V common stock, which was designed to track the economic performance ofthis matter.
On April 25, 2019, Cirba Inc. and Cirba IP, Inc. (collectively, “Cirba”) sued VMware exchanged the Dell Class V common stock for Dell Class C common stock or cash or both, resulting in the eliminationUnited States District Court for the District of Delaware (the “Delaware Court”) for allegedly infringing 2 patents and 3 trademarks. On October 22, 2019, VMware filed a separate lawsuit against Cirba Inc. in the United States District Court for the Eastern District of Virginia for infringing 4 additional VMware patents, and Cirba filed a counterclaim alleging infringement of an additional Cirba patent. On January 24, 2020, a jury returned a verdict that VMware had willfully infringed Cirba’s 2 patents and awarded approximately $237 million in damages. VMware accrued a total of $237 million as of January 31, 2020, which reflected the estimated losses that were considered both probable and reasonably estimable at that time. The amount accrued for this matter was included in accrued expenses and other on the consolidated balance sheet as of January 31, 2020 and the charge was included in general and administrative expense on the consolidated statements of income during the year ended January 31, 2020. On December 21, 2020, the Delaware Court granted VMware’s request for a new trial and set aside the verdict and damages award (“Post-Trial Order”). Thereafter, all claims and counterclaims were consolidated into a single action for all purposes, including 4 patents and 3 trademark claims asserted by Cirba and 8 patents asserted by VMware. The parties are currently in the discovery phase of the Dell Class V common stock. Referlitigation, with trial currently set for April 2023. Separately, VMware has filed challenges with the U.S. Patent and Trademark Office against each of the 4 patents that are the subject of Cirba’s allegations. All of the challenges were granted and reviews are underway as follows: 2 patents are undergoing ex parte reexam review; 1 patent is undergoing an inter partes review; and 1 patent is undergoing a post-grant review. As of January 29, 2021, the Company reassessed its estimated loss accrual based on the Post-Trial Order and determined that a loss was no longer probable and reasonably estimable with respect to Note P for more information.the consolidated action. Accordingly, the estimated loss accrual of $237 million recorded on the consolidated balance sheets was derecognized, with the credit included in general and administrative expense on the consolidated statements of income during the year ended January 29, 2021. The Company is
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
unable at this time to assess whether, or to what extent, it may be found liable and, if found liable, what the damages may be. The Company intends to vigorously defend against this matter.
Stock Purchase ArrangementsIn December 2019, the staff of the Enforcement Division of the SEC requested documents and information related to VMware’s backlog and associated accounting and disclosures. VMware is fully cooperating with Dellthe SEC and is engaged in discussions with the SEC about a potential resolution. VMware is unable to predict the outcome of this matter at this time.
While VMware believes that it has valid defenses against each of the above legal matters, given the unpredictable nature of legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a material adverse effect on VMware’s consolidated financial statements.
VMware accrues for a liability when a determination has been made that a loss is both probable and the amount of the loss can be reasonably estimated. If only a range can be estimated and no amount within the range is a better estimate than any other amount, an accrual is recorded for the minimum amount in the range. Significant judgment is required in both the determination that the occurrence of a loss is probable and is reasonably estimable. In making such judgments, VMware considers the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs are generally recognized as expense when incurred.
VMware is also subject to other legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business or in connection with business mergers and acquisitions, including claims with respect to commercial, contracting and sales practices, product liability, intellectual property, employment, corporate and securities law, class action, whistleblower and other matters. From time to time, VMware also receives inquiries from and has discussions with government entities and stockholders on various matters. As of January 28, 2022, amounts accrued relating to these other matters arising as part of the ordinary course of business were considered not material. VMware does not believe that any liability from any reasonably possible disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on its consolidated financial statements.
Contractual Commitments
VMware’s minimum contractual commitments as of January 28, 2022 were as follows (table in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | Purchase Obligations | | Asset Retirement Obligations | | Total |
| 2023 | | | $ | 473 | | | $ | 1 | | | $ | 474 | |
| 2024 | | | 101 | | | 1 | | | 102 | |
| 2025 | | | 39 | | | 3 | | | 42 | |
| 2026 | | | 1 | | | 2 | | | 3 | |
| 2027 | | | 1 | | | 9 | | | 10 | |
| Thereafter | | | — | | | 6 | | | 6 | |
| Total | | | $ | 615 | | | $ | 22 | | | $ | 637 | |
VMware’s contractual commitments also include principal payments on the unsecured senior notes and senior unsecured term loan facilities, leased office facilities and equipment under various lease arrangements and tax obligations. Refer to Note J for more information on VMware’s debt commitments, Note N for more information on VMware’s lease commitments and Note P for more information on VMware’s tax obligations.
Guarantees and Indemnification Obligations
VMware enters into stock purchase arrangementsagreements in the ordinary course of business with, Dell. Theamong others, customers, distributors, resellers, system vendors and systems integrators. Most of these agreements require VMware to indemnify the other party against third-party claims alleging that a VMware product infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require VMware to indemnify the other party against certain claims relating to property damage, personal injury, or the acts or omissions of VMware, its employees, agents, or representatives.
Additionally, following table summarizes purchasesthe Spin-Off, VMware and Dell have agreed to indemnify one another pursuant to the Tax Matters Agreement for certain tax liabilities or tax benefits relating to periods prior to the Spin-Off. Refer to Note P for more information.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware has agreements with certain vendors, financial institutions, lessors and service providers pursuant to which VMware has agreed to indemnify the other party for specified matters, such as acts and omissions of VMware, its employees, agents, or representatives.
VMware has procurement or license agreements with respect to technology that it has obtained the right to use in VMware’s products and agreements. Under some of these agreements, VMware has agreed to indemnify the supplier for certain claims that may be brought against such party with respect to VMware’s acts or omissions relating to the supplied products or technologies.
VMware has agreed to indemnify the directors and executive officers of VMware, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware’s by-laws and charter also provide for indemnification of directors and officers of VMware and VMware subsidiaries to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware also indemnifies certain employees who provide services with respect to employee benefits plans, including, for example, the members of the Administrative Committee of the VMware 401(k) Plan and employees who serve as directors or officers of VMware’s Class A common stock from Dell duringsubsidiaries.
In connection with certain acquisitions, VMware has agreed to indemnify the periods presented, pursuantformer directors and officers of the acquired company in accordance with the acquired company’s by-laws and charter in effect immediately prior to stock purchasethe acquisition or in accordance with indemnification or similar agreements entered into on March 29, 2017 (aggregate purchase price in millions, shares in thousands):by the acquired company and such persons. VMware typically purchases a “tail” directors and officers insurance policy, which should enable VMware to recover a portion of any future indemnification obligations related to the former officers and directors of an acquired company.
|
| | | |
| | For the Year Ended |
| | February 2, |
| | 2018 |
| Aggregate purchase price | $ | 725 |
|
Class A common shares repurchased(1) | 7,572 |
|
| Weighted-average price per share | $ | 95.75 |
|
(1) The aggregateIt is not possible to determine the maximum potential amount under these indemnification agreements due to the relatively small number of shares purchased was determined based upon a volume-weighted average price during a defined period, less an agreed upon discount.
There were no purchases of VMware’s Class A common stock from Dell during the year ended February 1, 2019prior indemnification claims and the Transition Period.
Notes Payable to Dell
On January 21, 2014, VMware entered intounique facts and circumstances involved in each particular situation. Historically, payments made by the Company under these agreements have not had a note exchange agreement with its parent company providing for the issuance of three promissory notes in the aggregate principal amount of $1,500 million, which consisted of outstanding principal duematerial effect on the following dates: $680 million due May 1, 2018, $550 million due May 1, 2020 and $270 million due December 1, 2022.Company’s consolidated results of operations, financial position, or cash flows.
On August 21, 2017, VMware repaid two of the notes payable to Dell in the aggregate principal amount of $1,230 million, representing repayment of the note due May 1, 2018 at par value and repayment of the note due May 1, 2020 at a discount. During the year ended February 2, 2018, VMware recognized a gain on extinguishment of debt of $6 million, which was recorded in other income (expense), net on the consolidated statements of income (loss). The remaining note payable of $270 million due December 1, 2022 may be prepaid without penalty or premium.
Interest is payable quarterly in arrears, at the annual rate of 1.75%. During the year ended February 1, 2019 and the Transition Period, interest expense on the notes payable to Dell was not significant. Interest expense recognized during the years ended February 2, 2018 and December 31, 2016 was $16 million and $26 million, respectively.
Pivotal
As of February 2, 2018, VMware had a 20% ownership interest in Pivotal, and the investment was accounted for using the cost method. The carrying value of the investment was included in other assets on the consolidated balance sheets and was $20 million as of February 2, 2018. Prior to Pivotal’s initial public offering on April 20, 2018, VMware’s previously held preferred shares were converted to shares of non-trading Class B common stock, resulting in VMware having a financial interest of 17% and a voting interest of 24% in Pivotal as of February 1, 2019. VMware recognized an unrealized gain of $813 million during the year ended February 1, 2019 in other income (expense), net on the consolidated statements of income (loss) to adjust its investment in Pivotal to its fair value of $833 million as of February 1, 2019, including an unrealized gain of $668 million recognized as a result of Pivotal’s initial public offering.
D.F. Business Combinations, Definite-Lived Intangible Assets, Net and Goodwill
Business Combinations
Fiscal 20192021
Acquisition of HeptioSaltStack, Inc.
During the fourththird quarter of fiscal 2019,2021, VMware completed the acquisition of HeptioSaltStack, Inc. (“Heptio”), a providerdeveloper of products and services that help enterprises deploy and operationalize Kubernetes. VMware acquired Heptiointelligent, event-driven automation software, to enhancebroaden VMware’s Kubernetes portfolio and cloud native strategy.Cloud Management capabilities from infrastructure to applications. The total purchase price, was $420 million, net of cash acquired, of $15was $51 million. The purchase price primarily included $27$29 million of identifiable intangible assets and $392$24 million of goodwill that iswas not expected to be deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, of $20 million, with anhad estimated useful lifelives of three years.
Acquisition of Datrium, Inc.
During the second quarter of fiscal 2021, VMware completed the acquisition of Datrium, Inc., a provider of cloud-native disaster recovery solutions, to broaden the VMware Site Recovery Disaster Recovery as a Service offerings. The total purchase price, net of cash acquired, was $137 million. The purchase price primarily included $25 million of identifiable intangible assets and $91 million of goodwill. The identifiable intangible assets, which primarily consisted of completed technology, had estimated useful lives of three years to five years. Management believesDuring the fourth quarter of fiscal 2021, the Company evaluated facts and circumstances that existed as of the acquisition date and adjusted the provisional amount recorded to deferred tax asset, resulting in an increase of $40 million to goodwill, and determined that intangible assets and the majority of goodwill were deductible for tax purposes.
Acquisition of Lastline, Inc.
During the second quarter of fiscal 2021, VMware completed the acquisition of Lastline, Inc., a provider of network-based security breach detection products and services, to enhance capabilities for network detection and threat analysis on VMware NSX and SD-WAN offerings. The total purchase price, net of cash acquired, represents the synergies expected from combining VMware’s solution offerings relatedwas $114 million. The purchase price primarily included $29 million of identifiable intangible assets and $86 million of goodwill that was not deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, had estimated useful lives of one year to Kubernetes with those of Heptio.
four years.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Acquisition of Nyansa, Inc.
During the first quarter of fiscal 2021, VMware completed the acquisition of Nyansa, Inc., a developer of artificial intelligence-based network analytics, to accelerate the delivery of end-to-end monitoring and troubleshooting capacities within VMware SD-WAN by VeloCloud. The total purchase price, net of cash acquired, was $38 million. The purchase price primarily included $14 million of identifiable intangible assets and $24 million of goodwill that was not deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, had estimated useful lives of one year to four years.
Other Fiscal 2021 Acquisitions
During the year ended January 29, 2021, VMware completed 5 other acquisitions, which were not material, individually or in aggregate, to the consolidated financial statements. VMware expected these acquisitions to primarily enhance its product features and capabilities for its VMware Carbon Black Cloud and vRealize Operations offerings. The aggregate purchase price for these 5 acquisitions, net of cash acquired, was $62 million and primarily included $52 million of identifiable intangible assets and $16 million of goodwill, the majority of which was deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, had estimated useful lives of one year to five years.
For each of the acquisitions completed during fiscal 2021, the excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which management believed represented synergies expected from combining the technologies of VMware with those of the acquired businesses. The estimated fair value assigned to the tangible assets, identifiable intangible assets, and assumed liabilities were based on management's estimates and assumptions.
The pro forma financial information assuming these fiscal 2021 acquisitions had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
Fiscal 2020
Acquisition of Pivotal
During the fourth quarter of fiscal 2020, VMware completed the acquisition of Pivotal, a leading cloud-native platform provider, to enhance VMware’s cloud native Kubernetes portfolio. Refer to Note B for more information.
Acquisition of Carbon Black
During the third quarter of fiscal 2020, VMware completed the acquisition of Carbon Black, a developer of cloud-native endpoint protection, in a cash tender offer for all of the outstanding shares of Carbon Black’s common stock, at a price of $26.00 per share. VMware acquired Carbon Black to create a comprehensive intrinsic security portfolio to protect workloads, clients and infrastructure from cloud to edge. Management believed the acquisition would result in synergies with the Carbon Black platform and its VMware NSX and VMware Workspace ONE offerings, among others, and enable VMware to offer a highly differentiated intrinsic security platform addressing multiple concerns of the security industry. The total purchase price was $2.0 billion, net of cash acquired of $111 million.
Merger consideration totaling $117$18 million including $24 million beingwas held in escrow, iswith a third-party paying agent and was payable to certain employees of HeptioCarbon Black subject to specified future employment conditions, and iswas being recognized as expense over the requisite service period of approximately fourtwo years on a straight-line basis. Compensation expense recognized during
VMware assumed all of Carbon Black’s unvested stock options and restricted stock outstanding at the year ended February 1, 2019 was not material.
Thecompletion of the acquisition with an estimated fair value of assumed unvested equity awards attributed$181 million. Of the total consideration, $171 million was allocated to post-combinationfuture services was $47 million and willwould be expensed over the remaining requisite service periods of approximately three years on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
The initial allocationshare conversion ratio of the purchase price0.2 was based on a preliminary valuation and assumptions and is subjectapplied to change within the measurement period. VMware expects to finalize the allocationconvert Carbon Black’s outstanding equity awards into shares of the purchase price as soon as practicable and no later than one year from the acquisition date.VMware's common stock.
Acquisition of CloudHealth Technologies,Avi Networks, Inc.
During the thirdsecond quarter of fiscal 2019,2020, VMware completed the acquisition of CloudHealth Technologies,Avi Networks, Inc. (“CloudHealth Technologies”Avi Networks”). CloudHealth Technologies delivers, a cloud operations platform that enables customers to analyze and manage cloud cost, usage, security, and performance centrally for native public clouds, which expanded VMware’s portfolioprovider of multi-cloud management solutions.application delivery services. VMware acquired Avi Networks to provide customers with application delivery controller capabilities that include server load balancing for various applications and analytics. Together, VMware and Avi Networks expected to deliver a software defined networking stack built for the multi-cloud environment. The total purchase price was $495$326 million, net of cash acquired of $26$9 million. The purchase price primarily included $101
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Merger consideration totaling $27 million was held in escrow and was payable to certain employees of identifiable intangible assetsAvi Networks subject to specified future employment conditions and $394 millionwas being recognized as expense over the requisite service period of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets included completed technology of $69 million and customer relationships of $18 million, with estimated useful lives of one to five years.approximately three years on a straight-line basis.
The fair value of assumed unvested equity awards attributed to post-combination services was $39$32 million and will bewas being expensed over the remaining requisite service periods of approximately three years on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
The initial allocationAcquisition of AetherPal, Inc.
During the first quarter of fiscal 2020, VMware completed the acquisition of AetherPal Inc., a provider of remote support solutions, to enhance VMware’s Workspace ONE offerings for a total purchase price was based on a preliminary valuationof $45 million,
Other Fiscal 2020 Business Combinations
During the third quarter of fiscal 2020, VMware completed 4 other acquisitions, which were not material individually or in aggregate to the consolidated financial statements. VMware expected these acquisitions to enhance its product features and assumptionscapabilities for its Software-Defined Data Center solutions and is subject to change within the measurement period. VMware expects to finalize the allocation of theSaaS offerings. The aggregate purchase price, as soon as practicable and no later than one year from the acquisition date.net of cash acquired for these 4 acquisitions was $68 million.
The pro forma financial information assuming thefiscal 2020 acquisitions of Heptio and CloudHealth Technologies had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisitions, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes, both individually andor in aggregate.
Other Asset Acquisitions
During the first quarter of fiscal 2019, VMware completed four asset acquisitions, in which the Company acquired certain intangible assets classified as completed technology. The aggregate purchase price of the intangible assets acquired was $26 million.
Fiscal 2018
Acquisition of VeloCloud Networks, Inc.
During the fourth quarter of fiscal 2018, VMware completed the acquisition of VeloCloud Networks, Inc. (“VeloCloud”), a provider of cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. VMware acquired VeloCloud to build on its network virtualization platform, VMware NSX (“NSX”), and to expand its networking portfolio. The total purchase price was $449 million, net of cash acquired of $24 million. The purchase price primarily included $142 million of identifiable intangible assets and $326 million of goodwill that was not deductible for tax purposes. The identifiable intangible assets primarily include completed technology of $87 million and customer contracts of $44 million, with estimated useful lives of six to seven years.
The fair value of assumed unvested equity awards attributed to post-combination services was $30 million and will be expensed over the remaining requisite service periods on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
Prior to the closing of the acquisition, VMware held an ownership interest in VeloCloud. Upon completion of the step acquisition, VMware recognized a gain of $8 million in other income (expense), net for the remeasurement of its previously held ownership interest to fair value, which was $12 million.
The pro forma financial information assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other 2018 Business Combinations
During the second quarter of fiscal 2018, VMware completed the acquisitions of Wavefront and Apteligent, Inc., which were not material to the consolidated financial statements. The aggregate purchase price for the two acquisitions was $238 million, net of cash acquired of $35 million. The aggregate purchase price included $36 million of identifiable intangible assets and $238 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets primarily relate to purchased technology, with estimated useful lives of five years. The fair value of assumed unvested equity awards attributed to post-combination services was $37 million and will be expensed over the remaining requisite service periods on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
Prior to the closing of the acquisition, VMware held an ownership interest in Wavefront. Upon completion of the step acquisition, VMware recognized a gain of $34 million in other income (expense), net for the remeasurement of its previously held ownership interest to fair value, which was $49 million. Upon closing of the acquisition, Dell was paid $20 million in cash for its non-controlling ownership interest in Wavefront.
The pro forma financial information assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
Fiscal 2016
Acquisition of Arkin Net, Inc.
On June 21, 2016, VMware acquired all of the outstanding shares of Arkin Net, Inc. (“Arkin”) for approximately $67 million of cash, net of liabilities assumed. VMware acquired Arkin, a provider of software-defined data center security and operations, as part of a strategy to accelerate customers’ adoption of NSX and software-defined data centers. Prior to the closing of the acquisition on June 21, 2016, Dell owned approximately 16% of the outstanding shares of Arkin. As a result of the acquisition, cash paid to Dell was approximately $13 million.aggregate.
Definite-Lived Intangible Assets, Net
The following table summarizes the changes in the carrying amount of definite-lived intangible assets during the periods presented (table in millions):
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Balance, beginning of the year | $ | 548 |
| | $ | 507 |
|
| Additions to intangible assets related to business combinations | 154 |
| | 178 |
|
| Amortization expense | (161 | ) | | (137 | ) |
| Balance, end of the year | $ | 541 |
| | $ | 548 |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| Balance, beginning of the year | $ | 993 | | | $ | 1,172 | |
| Additions related to business combinations and purchases of intangible assets | 24 | | | 149 | |
| Amortization expense | (303) | | | (328) | |
| | | |
| Balance, end of the year | $ | 714 | | | $ | 993 | |
As of the periods presented, definite-lived intangible assets consisted of the following (amounts in tables in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| January 28, 2022 |
| Weighted-Average
Useful Lives
(in years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Book
Value |
| Purchased technology | 5.3 | | $ | 836 | | | $ | (501) | | | $ | 335 | |
| Customer relationships and customer lists | 11.5 | | 721 | | | (376) | | | 345 | |
| Trademarks and tradenames | 7.7 | | 131 | | | (97) | | | 34 | |
| | | | | | | |
| Total definite-lived intangible assets | | | $ | 1,688 | | | $ | (974) | | | $ | 714 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| January 29, 2021 |
| Weighted-Average
Useful Lives
(in years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Book
Value |
| Purchased technology | 5.3 | | $ | 948 | | | $ | (462) | | | $ | 486 | |
| Customer relationships and customer lists | 11.4 | | 727 | | | (281) | | | 446 | |
| Trademarks and tradenames | 7.6 | | 132 | | | (78) | | | 54 | |
| Other | 2.0 | | 21 | | | (14) | | | 7 | |
| Total definite-lived intangible assets | | | $ | 1,828 | | | $ | (835) | | | $ | 993 | |
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | |
| | February 1, 2019 |
| | Weighted-Average Useful Lives
(in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Purchased technology | 6.3 | | $ | 781 |
| | $ | (503 | ) | | $ | 278 |
|
| Leasehold interest | 34.9 | | 149 |
| | (33 | ) | | 116 |
|
| Customer relationships and customer lists | 7.5 | | 193 |
| | (96 | ) | | 97 |
|
| Trademarks and tradenames | 7.9 | | 86 |
| | (40 | ) | | 46 |
|
| Other | 3.9 | | 7 |
| | (3 | ) | | 4 |
|
| Total definite-lived intangible assets | | | $ | 1,216 |
| | $ | (675 | ) | | $ | 541 |
|
|
| | | | | | | | | | | | | |
| | February 2, 2018 |
| | Weighted-Average Useful Lives
(in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Purchased technology | 6.4 | | $ | 750 |
| | $ | (466 | ) | | $ | 284 |
|
| Leasehold interest | 34.9 | | 149 |
| | (29 | ) | | 120 |
|
| Customer relationships and customer lists | 7.8 | | 177 |
| | (74 | ) | | 103 |
|
| Trademarks and tradenames | 8.4 | | 70 |
| | (31 | ) | | 39 |
|
| Other | 5.7 | | 5 |
| | (3 | ) | | 2 |
|
| Total definite-lived intangible assets | | | $ | 1,151 |
| | $ | (603 | ) | | $ | 548 |
|
Amortization expense on definite-lived intangible assets was $161$303 million, $137 million, $129$328 million and $10$300 million during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 2016 and the Transition Period,2020, respectively.
Based on intangible assets recorded as of February 1, 2019January 28, 2022 and assuming no subsequent additions, dispositions or impairment of underlying assets, the remaining estimated annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (table in millions):
| | | 2020 | $ | 155 |
| |
| 2021 | 97 |
| |
| 2022 | 82 |
| |
| 2023 | 59 |
| 2023 | $ | 253 | |
| 2024 | 42 |
| 2024 | 201 | |
| 2025 | | 2025 | 109 | |
| 2026 | | 2026 | 69 | |
| 2027 | | 2027 | 38 | |
| Thereafter | 106 |
| Thereafter | 44 | |
| Total | $ | 541 |
| Total | $ | 714 | |
Goodwill
The following table summarizes the changes in the carrying amount of goodwill during the periods presented (table in millions): | | | | | | | | | | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| Balance, beginning of the year | $ | 9,599 | | | $ | 9,329 | |
| Change in goodwill due to business combinations and related adjustments | (1) | | | 270 | |
| Balance, end of the year | $ | 9,598 | | | $ | 9,599 | |
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Balance, beginning of the year | $ | 4,597 |
| | $ | 4,032 |
|
| Increase in goodwill related to business combinations | 784 |
| | 565 |
|
| Balance, end of the year | $ | 5,381 |
| | $ | 4,597 |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E.G. Realignment and Loss on Disposition
Disposition of VMware vCloud Air Business
During the secondthird quarter of fiscal 2018,2021, VMware completed the saleapproved a plan to streamline its operations and better align resources with its business priorities. As a result of vCloud Air to OVH. The loss recognized in connection with this transaction was $104 millionaction, approximately 280 positions were eliminated during the year ended February 2, 2018 and was recorded inJanuary 29, 2021. VMware recognized $42 million of severance-related realignment and loss on dispositionexpenses during the year ended January 29, 2021 on the consolidated statements of income (loss). Losses recognized on the disposition of vCloud Air included the impairment of fixed assets identified as part of the sale, as well as the costsincome. Actions associated with certain transition services, which primarily included employee-related expenses and costs associated with data-center colocation services. Transition servicesthis plan were performed over a periodsubstantially complete by the end of 18 months, starting fromfiscal 2021.
During the datefourth quarter of the sale.
Realignment
On January 22, 2016,fiscal 2020, VMware approved a plan to streamline its operations, with plans to reinvest the associated savings in field, technicalbetter align business priorities and support resources relatedshift positions to growth products.lower cost locations. As a result of these actions, approximately 8001,100 positions were eliminated during the year ended DecemberJanuary 31, 2016.2020. VMware recognized $50$79 million of severance-related realignment expenses during the year ended DecemberJanuary 31, 20162020 on the consolidated statements of income (loss). Additionally, VMware consolidated certain facilities as part of this plan, which resulted in the recognition of $2 million of related expenses during the year ended December 31, 2016 on the consolidated statements of income (loss).income. Actions associated with this plan were substantially completed by December 31, 2016.during fiscal 2021.
The following table summarizestables summarize the activity for the accrued realignment expenses forduring the year ended December 31, 2016January 29, 2021 (table in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended January 29, 2021 |
| Balance as of
January 31, 2020 | | Realignment Expense | | Utilization | | Balance as of
January 29, 2021 | | |
| Severance-related costs | $ | 74 | | | $ | 42 | | | $ | (113) | | | $ | 3 | | | |
| | | | | | | | | |
| |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | Balance as of January 1, 2016 | | Realignment | | Utilization | | Balance as of December 31, 2016 |
| Severance-related costs | $ | 3 |
| | $ | 50 |
| | $ | (52 | ) | | $ | 1 |
|
| Costs to exit facilities | — |
| | 2 |
| | (1 | ) | | 1 |
|
| Total | $ | 3 |
| | $ | 52 |
| | $ | (53 | ) | | $ | 2 |
|
F.H. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period, as calculated using the treasury stock method. Potentially dilutive securities primarily include unvested restricted stock, unitswhich includes restricted stock unit (“RSUs”RSU”), including PSUs, and PSU awards, and stock options, including purchase options under VMware’s employee stock purchase plan.plan, which included Pivotal’s employee stock purchase plan through the date of acquisition. Securities are excluded from the computation of diluted net income (loss) per share if their effect would be anti-dilutive. Prior to the Spin-Off, VMware uses the two-class method to calculate net income (loss) per share as both classes share the same rights in dividends; therefore, basic and diluted earnings per share are the same for both classes.used
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the two-class method to calculate net income per share. Since both classes shared the same rights in dividends, basic and diluted earnings per share were the same for both Class A Stock and Class B Stock. Automatically as a result of the Spin-Off, each share of Class B Stock converted into 1 share of Class A Stock and Class A Stock became, and remains, the sole outstanding class of VMware common stock, and, as a result, the two-class method is no longer applicable to the Company’s calculation of net income per share.
The following table sets forth the computations of basic and diluted net income (loss) per share during the periods presented (table in millions, except per share amounts and shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the Year Ended |
| | | | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | | | 2022 | | 2021 | | 2020 |
| Net income attributable to VMware, Inc. | | | | | | | | | $ | 1,820 | | | $ | 2,058 | | | $ | 6,412 | |
| | | | | | | | | | | | | |
| Weighted-average shares of common stock, basic | | | | | | | | | 419,504 | | | 419,841 | | | 417,058 | |
| Effect of other dilutive securities | | | | | | | | | 2,890 | | | 3,399 | | | 8,177 | |
| Weighted-average shares of common stock, diluted | | | | | | | | | 422,394 | | | 423,240 | | | 425,235 | |
| Net income per weighted-average share of common stock attributable to VMware, Inc. common stockholders, basic | | | | | | | | | $ | 4.34 | | | $ | 4.90 | | | $ | 15.37 | |
| Net income per weighted-average share of common stock attributable to VMware, Inc. common stockholders, diluted | | | | | | | | | $ | 4.31 | | | $ | 4.86 | | | $ | 15.08 | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
| Net income (loss) | $ | 2,422 |
| | $ | 659 |
| | $ | 1,223 |
| | $ | (5 | ) |
| Gain on stock purchase with Dell, net of tax | — |
| | — |
| | (8 | ) | | — |
|
| Net income (loss), as adjusted | $ | 2,422 |
| | $ | 659 |
| | $ | 1,215 |
| | $ | (5 | ) |
| Weighted-average shares, basic for Classes A and B | 407,766 |
| | 406,738 |
| | 420,520 |
| | 408,625 |
|
| Effect of stock purchase with Dell | — |
| | — |
| | 7 |
| | — |
|
| Effect of other dilutive securities | 6,501 |
| | 6,630 |
| | 3,467 |
| | — |
|
| Weighted-average shares, diluted for Classes A and B | 414,267 |
| | 413,368 |
| | 423,994 |
| | 408,625 |
|
| Net income (loss) per weighted-average share, basic for Classes A and B | $ | 5.94 |
| | $ | 1.62 |
| | $ | 2.91 |
| | $ | (0.01 | ) |
| Net income (loss) per weighted-average share, diluted for Classes A and B | $ | 5.85 |
| | $ | 1.59 |
| | $ | 2.87 |
| | $ | (0.01 | ) |
(1) During the Transition Period, VMware incurred a net loss. As a result, all potentially dilutive securities were anti-dilutive and excluded from the computation of diluted net loss per share.
The following table sets forth the weighted-average common share equivalents of Class A common stockStock that were excluded from the diluted net income (loss) per share calculations during the periods presented because their effect would have been anti-dilutive (shares in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | For the Year Ended |
| | | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | | 2022 | | 2021 | | 2020 |
| Anti-dilutive securities: | | | | | | | | | | | | | |
| Employee stock options | | | | | | | | | 57 | | | 150 | | | 34 | |
| Restricted stock units | | | | | | | | | 463 | | | 5,038 | | | 315 | |
| Total | | | | | | | | | 520 | | | 5,188 | | | 349 | |
|
| | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
| Anti-dilutive securities: | | | | | | | |
| Employee stock options | 50 |
| | 51 |
| | 1,817 |
| | 2,353 |
|
| Restricted stock units | 255 |
| | 140 |
| | 652 |
| | 3,259 |
|
| Total | 305 |
| | 191 |
| | 2,469 |
| | 5,612 |
|
G.I. Cash, Cash Equivalents, Restricted Cash and Short-Term Investments
Cash cash equivalents and investments as of the periods presented consisted of the following (tables in millions):Cash Equivalents
|
| | | | | | | | | | | | | | | |
| | February 1, 2019 |
| | Cost or Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
| Cash | $ | 461 |
| | $ | — |
| | $ | — |
| | $ | 461 |
|
| Cash equivalents: | | | | | | | |
| Money-market funds | $ | 2,316 |
| | $ | — |
| | $ | — |
| | $ | 2,316 |
|
| Demand deposits and time deposits | 53 |
| | — |
| | — |
| | 53 |
|
| Total cash equivalents | $ | 2,369 |
| | $ | — |
| | $ | — |
| | $ | 2,369 |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | |
| | February 2, 2018 |
| | Cost or Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
| Cash | $ | 423 |
| | $ | — |
| | $ | — |
| | $ | 423 |
|
| Cash equivalents: | | | | | | | |
| Money-market funds | $ | 5,460 |
| | $ | — |
| | $ | — |
| | $ | 5,460 |
|
| U.S. and foreign corporate debt securities | 88 |
| | — |
| | — |
| | 88 |
|
| Total cash equivalents | $ | 5,548 |
| | $ | — |
| | $ | — |
| | $ | 5,548 |
|
| Short-term investments: | | | | | | | |
| U.S. Government and agency obligations | $ | 965 |
| | $ | — |
| | $ | (8 | ) | | $ | 957 |
|
| U.S. and foreign corporate debt securities | 4,503 |
| | 1 |
| | (31 | ) | | 4,473 |
|
| Foreign governments and multi-national agency obligations | 99 |
| | — |
| | (1 | ) | | 98 |
|
| Mortgage-backed securities | 123 |
| | — |
| | (2 | ) | | 121 |
|
| Marketable available-for-sale equity securities | 15 |
| | 18 |
| | — |
| | 33 |
|
| Total short-term investments | $ | 5,705 |
| | $ | 19 |
| | $ | (42 | ) | | $ | 5,682 |
|
VMware’s cash, cash equivalents and short-term investments declined significantly as a result of the Special Dividend paid on December 28, 2018. Upon liquidation of investment securities that were used to fund the Special Dividend, the Company recognized a loss of $53 million in investment income on its consolidated statements of income (loss) during the year ended February 1, 2019. The realized gains and losses on investments during the years ended February 2, 2018 and December 31, 2016 and the Transition Period were not significant.
Short-term investments on the consolidated balance sheets as of February 1, 2019 includes a marketable equity investment carried at fair value. Refer to Note I for further information.
VMware evaluated its available-for-sale investments as of February 2, 2018 for other-than-temporary declines in fair value and did not consider any to be other-than-temporarily impaired.
Unrealized losses on available-for-sale investments, which have been in a net loss position for less than twelve months as of February 2, 2018, were as follows (table in millions):
|
| | | | | | | |
| | February 2, 2018 |
| | Fair Value | | Unrealized
Losses |
| U.S. and foreign corporate debt securities | $ | 3,100 |
| | $ | (22 | ) |
As of the periods presented, unrealized losses on available-for-sale investments in the other investment categories, which have been in a net loss position for less than twelve months, were not significant. Unrealized losses on available-for-sale investments, which have been in a net loss position for twelve months or greater, were not significant as of February 1, 2019 and February 2, 2018.
Restricted Cash
During November 2016, the FASB issued ASU 2016-18, for which restricted cash or restricted cash equivalents is included with cash and cash equivalents when reconciling the beginning-of-periodtotaled $3.6 billion and end-of-period total amounts shown on the statement$4.7 billion as of cash flows. The updated standard was effective for interimJanuary 28, 2022 and annual periods beginning after December 15, 2017January 29, 2021, respectively. Cash equivalents were $3.0 billion as of January 28, 2022 and required a full retrospective transition method. VMware adopted ASU 2016-18 during the first quarterconsisted of fiscal 2019money-market funds of $3.0 billion and has applied the standard retrospectively to all periods presented. The adoptiontime deposits of ASU 2016-18 did not have a significant impact on the consolidated statements$34 million. Cash equivalents were $3.8 billion as of cash flows during the years ended February 2, 2018January 29, 2021 and December 31, 2016consisted of money-market funds of $3.7 billion and the Transition Period.time deposits of $102 million.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted Cash
The following table provides a reconciliation of the Company’s cash and cash equivalents, and current portion of restricted cash and non-current portion of restricted cash reported withinon the consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash shown in the Company’s consolidated statementsas of cash flows for the periods presented (table in millions):
| | | | | | | | | | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 3,614 | | | $ | 4,692 | |
| Restricted cash within other current assets | 43 | | | 56 | |
| Restricted cash within other assets | 6 | | | 22 | |
| Total cash, cash equivalents and restricted cash | $ | 3,663 | | | $ | 4,770 | |
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Cash and cash equivalents | $ | 2,830 |
| | $ | 5,971 |
|
| Restricted cash within other current assets | 35 |
| | 22 |
|
| Restricted cash within other assets | 29 |
| | 10 |
|
| Total cash, cash equivalents and restricted cash | $ | 2,894 |
| | $ | 6,003 |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts included in restricted cash primarily relate to certain employee-related benefits, as well as amounts related to installment payments to certain employees as part of acquisitions, subject to the achievement of specified future employment conditions.
H.Short-term investments totaled $19 million and $23 million as of January 28, 2022 and January 29, 2021, respectively, and consisted of marketable equity securities. Refer to Note K for more information regarding the Company’s marketable equity securities.
J. Debt
Long-term DebtUnsecured Senior Notes
On August 21, 2017,2, 2021, VMware issued three5 series of unsecured senior notes (“Senior Notes”) pursuant to a public debt offering. offering (the “2021 Senior Notes”). The proceeds from the issuance2021 Senior Notes were $3,961 million,$5.9 billion, net of debt discount of $9$11 million and debt issuance costs of $30$47 million. The proceeds from the 2021 Senior Notes were used to fund a portion of the Special Dividend in connection with the Spin-Off.
VMware also has unsecured senior notes issued on April 7, 2020 (the “2020 Senior Notes”) and on August 21, 2017 (the “2017 Senior Notes", collectively with the 2020 Senior Notes and 2021 Senior Notes, the “Senior Notes”).
The carrying value of the Senior Notes as of the periods presented werewas as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | |
| January 28, | | January 29, | | Effective Interest Rate | |
| 2022 | | 2021 | |
| 2017 Senior Notes: | | | | | | |
| 2.95% Senior Note Due August 21, 2022 | $ | — | | | $ | 1,500 | | | 3.17% | |
| 3.90% Senior Note Due August 21, 2027 | 1,250 | | | 1,250 | | | 4.05% | |
| 2020 Senior Notes: | | | | | | |
| 4.50% Senior Note Due May 15, 2025 | 750 | | | 750 | | | 4.70% | |
| 4.65% Senior Note Due May 15, 2027 | 500 | | | 500 | | | 4.80% | |
| 4.70% Senior Note Due May 15, 2030 | 750 | | | 750 | | | 4.86% | |
| 2021 Senior Notes: | | | | | | |
| 0.60% Senior Note Due August 15, 2023 | 1,000 | | | — | | | 0.95% | |
| 1.00% Senior Note Due August 15, 2024 | 1,250 | | | — | | | 1.23% | |
| 1.40% Senior Note Due August 15, 2026 | 1,500 | | | — | | | 1.61% | |
| 1.80% Senior Note Due August 15, 2028 | 750 | | | — | | | 2.01% | |
| 2.20% Senior Note Due August 15, 2031 | 1,500 | | | — | | | 2.32% | |
| Total principal amount | 9,250 | | | 4,750 | | | | |
| Less: unamortized discount | (15) | | | (7) | | | | |
| Less: unamortized debt issuance costs | (61) | | | (26) | | | | |
| | | | | | |
| | | | | | |
| Long-term debt | $ | 9,174 | | | $ | 4,717 | | | | |
|
| | | | | | | | | |
| | February 1, | | February 2, | | Effective Interest Rate |
| | 2019 | | 2018 | |
| Long-term debt: | | | | | |
| 2.30% Senior Note Due August 21, 2020 | $ | 1,250 |
| | $ | 1,250 |
| | 2.56% |
| 2.95% Senior Note Due August 21, 2022 | 1,500 |
| | 1,500 |
| | 3.17% |
| 3.90% Senior Note Due August 21, 2027 | 1,250 |
| | 1,250 |
| | 4.05% |
| Total principal amount | 4,000 |
| | 4,000 |
| | |
| Less: unamortized discount | (7 | ) | | (8 | ) | | |
| Less: unamortized debt issuance costs | (21 | ) | | (28 | ) | | |
| Net carrying amount | $ | 3,972 |
| | $ | 3,964 |
| | |
On May 11, 2020, VMware exercised a make-whole call and redeemed the $1.3 billion unsecured senior note due August 21, 2020 at a premium. The loss on extinguishment of debt was not material during the year ended January 29, 2021 and was
recognized in other income (expense), net on the consolidated statements of income.
Interest on the 2021 Senior Notes is payable semiannually in arrears, on February 15 and August 15 of each year, commencing on February 15, 2022. Interest on the 2020 Senior Notes is payable semiannually in arrears, on May 15 and November 15 of each year, commencing on November 15, 2020. The interest rate on the 2020 Senior Notes is subject to adjustment based on certain rating events. Interest on the 2017 Senior Notes is payable semiannually in arrears, on February 21 and August 21 of each year. Duringyear, commencing on February 21, 2018. Interest expense was $240 million, $183 million and $129
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
million during the years ended February 1, 2019January 28, 2022, January 29, 2021 and February 2, 2018, interestJanuary 31, 2020, respectively. Interest expense, of $129 million and $58 million, respectively, which included amortization of discount and issuance costs, was recognized on the consolidated statements of income (loss).income. The discount and issuance costs are amortized over the term of the Senior Notes on a straight-line basis, which approximates the effective interest method.
The Senior Notes are redeemable in whole at any time or in part from time to time at VMware’s option and may be subject to a make-whole premium. In addition, upon the occurrence of certain change-of-control triggering events and certain downgrades of the ratings on the Senior Notes, VMware may be required to repurchase the notes at a repurchase price equal to 101% of the aggregate principal plus any accrued and unpaid interest on the date of purchase.repurchase. The Senior Notes rank equally in right of payment with VMware’s other unsecured and unsubordinated indebtedness. The Senior Notes also includeindebtedness and contain restrictive covenants that, in certain circumstances, limit VMware’s ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate, merge, sell or otherwise dispose of all or substantially all of VMware’s assets.
The future principal payments for the Senior Notes as of January 28, 2022 were as follows (amounts in millions):
| | | | | |
| |
| 2023 | $ | — | |
| 2024 | 1,000 | |
| 2025 | 1,250 | |
| 2026 | 750 | |
| 2027 | 1,500 | |
| Thereafter | 4,750 | |
| Total | $ | 9,250 | |
| |
| |
| |
| |
| |
Refer to Note CD for informationdisclosure regarding the notesnote payable to Dell.
Senior Unsecured Term Loan Facility
On September 2, 2021, VMware received commitments from financial institutions for a three-year senior unsecured term loan facility and a five-year senior unsecured term loan facility that provided the Company with a one-time aggregate borrowing capacity of up to $4.0 billion (the “2021 Term Loan”). On November 1, 2021, the Company drew down an aggregate of $4.0 billion with a weighted average interest rate of 0.90%. The drawdown was used to fund a portion of the Special Dividend in connection with the Spin-Off. On January 25, 2022, the Company repaid an aggregate of $500 million. As of January 28, 2022, the outstanding balance on the 2021 Term Loan of $3.5 billion, net of unamortized debt issuance cost, was included in long-term debt on the consolidated balance sheets.
On September 26, 2019, VMware entered into a senior unsecured term loan facility (the “2019 Term Loan”) with a syndicate of lenders that provided the Company with a borrowing capacity of up to $2.0 billion through February 7, 2020 for general corporate purposes. During the year ended January 31, 2020, the Company drew down an aggregate of $3.4 billion and repaid an aggregate of $1.9 billion. During the third quarter of fiscal 2021, VMware repaid the outstanding balance of $1.5 billion on the 2019 Term Loan.
The 2021 Term Loan, together with the 2019 Term Loan (the “Term Loan”) contain certain representations, warranties and covenants. Commitment fees incurred on the Term Loan were not significant for the periods presented. Interest expense for the Term Loan, including amortization of issuance costs, was not significant during the year ended January 28, 2022, and was $17 million and $15 million during the years ended January 29, 2021 and January 31, 2020, respectively.
Revolving Credit Facility
On September 12, 2017,2, 2021, VMware entered into an unsecured credit agreement establishing a revolving credit facility (“Credit Facility”) with a syndicate of lenders that provides the Company with a borrowing capacity of up to $1,000 million, which may be used $1.5 billion for general corporate purposes.purposes (the “2021 Revolving Credit Facility”). The 2021 Revolving Credit Facility replaced the Company’s existing $1.0 billion revolving credit facility that was entered into on September 12, 2017 and was undrawn. Commitments under the 2021 Revolving Credit Facility are available for a period of five years, which may be extended, subject to the satisfaction of certain conditions, by up to two2 one-year periods. As of February 1,
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2019,January 28, 2022, there werewas no outstanding borrowingsborrowing under the 2021 Revolving Credit Facility. The credit agreement contains certain representations, warranties and covenants. Commitment fees, interest rates and other terms of borrowing under the 2021 Revolving Credit Facility may vary based on VMware’s external credit ratings. The amount paidincurred in connection with the ongoing commitment fee, which is payable quarterly in arrears, was not significant during the yearsyear ended February 1, 2019 and February 2, 2018January 28, 2022.
I.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
K. Fair Value Measurements
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Certain financial assets and liabilities are measured at fair value on a recurring basis. VMware determines fair value using the following hierarchy:
•Level 1 - Quoted prices in active markets for identical assets or liabilities;
•Level 2 - Inputs other than Level 1 inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are noted as beingnot active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
VMware’s fixed income securities were primarily classified as Level 2, with the exception of some of the U.S. Government and agency obligations that were classified as Level 1. Additionally, VMware’s Level 2 classification included forward contracts, notes payable to Dell and the Senior Notes.
As of February 1, 2019 and February 2, 2018, VMware’s Level 2 investment securities were generally priced using non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques.
VMware did not have any significant assets or liabilities that were classified as Level 3 of the fair value hierarchy for the periods presented, and there have been no transfers between fair value measurement levels during the periods presented.
The following tables set forth the fair value hierarchy of VMware’s cash equivalents and short-term investments that were required to be measured at fair value as of the periods presented (tables in millions):
| | | | | | | | | | | | | | | | | |
| | January 28, 2022 |
| | Level 1 | | Level 2 | | Total |
| Cash equivalents: | | | | | |
| Money-market funds | $ | 2,998 | | | $ | — | | | $ | 2,998 | |
Time deposits(1) | — | | | 34 | | | 34 | |
| Total cash equivalents | $ | 2,998 | | | $ | 34 | | | $ | 3,032 | |
| Short-term investments: | | | | | |
| Marketable equity securities | $ | 19 | | | $ | — | | | $ | 19 | |
| Total short-term investments | $ | 19 | | | $ | — | | | $ | 19 | |
| | | | February 1, 2019 | | January 29, 2021 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Cash equivalents: | | | | |
|
| Cash equivalents: | | | | | |
| Money-market funds | $ | 2,316 |
| | $ | — |
| | $ | 2,316 |
| Money-market funds | $ | 3,738 | | | $ | — | | | $ | 3,738 | |
| Demand deposits and time deposits | — |
| | 53 |
| | 53 |
| |
Time deposits(1) | | Time deposits(1) | — | | | 102 | | | 102 | |
| Total cash equivalents | $ | 2,316 |
| | $ | 53 |
| | $ | 2,369 |
| Total cash equivalents | $ | 3,738 | | | $ | 102 | | | $ | 3,840 | |
| Short-term investments: | | | | | | Short-term investments: | | | | | |
| Marketable equity securities | $ | 19 |
| | $ | — |
| | $ | 19 |
| Marketable equity securities | $ | 23 | | | $ | — | | | $ | 23 | |
| Total short-term investments | $ | 19 |
| | $ | — |
| | $ | 19 |
| Total short-term investments | $ | 23 | | | $ | — | | | $ | 23 | |
(1)Time deposits were valued at amortized cost, which approximated fair value.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | |
| | February 2, 2018 |
| | Level 1 | | Level 2 | | Total |
| Cash equivalents: | | | | | |
| Money-market funds | $ | 5,460 |
| | $ | — |
| | $ | 5,460 |
|
| U.S. and foreign corporate debt securities | — |
| | 88 |
| | 88 |
|
| Total cash equivalents | $ | 5,460 |
| | $ | 88 |
| | $ | 5,548 |
|
| Short-term investments: | | | | | |
| U.S. Government and agency obligations | $ | 684 |
| | $ | 273 |
| | $ | 957 |
|
| U.S. and foreign corporate debt securities | — |
| | 4,473 |
| | 4,473 |
|
| Foreign governments and multi-national agency obligations | — |
| | 98 |
| | 98 |
|
| Mortgage-backed securities | — |
| | 121 |
| | 121 |
|
| Marketable available-for-sale equity securities | 33 |
| | — |
| | 33 |
|
| Total short-term investments | $ | 717 |
| | $ | 4,965 |
| | $ | 5,682 |
|
The notesSenior Notes, 2021 Term Loan and note payable to Dell and the Senior Notes were not adjusted torecorded at fair value. The fair value of the notes payable to Dell was approximately $252 million and $246 million as of February 1, 2019 and February 2, 2018, respectively. The fair value of the Senior Notes was approximately $3,862 million$9.3 billion and $3,863$5.3 billion as of January 28, 2022 and January 29, 2021, respectively. The fair value of the 2021 Term Loan approximated its carrying value as of January 28, 2022. The fair value of the note payable to Dell was $276 million as of February 1, 2019 and February 2, 2018, respectively.January 29, 2021. VMware repaid the outstanding balance of $270 million on the note payable to Dell during the third quarter of fiscal 2022. Fair value for both the notesSenior Notes and note payable to Dell and the Senior Notes was estimated primarily based on observable market interest rates (Level 2 inputs).
VMware offers a deferred compensation plan for eligible employees, which allows participants to defer payment for part or all of their compensation. TheThere is no net impact to the consolidated statements of income (loss) is not significant since changes in the fair value of the assets substantially offset changes in the fair value of the liabilities. As such, assets and liabilities associated with this plan have not been included in the above tables. Assets associated with this plan were the same as the liabilities at approximately $77$162 million and $60$140 million as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively, and arewere included in other assets on the consolidated balance sheets. Liabilities associated with this plan were included in accrued expenses and other of $16 million and in other liabilities of
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
$146 million on the consolidated balance sheetsas of January 28, 2022. Liabilities associated with this plan of $140 million were included in other liabilities on the consolidated balance sheets.sheetsas of January 29, 2021.
Equity Securities Carried atWith a Readily Determinable Fair Value
VMware holdsVMware’s equity securities include an equity security, which is publicly traded and measured atinvestment in a company that completed its initial public offering during the third quarter of fiscal 2021. The fair value usingof the investment is based on quoted prices for identical assets in an active market (Level 1). Prior to the adoptionAs of ASU 2016-01, unrealized gains or losses onJanuary 29, 2021, this equity security were recognizedinvestment had a fair value of $162 million, of which $139 million was included in accumulated other comprehensive income (loss)assets on the consolidated balance sheets. Effective February 3, 2018, VMware adopted ASU 2016-01sheets due to a certain sale restriction and reclassified$23 million was included in short-term investments as they were unrestricted and available for sale. The sale restriction lapsed for the unrealized gain on this securityremaining shares during the first quarter of $11 million to retained earnings as a cumulative-effect adjustment on the consolidated balance sheets. Unrealized gains and losses are now recognized in other income (expense), net on the consolidated statements of income (loss)fiscal 2022. As of February 1, 2019, January 28, 2022, the fair value of this equity securitythe investment was $19 million and was included in short-term investments on the consolidated balance sheets.
The unrealizedcarrying value at the time of sale for the investments sold during the years ended January 28, 2022 and January 29, 2021 was $83 million and $26 million, respectively. A loss of $37 million and a gain of $23 million were recognized on the consolidated statementsinvestments sold during the years ended January 28, 2022 and January 29, 2021, respectively. An unrealized loss of income (loss)$29 million was $14 millionrecognized during the year ended February 1, 2019.
Through its ownership in Class B Common Stock, VMware had a financial interest of 17% and a voting interest of 24% in PivotalJanuary 28, 2022 on the investment still held as of February 1, 2019. VMware electedJanuary 28, 2022 . Unrealized gains of $140 million and $21 million were recognized during the fair value option of accounting because it believes that fair value isyears ended January 29, 2021 and January 31, 2020, respectively on the most relevant measurement for this investment. The fair value of VMware’s investment in Pivotal was $833 millioninvestments still held as of February 1, 2019January 29, 2021 and was determined using the quoted market price of Pivotal’s Class A common stock as of each reporting period, adjusted for the impact of superior voting rights (Level 2).
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial information of Pivotal is made publicly available. The following tables include summarized financial information for the third quarter of fiscal 2019 obtained from Pivotal’s most recent Form 10-Q filed with the SEC on December 12, 2018 (tables in millions):
|
| | | |
| | Nine Months Ended |
| | November 2, |
| | 2018 |
| Results of Operations Data: | |
| Revenue | $ | 488 |
|
| Gross profit | 307 |
|
| Loss from operations | (105 | ) |
| Net loss | (103 | ) |
| Net loss attributable to Pivotal | (103 | ) |
|
| | | |
| | November 2, |
| | 2018 |
| Balance Sheet Data: | |
| Current assets | $ | 880 |
|
| Total assets | 1,654 |
|
| Current liabilities | 331 |
|
| Total liabilities | 401 |
|
| Non-controlling interest | 1 |
|
Equity Securities Without a Readily Determinable Fair Value
VMware’s equity securities also include investments in privately held companies, which do not have a readily determinable fair value. Prior to the adoption of ASU 2016-01, VMware accounted for these equity securities at cost less impairment and recorded realized gains and losses on securities sold or impaired in other income (expense), net on the consolidated statements of income (loss). As of February 2, 2018, investments in privately held companies, which consisted primarily of equity securities accounted for under the cost method, had a carrying value of $146 million, which included $20 million related to its investment in Pivotal.
Upon adoption of ASU 2016-01, VMware elected to measure these equity securities at cost less impairment, if any, adjusted for observable price changes in orderly transactions for the identical or a similar security of the same issuer.As of February 1, 2019, investments in privately held companies, which consisted primarily of equity securities, had a carrying value of $95 million and were included in other assets on the consolidated balance sheets.January 31, 2020, respectively. All gains and losses on these securities, whether realized or unrealized, are recognized in other income (expense), net on the consolidated statements of income.
Equity Securities Without a Readily Determinable Fair Value
VMware’s equity securities also include investments in privately held companies, which do not have a readily determinable fair value. As of January 28, 2022 and January 29, 2021, investments in privately held companies, which consisted primarily of equity securities, had a carrying value of $163 million and $129 million, respectively, and were included in other assets on the consolidated balance sheets.
During the years ended January 28, 2022 and January 31, 2020, gross upward adjustments of $29 million and $16 million, respectively, were recognized on securities still held as of January 28, 2022 and January 31, 2020, respectively. During the year ended January 29, 2021, gross downward adjustments of $14 million were recognized on securities still held as of January 29, 2021.
Unrealized gains, net recognized on securities still held as of January 28, 2022 and January 31, 2020 were $25 million and $14 million, respectively, during the years ended January 28, 2022 and January 31, 2020, respectively. Unrealized losses, net recognized on securities still held as of January 29, 2021 were $12 million during the year ended January 29, 2021. All gains and losses on these securities, whether realized or unrealized, are recognized in other income (loss).(expense), net on the consolidated statements of income.
J.L. Derivatives and Hedging Activities
VMware conducts business on a global basis in multiple foreign currencies, subjecting the Company to foreign currency risk. To mitigate a portion of this risk, VMware utilizes hedging contracts as described below, which potentially expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreements. VMware manages counterparty risk by seeking counterparties of high credit quality and by monitoring credit ratings, and credit spreads of, and other relevant public information about its counterparties. VMware does not, and does not intend to, use derivative instruments for trading or speculative purposes.
Cash Flow Hedges
To mitigate its exposure to foreign currency fluctuations resulting from certain operating expenses denominated in certain foreign currencies, VMware enters into forward contracts that are designated as cash flow hedging instruments as the accounting criteria for such designation are met. Therefore, the effective portion of gains or losses resulting from changes in the fair value of these instruments is initially reported in accumulated other comprehensive income (loss)loss on the consolidated balance sheets and is subsequently reclassified to the related operating expense line item on the consolidated statements of
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
income (loss) in the same period that the underlying expenses are incurred. During the years ended February 1, 2019, February 2, 2018, December January 28, 2022, January 29, 2021 and January 31, 2016 and the Transition Period,2020, the effective portion of gains or losses reclassified to the consolidated statements of income (loss) was not significant. Interest charges or “forward points”forward points on VMware’s forward contracts arewere excluded from the assessment of hedge effectiveness and arewere recorded in other income (expense), netto the related operating expense line item on the consolidated statements of income (loss) asin the same period that the interest charges are incurred.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
These forward contracts have contractual maturities of twelvefourteen months or less, and as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, outstanding forward contracts had a total notional value of $367$642 million and $318$486 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. The fair value of these forward contracts was not significant as of January 28, 2022 and January 29, 2021.
During the years ended February 1, 2019, February 2, 2018 January 28, 2022, January 29, 2021 and DecemberJanuary 31, 2016 and the Transition Period,2020, all cash flow hedges were considered effective.
Forward Contracts Not Designated as Hedges
VMware has established a program that utilizes forward contracts to offset the foreign currency risk associated with net outstanding monetary asset and liability positions. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are reported in other income (expense), net on the consolidated statements of income (loss).income.
These forward contracts generally have a contractual maturity of one month, and as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, outstanding forward contracts had a total notional value of $1,208 million$1.5 billion and $1,020 million,$1.2 billion, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. The fair value of these forward contracts was not significant as of January 28, 2022 and January 29, 2021.
During the years ended February 1, 2019 and December 31, 2016, VMware recognized gains of $69 million and $23 million, respectively, and losses of $97 million and $18 million during the February 2, 2018 and the Transition Period, respectively,Gains related to the settlement of forward contracts.contracts were $57 million and $54 million during the years ended January 28, 2022 and January 31, 2020, respectively. The loss related to the settlement of forward contracts was $63 million during the year endedJanuary 29, 2021. Gains and losses are recorded in other income (expense), net on the consolidated statements of income (loss).income.
The combined gains and losses related to the settlement of forward contracts and the underlying foreign currency denominated assets and liabilities were not significant during the yearsyear ended February 1, 2019, February 2, 2018 January 28, 2022. The combined gains and December 31, 2016losses related to the settlement of forward contracts and the Transition Period.underlying foreign currency denominated assets and liabilities resulted in net gains of $31 million during each of the years ended January 29, 2021 and January 31, 2020. Net gains and losses are recorded in other income (expense), net on the consolidated statements of income (loss).income.
K.M. Property and Equipment, Net
Property and equipment, net, as of the periods presented consisted of the following (table in millions): | | | | | | | | | | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| Equipment and software | $ | 1,729 | | | $ | 1,620 | |
| Buildings and improvements | 1,170 | | | 1,137 | |
| Furniture and fixtures | 134 | | | 132 | |
| Capital in progress | 179 | | | 82 | |
| Total property and equipment | 3,212 | | | 2,971 | |
| Accumulated depreciation | (1,751) | | | (1,637) | |
| Total property and equipment, net | $ | 1,461 | | | $ | 1,334 | |
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Equipment and software | $ | 1,419 |
| | $ | 1,262 |
|
| Buildings and improvements | 951 |
| | 824 |
|
| Furniture and fixtures | 109 |
| | 101 |
|
| Construction in progress | 55 |
| | 129 |
|
| Total property and equipment | 2,534 |
| | 2,316 |
|
| Accumulated depreciation | (1,401 | ) | | (1,242 | ) |
| Total property and equipment, net | $ | 1,133 |
| | $ | 1,074 |
|
As of February 2, 2018, constructionCapital in progress primarily represented buildingsconsisted of capitalized costs associated with the development of internal-use software and various building and site improvements related to VMware’s Palo Alto campus expansion that had not yet been placed into service. As of February 1, 2019, the construction related to this expansion was substantially complete and was placed in service.
Depreciation expense was $199$276 million, $195 million, $215$253 million and $18$234 million during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 20162020, respectively.
N. Leases
VMware has operating and the Transition Period, respectively.
L. Commitmentsfinance leases primarily related to office facilities and Contingencies
Litigation
On August 10, 2015, the Company received a subpoena from the California Attorney General’s office (“California AG”), following the Company’s settlement with the Departmentequipment, which have remaining lease terms of Justice and the General Services Administration during June
one month to 24 years.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2015. In this matter,The components of lease expense during the California AG is investigating the accuracy of the Company’s sales practices with departments and agencies within the State of California. The Company held an initial meeting with the California AG’s representatives on November 5, 2015, and thereafter provided certain requested documents to the California AG. The Company did not receive any further communications from the California AG until the fall of 2017. Since then, the California AG and the Company have exchanged communications regarding the legal bases for the allegations, and the Company has provided additional information requested by the California AG. The Company is unable at this time to reasonably assess whether or to what extent it may be found liable and believes a loss is not considered probable and is not estimable.
On March 4, 2015, Christoph Hellwig, a software developer who alleged that software code he wrote is used in a component of the Company’s vSphere product, filed a lawsuit against VMware in the Hamburg Regional Court in Germany alleging copyright infringement for failing to comply with the terms of the open source General Public License v.2 (“GPL v.2”). On July 8, 2016, the German court issued a written decision dismissing Mr. Hellwig’s lawsuit. Following Mr. Hellwig’s appeal of that decision, on February 28, 2019, the appellate court affirmed the regional court’s decision dismissing Mr. Hellwig’s lawsuit. The time for Mr. Hellwig to file a further appeal has not yet expired. The Company intends to continue vigorously defending itself against this lawsuit.
While VMware believes that it has valid defenses against each of the above legal matters, given the unpredictable nature of legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a material adverse effect on VMware’s consolidated financial statements.
VMware accrues for a liability when a determination has been made that a loss is both probable and the amount of the loss can be reasonably estimated. If only a range can be estimated and no amount within the range is a better estimate than any other amount, an accrual is recorded for the minimum amount in the range. Significant judgment is required in both the determination that the occurrence of a loss is probable and is reasonably estimable. In making such judgments, VMware considers the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs are generally recognized as expense when incurred.
VMware is also subject to other legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business or in connection with business mergers and acquisitions, including claims with respect to commercial, contracting and sales practices, product liability, intellectual property, employment, corporate and securities law, class action, whistleblower and other matters. From time to time, VMware also receives inquiries from and has discussions with government entities and stockholders on various matters. As of February 1, 2019, amounts accrued relating to these other matters arising as part of the ordinary course of business were considered not material. VMware does not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on its consolidated financial statements.
Operating Leases and Other Contractual Commitments
VMware leases office facilities and equipment under various operating arrangements. Rent expense for the years ended February 1, 2019, February 2, 2018, and December 31, 2016 was $145 million, $116 million and $112 million, respectively. Rent expense for the Transition Period was not material. VMware’s minimum future lease commitments and other contractual commitments at February 1, 2019periods presented were as follows (table in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the Year Ended |
| | | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | | 2022 | | 2021 | | 2020 |
| Operating lease expense | | | | | | | | | $ | 192 | | | $ | 190 | | | $ | 167 | |
| Finance lease expense: | | | | | | | | | | | | | |
| Amortization of ROU assets | | | | | | | | | 6 | | | 6 | | | 4 |
| Interest on lease liabilities | | | | | | | | | 1 | | | 2 | | | 1 |
| Total finance lease expense | | | | | | | | | 7 | | | 8 | | | 5 |
| Short-term lease expense | | | | | | | | | 1 | | | 3 | | | 3 |
| Variable lease expense | | | | | | | | | 31 | | | 29 | | | 31 |
| Total lease expense | | | | | | | | | $ | 231 | | | $ | 230 | | | $ | 206 | |
|
| | | | | | | | | | | | | | | |
| | Future Lease Commitments(1) | | Purchase Obligations | | Other Contractual Commitments(2) | | Total |
| 2020 | $ | 109 |
| | $ | 143 |
| | $ | 5 |
| | $ | 257 |
|
| 2021 | 79 |
| | 95 |
| | 3 |
| | 177 |
|
| 2022 | 64 |
| | 93 |
| | 5 |
| | 162 |
|
| 2023 | 54 |
| | 8 |
| | 3 |
| | 65 |
|
| 2024 | 41 |
| | — |
| | 3 |
| | 44 |
|
| Thereafter | 523 |
| | — |
| | 4 |
| | 527 |
|
| Total | $ | 870 |
| | $ | 339 |
| | $ | 23 |
| | $ | 1,232 |
|
| |
(1)
| Amounts in the table above exclude legally binding minimum lease payments for leases signed but not yet commenced of $164 million, as well as expected sublease income. |
| |
(2)
| Consisting of various contractual agreements, which include commitments on the lease for VMware’s Washington data center facility and asset retirement obligations. |
The Company subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income was $20 million, $20 million and $22 million during the years ended January 28, 2022, January 29, 2021 and January 31, 2020, respectively.
Supplemental cash flow information related to operating and finance leases during the periods presented was as follows (table in millions):
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| | | | January 28, | | January 29, | | January 31, |
| | | | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows from operating leases | | | | $ | 173 | | | $ | 174 | | | $ | 167 | |
| Operating cash flows from finance leases | | | | 1 | | | 1 | | 2 |
| Financing cash flows from finance leases | | | | 5 | | | 4 | | 1 |
| ROU assets obtained in exchange for lease liabilities: | | | | | | | | |
| Operating leases | | | | $ | 225 | | | $ | 275 | | | $ | 226 | |
| Finance leases | | | | — | | | 1 | | 63 |
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplemental balance sheet information related to operating and finance leases as of the periods presented was as follows (table in millions):
| | | | | | | | | | | |
| | | |
| | | |
| | | |
| January 28, 2022 |
| Operating Leases | | Finance Leases |
ROU assets, non-current(1) | $ | 1,062 | | | $ | 46 | |
| | | |
Lease liabilities, current(2) | $ | 145 | | | $ | 5 | |
Lease liabilities, non-current(3) | 927 | | | 43 | |
| Total lease liabilities | $ | 1,072 | | | $ | 48 | |
| | | | | | | | | | | |
| January 29, 2021 |
| Operating Leases | | Finance Leases |
ROU assets, non-current(1) | $ | 997 | | | $ | 53 | |
| | | |
Lease liabilities, current(2) | $ | 109 | | | $ | 5 | |
Lease liabilities, non-current(3) | 891 | | | 50 | |
| Total lease liabilities | $ | 1,000 | | | $ | 55 | |
(1) ROU assets for operating leases are included in other assets and ROU assets for finance leases are included in property and equipment, net on the consolidated balance sheets.
(2) Current lease liabilities are included primarily in accrued expenses and other on the consolidated balance sheets.
(3) Non-current operating lease liabilities are presented as operating lease liabilities on the consolidated balance sheets. Non-current finance lease liabilities are included in other liabilities on the consolidated balance sheets.
Lease term and discount rate related to operating and finance leases as of the periods presented were as follows:
| | | | | | | | | | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| Weighted-average remaining lease term (in years) | | | |
| Operating leases | 11.9 | | 12.6 |
| Finance leases | 7.3 | | 8.3 |
| Weighted-average discount rate | | | |
| Operating leases | 3.2 | % | | 3.5 | % |
| Finance leases | 2.9 | % | | 2.9 | % |
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following represents VMware’s future minimum lease payments under non-cancellable operating and finance leases as of January 28, 2022 (table in millions):
| | | | | | | | | | | |
| |
| Operating Leases | | Finance Leases |
| 2023 | $ | 176 | | | $ | 7 | |
| 2024 | 165 | | | 7 | |
| 2025 | 121 | | | 6 | |
| 2026 | 116 | | | 7 | |
| 2027 | 99 | | | 8 | |
| Thereafter | 666 | | | 19 | |
| Total future minimum lease payments | 1,343 | | | 54 | |
| Less: Imputed interest | (271) | | | (6) | |
Total lease liabilities(1) | $ | 1,072 | | | $ | 48 | |
| | | |
| | | |
| | | |
| | | |
| | | |
(1) Total lease liabilities as of January 28, 2022 excluded legally binding lease payments for leases signed but not yet commenced of $29 million.
The amount of the future operating lease commitments after fiscal 20242027 is primarily for the ground leases on VMware’s Palo Alto, California headquarter facilities, which expire in fiscal 2047. As several of VMware’s operating leases are payable in foreign currencies, the operating lease payments may fluctuate in response to changes in the exchange rate between the U.S. dollar and the foreign currencies in which the commitments are payable.
Guarantees and Indemnification Obligations
VMware enters into agreements in the ordinary course of business with, among others, customers, distributors, resellers, system vendors and systems integrators. Most of these agreements require VMware to indemnify the other party against third-party claims alleging that a VMware product infringes or misappropriates a patent, copyright, trademark, trade secret, and/or other intellectual property right. Certain of these agreements require VMware to indemnify the other party against certain claims relating to property damage, personal injury, or the acts or omissions of VMware, its employees, agents, or representatives.
VMware has agreements with certain vendors, financial institutions, lessors and service providers pursuant to which VMware has agreed to indemnify the other party for specified matters, such as acts and omissions of VMware, its employees, agents, or representatives.
VMware has procurement or license agreements with respect to technology that it has obtained the right to use in VMware’s products and agreements. Under some of these agreements, VMware has agreed to indemnify the supplier for certain claims that may be brought against such party with respect to VMware’s acts or omissions relating to the supplied products or technologies.
VMware has agreed to indemnify the directors and executive officers of VMware, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware’s by-laws and charter also provide for indemnification of directors and officers of VMware and VMware subsidiaries to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware also indemnifies certain employees who provide services with respect to employee benefits plans, including, for example, the members of the Administrative Committee of the VMware 401(k) Plan, and employees who serve as directors or officers of VMware’s subsidiaries.
In connection with certain acquisitions, VMware has agreed to indemnify the former directors and officers of the acquired company in accordance with the acquired company’s by-laws and charter in effect immediately prior to the acquisition or in accordance with indemnification or similar agreements entered into by the acquired company and such persons. VMware typically purchases a “tail” directors and officers insurance policy, which should enable VMware to recover a portion of any future indemnification obligations related to the former officers and directors of an acquired company.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the relatively small number of prior indemnification claims and the unique facts and circumstances involved in each particular situation. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s consolidated results of operations, financial position, or cash flows.
M.O. Accrued Expenses and Other
Accrued expenses and other as of the periods presented consisted of the following (table in millions): | | | | | | | | | | | |
| January 28, | | January 29, |
| 2022 | | 2021 |
| Accrued employee related expenses | $ | 1,412 | | | $ | 1,266 | |
| Accrued partner liabilities | 212 | | | 218 | |
| Customer deposits | 470 | | | 294 | |
| Lease liabilities | 150 | | | 114 | |
Other(1) | 562 | | | 490 | |
| Total | $ | 2,806 | | | $ | 2,382 | |
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Accrued employee related expenses | $ | 732 |
| | $ | 634 |
|
| Accrued partner liabilities | 207 |
| | 241 |
|
| Customer Deposits | 238 |
| | 126 |
|
| Other | 416 |
| | 356 |
|
| Total | $ | 1,593 |
| | $ | 1,357 |
|
Accrued partner liabilities primarily relate to rebates and marketing development fund accruals for channel partners, system vendors and systems integrators. Accrued partner liabilities also include accruals for professional service arrangements for which VMware intends to leverage channel partners to directly fulfill the obligation to its customers.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
N. Unearned Revenue and Remaining Performance Obligations
Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Unearned license revenue | $ | 255 |
| | $ | 184 |
|
| Unearned software maintenance revenue | 5,972 |
| | 5,082 |
|
| Unearned professional services revenue | 751 |
| | 573 |
|
| Total unearned revenue | $ | 6,978 |
| | $ | 5,839 |
|
Unearned license revenue is primarily related to the allocated portion of VMware's software-as-a-service (“SaaS”) offerings and is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized over time on a ratable basis over the contract duration. The weighted-average remaining term as of February 1, 2019 was approximately two years. In addition, unearned software maintenance revenue also includes the allocated portion of VMware’s SaaS offerings. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.
The following table summarizes unearned revenue activity during the periods presented:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | May 4, | | August 3, | | November 2, | | February 1, |
| | 2018 | | 2018 | | 2018 | | 2019 |
| Balance, beginning of the period | $ | 5,839 |
| | $ | 5,756 |
| | $ | 6,030 |
| | $ | 6,201 |
|
| Current period billings | 1,210 |
| | 1,507 |
| | 1,464 |
| | 2,094 |
|
Revenue recognized from amounts previously classified as unearned revenue(1) | (1,215 | ) | | (1,233 | ) | | (1,299 | ) | | (1,317 | ) |
| Other | (78 | ) | | — |
| | 6 |
| | — |
|
| Balance, end of the period | $ | 5,756 |
| | $ | 6,030 |
| | $ | 6,201 |
| | $ | 6,978 |
|
(1) Revenue recognized from amounts previously classified as unearned revenue did not include revenue for performance obligations that were fully satisfied upon delivery, such as on-premises license.
Revenue recognized during the years ended February 2, 2018 and December 31, 2016 and the Transition Period, from amounts previously classified as unearned revenue, was $4,621 million, $4,000 million and $392 million, respectively, and did not include revenue for performance obligations that were fully satisfied upon delivery, such as on-premises license.
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.
As of February 1, 2019, the aggregate transaction price allocated to remaining performance obligations was $7,749 million. Approximately 56% is expected to be recognized as revenue over the next 12 months and the remainder thereafter. VMware applied the practical expedient to not disclose the amount of transaction price allocated to remaining performance obligations for periods prior to the adoption of Topic 606.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
O.P. Income Taxes
The domestic and foreign components of income (loss) before provisions (benefits) for income taxestax for the periods presented were as follows (table in millions):
| | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| January 28, | | January 29, | | January 31, |
| | 2022 | | 2021 | | 2020 |
| Domestic | $ | 633 | | | $ | 932 | | | $ | 895 | |
| Foreign | 1,452 | | | 1,450 | | | 543 | |
| Total income before income tax | $ | 2,085 | | | $ | 2,382 | | | $ | 1,438 | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
| Domestic | $ | 1,650 |
| | $ | 636 |
| | $ | 455 |
| | $ | (60 | ) |
| Foreign | 1,233 |
| | 1,178 |
| | 1,048 |
| | 25 |
|
| Total income (loss) before income tax | $ | 2,883 |
| | $ | 1,814 |
| | $ | 1,503 |
| | $ | (35 | ) |
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware’s income tax provision (benefit) for income taxes for the periods presented consisted of the following (table in millions):
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
| Federal: | | | | | | | |
| Current | $ | 181 |
| | $ | 688 |
| | $ | 145 |
| | $ | 198 |
|
| Deferred | 103 |
| | 281 |
| | (1 | ) | | (225 | ) |
| | 284 |
| | 969 |
| | 144 |
| | (27 | ) |
| State: | | | | | | | |
| Current | 31 |
| | 8 |
| | 22 |
| | 25 |
|
| Deferred | 18 |
| | 22 |
| | (9 | ) | | (32 | ) |
| | 49 |
| | 30 |
| | 13 |
| | (7 | ) |
| Foreign: | | | | | | | |
| Current | 136 |
| | 152 |
| | 128 |
| | 5 |
|
| Deferred | (8 | ) | | 4 |
| | (5 | ) | | (1 | ) |
| | 128 |
| | 156 |
| | 123 |
| | 4 |
|
| Total provision (benefit) for income taxes | $ | 461 |
| | $ | 1,155 |
| | $ | 280 |
| | $ | (30 | ) |
The 2017 Tax Act introduced significant changes to U.S. income tax law including a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (“Transition Tax”) and a reduction of the U.S. statutory corporate income tax rate from 35% to 21%. During December 2017, the SEC staff issued SAB 118, which allowed the Company to record provisional tax amounts during a measurement period not to extend beyond one year of the enactment date. Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its consolidated financial statements for the year ended February 2, 2018. During the fourth quarter of fiscal 2019, the Company completed its analysis of the effect of the Tax Act and the adjustments recorded on the consolidated statement of income (loss) were not material for the year ended February 1, 2019.
Federal income tax increased during the year ended February 2, 2018, primarily due to the 2017 Tax Act. As a result of the Transition Tax, VMware recorded a provisional estimate for income tax expense of approximately $800 million that was calculated on a separate tax return basis. In addition, the Company recorded a provisional estimate for tax expense of approximately $100 million related to the remeasurement of its deferred tax assets and liabilities, which resulted from the reduction of the U.S. statutory corporate income tax rate. | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| January 28, | | January 29, | | January 31, |
| | 2022 | | 2021 | | 2020 |
| Federal: | | | | | |
| Current | $ | 16 | | | $ | 157 | | | $ | 78 | |
| Deferred | 64 | | | (19) | | | (219) | |
| 80 | | | 138 | | | (141) | |
| State: | | | | | |
| Current | 50 | | | 73 | | | 45 | |
| Deferred | (13) | | | (14) | | | (44) | |
| 37 | | | 59 | | | 1 | |
| Foreign: | | | | | |
| Current | 279 | | | 246 | | | 240 | |
| Deferred | (131) | | | (119) | | | (5,018) | |
| 148 | | | 127 | | | (4,778) | |
| Total income tax provision (benefit) | $ | 265 | | | $ | 324 | | | $ | (4,918) | |
Provision for income taxes decreased during the year ended February 1, 2019,January 28, 2022 compared to January 29, 2021, primarily driven by the absence of the Transition Tax. This decrease was partially offset by the$31 million discrete tax expense of $187 million recognized during the year ended February 1, 2019,benefit related to the book and tax basis difference on the Company’s investment in Pivotal, netequity securities recognized during the year ended January 28, 2022 as compared to a discrete tax expense of $52 million during the year ended January 29, 2021. The decrease was partially offset by a discrete tax benefit of $59 million due to an intra-group transfer of Pivotal’s intellectual property rights to the Company’s Irish subsidiary during the year ended January 29, 2021.
Provision for income taxes increased during the year ended January 29, 2021 compared to January 31, 2020, primarily driven by a decrease in discrete tax benefits related to intra-group transfers of certain of the reversalCompany’s intellectual property rights. The increase was also driven by a decrease in excess tax benefits recognized, which were $41 million during the year ended January 29, 2021 compared to $182 million during the year ended January 31, 2020.
During the second quarter of fiscal 2020, the Company completed an intra-group transfer of certain of its intellectual property rights (the “IP”) to its Irish subsidiary, where its international business is headquartered (the “IP Transfer”). The transaction changed the Company’s mix of international income from a lower non-U.S. tax jurisdiction to Ireland, which is subject to a statutory tax rate of 12.5%. A discrete tax benefit of $4.9 billion was recognized with a deferred tax asset during the second quarter of fiscal 2020. This deferred tax asset was recognized as a result of the previously recorded valuation allowance.
book and tax basis difference on the IP transferred to an Irish subsidiary and was based on the intellectual property’s current fair value.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of VMware’s incomeeffective tax rate to the statutory federal tax rate for the periods presented iswas as follows:
| | | | | | | | | | | | | | | | | |
| For the Year Ended |
| January 28, | | January 29, | | January 31, |
| 2022 | | 2021 | | 2020 |
| Statutory federal tax rate | 21 | % | | 21 | % | | 21 | % |
| State taxes, net of federal benefit | 1 | % | | 2 | % | | — | % |
| Tax rate differential for non-U.S. jurisdictions | (10) | % | | (8) | % | | (3) | % |
| Research and development tax credit | (4) | % | | (3) | % | | (8) | % |
| | | | | |
| Excess tax benefits from stock-based compensation | (1) | % | | (1) | % | | (11) | % |
| | | | | |
| | | | | |
Discrete tax benefit due to IP Transfer(1) | — | % | | (2) | % | | (343) | % |
| U.S. tax on foreign earnings | 1 | % | | 2 | % | | — | % |
| Permanent items | 5 | % | | 3 | % | | — | % |
| | | | | |
| Effective tax rate | 13 | % | | 14 | % | | (344) | % |
|
| | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
Statutory federal tax rate(1) | 21 | % | | 34 | % | | 35 | % | | 35 | % |
| State taxes, net of federal benefit | 2 | % | | 1 | % | | 1 | % | | 14 | % |
| Tax rate differential for non-U.S. jurisdictions | (5 | )% | | (13 | )% | | (16 | )% | | 9 | % |
| U.S. tax credits | (7 | )% | | (4 | )% | | (3 | )% | | — | % |
Excess tax benefits from stock-based compensation(2) | (3 | )% | | (6 | )% | | — | % | | — | % |
Transition Tax due to 2017 Tax Act(3) | — | % | | 44 | % | | — | % | | — | % |
Rate Change due to 2017 Tax Act(3) | — | % | | 6 | % | | — | % | | — | % |
| Permanent items | 8 | % | | 2 | % | | 3 | % | | 27 | % |
| Other | — | % | | — | % | | (1 | )% | | 2 | % |
| Effective tax rate | 16 | % | | 64 | % | | 19 | % | | 87 | % |
(1)The 2017 Tax Act reduced the U.S. statutory corporate income A discrete tax rate from 35% to 21%, effective January 1, 2018, which resulted inbenefit of $59 million was recognized with a blended U.S. statutory corporatedeferred tax rate of 34%asset during the year ended February 2, 2018.
| |
(2)
| VMware adopted ASU 2016-09 during the first quarter of fiscal 2018. As a result, net excess tax benefits recognized in connection with stock-based awards are included in the income tax provision on the consolidated statements of income (loss). Prior to adopting the updated standard, such amounts were recognized in additional paid-in capital on the Company’s consolidated balance sheets. |
(3) The effectiveJanuary 29, 2021. This deferred tax rateasset was recognized as a result of intra-group transfer of Pivotal’s IP rights to an Irish subsidiary. A discrete tax benefit of $4.9 billion was recognized with a deferred tax asset during the year ended February 2, 2018January 31, 2020. This deferred tax asset was impacted by key componentsrecognized as a result of the 2017 Tax Act, includingbook and tax basis difference on the Transition Tax, and the remeasurement of VMware’s deferred tax assets and liabilities dueIP transferred to the reduction in the U.S. statutory corporate tax rate.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
an Irish subsidiary.
Deferred tax assets and liabilities are recognized for future tax consequences resulting from differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities as of the periods presented consisted of the following (table in millions):
|
| | | | | | | |
| | February 1, | | February 2, |
| 2019 | | 2018 |
| Deferred tax assets: | | | |
| Accruals and other | $ | 78 |
| | $ | 48 |
|
| Unearned revenue | 287 |
| | 187 |
|
| Stock-based compensation | 64 |
| | 52 |
|
| Tax credit and net operating loss carryforwards | 273 |
| | 254 |
|
| Other assets, net | 32 |
| | 27 |
|
| Basis difference on investment in business | — |
| | 13 |
|
| Gross deferred tax assets | 734 |
| | 581 |
|
| Valuation allowance | (229 | ) | | (200 | ) |
| Total deferred tax assets | 505 |
| | 381 |
|
| Deferred tax liabilities: | | | |
| Deferred commissions | (129 | ) | | (115 | ) |
| Property, plant and equipment, net | (89 | ) | | (67 | ) |
| Intangibles and other assets, net | (28 | ) | | (4 | ) |
| Basis difference on investment in business | (187 | ) | | — |
|
| Total deferred tax liabilities | (433 | ) | | (186 | ) |
| Net deferred tax assets | $ | 72 |
| | $ | 195 |
|
Net deferred tax assets was comprised of deferred tax assets of $103 million and $227 million as of February 1, 2019 and February 2, 2018, respectively, partially offset by deferred tax liabilities of $31 million and $32 million as of February 1, 2019 and February 2, 2018, respectively. Deferred tax liabilities were included in other liabilities on the consolidated balance sheets for the periods presented. | | | | | | | | | | | |
| | January 28, | | January 29, |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Accruals and other | $ | 280 | | | $ | 238 | |
| Lease liabilities | 179 | | | 167 | |
| Unearned revenue | 538 | | | 501 | |
| Stock-based compensation | 76 | | | 86 | |
| Tax credit and net operating loss carryforwards | 710 | | | 553 | |
| Other assets, net | 135 | | | 54 | |
| Intangible and other non-current assets | 4,916 | | | 4,900 | |
| | | |
| Gross deferred tax assets | 6,834 | | | 6,499 | |
| Valuation allowance | (471) | | | (366) | |
| Total deferred tax assets | 6,363 | | | 6,133 | |
| Deferred tax liabilities: | | | |
| Deferred commissions | (177) | | | (158) | |
| ROU Assets | (151) | | | (145) | |
| Property, plant and equipment, net | (134) | | | (109) | |
| | | |
| | | |
| Total deferred tax liabilities | (462) | | | (412) | |
| Net deferred tax assets | $ | 5,901 | | | $ | 5,721 | |
The decreaseincrease in net deferred tax assets from February 2, 2018January 29, 2021 to February 1, 2019January 28, 2022 was primarily driven by the book and tax basis difference on the Company’s investment in Pivotal, partially offset by an increase in unearned revenuecertain tax attributes, which were allocated from Dell, as a result of the Spin-Off of $165 million as of February 1, 2019 as compared to February 2, 2018.January 28, 2022.
VMware has U.S.had federal, state and foreign net operating loss carryforwards of $201$269 million, $521 million and $195$9 million, as of February 1, 2019January 28, 2022, respectively. VMware had federal, state and February 2, 2018, respectively, from acquisitions made since 2007. Theseforeign net operating loss carryforwards expire at different periods through 2038. Portions of these carryforwards are subject to annual limitations. VMware expects to be able to fully utilize these net operating losses against future income. VMware also has$655 million, $714 million and $191 million as of January 29, 2021, respectively. The federal and state net operating loss carryforwards of $142 million and $187 million as of February 1, 2019 and February 2, 2018, respectively, resulting from acquisitions made since 2007, expiring at different periods through 2038.
VMware has California research and development (“R&D”) credit carryforwards for income tax purposes of $199 million and $168 million as of February 1, 2019 and February 2, 2018, respectively, that can be carried over indefinitely. VMware also has R&D credit carryforwards for Georgia of $12 million as of February 1, 2019. The R&D credit carryforwards for Massachusetts as of February 1, 2019 and for Massachusetts and Georgia as of February 2, 2018 werewill start to expire in fiscal 2023, if not material. The R&D credit carryforwards for Georgia and Massachusetts expire at different periods through 2033. In addition, VMware had no foreign tax credit carryforwards as of February 1, 2019, and the amount of foreign tax credit carryforwards as of February 2, 2018 was not significant. There were no non-U.S. net operating losses as of February 1, 2019, and the non-U.S. net operating losses were not material as of February 2, 2018.utilized. These net operating losses have various carryforward periods, including certain
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
portions that can be carried overforward indefinitely. The majority of the Company’s foreign net operating loss carryforwards can be carried forward indefinitely.
VMware had federal research and development (“R&D”) tax credit carryforwards of $164 million and $46 million as of January 28, 2022 and January 29, 2021, respectively. The federal R&D tax credit will start to expire in fiscal 2025, if not utilized. VMware also had California and other state R&D credit carryforwards for income tax purposes of $397 million and $323 million as of January 28, 2022 and January 29, 2021, respectively. The California R&D tax credit carryforwards can be carried forward indefinitely and the other state R&D tax credit carryforwards will start to expire in fiscal 2023, if not utilized. In addition, VMware had federal foreign tax credit carryforwards of $49 million as of January 28, 2022 and the amount was not significant as of January 29, 2021. The federal foreign tax credit will start to expire in fiscal 2027, if not utilized. VMware also had non-U.S. capital loss carryforwards of $23 million and $22 million as of January 28, 2022 and January 29, 2021, respectively, which can be carried forward indefinitely.
VMware determined that the realization of deferred tax assets relating to portions of the state net operating loss carryforwards, state R&D tax credits and foreign capital lossesloss carryforwards did not meet the more-likely-than-not threshold. Accordingly, a valuation allowance of $225$471 million and $183$366 million was recorded as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
If, in the future, new evidence supports the realization of the deferred tax assets related to these items, the valuation allowance will be reversed and a tax benefit will be recorded accordingly.
VMware believes it is more-likely-than-not that the net deferred tax assets as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, will be realized in the foreseeable future as VMware believes that it will generate sufficient taxable income in future years. VMware's ability to generate sufficient taxable income in future years in appropriate tax jurisdictions will determine the amount of net deferred tax asset balances to be realized in future periods. During the year ended February 1, 2019,January 28, 2022, the total change in the valuation allowance was $29$105 million, which was primarily due to certain tax attributes allocated by Dell as a result of the Spin-Off and California R&D credits generated duringin the current year, ended February 1, 2019, partially offset by the reversal of the previously recorded valuation allowance related to the Company’s investment in Pivotal.California R&D credits usage.
For the periods presented, VMware’s rate of taxation in non-U.S. jurisdictions was lower than the U.S. tax rate. VMware’s non-U.S. earnings are primarily earned by its subsidiariessubsidiary organized in Ireland, where the statutory rate is 12.5%. Prior to the year ended February 2, 2018, the Company did not recognize a deferred tax liability related to undistributed foreign earnings of its subsidiaries because such earnings were considered to be indefinitely reinvested in its foreign operations, or were remitted substantially free of U.S. tax. Under the 2017 Tax Act, all foreign earnings are subject to U.S. taxation. As a result, the Company repatriated, and expects to continue to repatriate, a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings. As of February 1, 2019,January 28, 2022, the amount of deferred tax liability related to the potential repatriation of foreign earnings was not material. Further developments in non-U.S. tax jurisdictions and unfavorable changes in non-U.S. tax laws and regulations, such as foreign tax laws enacted in response to the 2017 Tax Act, could result in adverse changes to global taxation and materially affect VMware’s financial position, results of operations, or annual effective tax rate.
Tax Sharing AgreementAgreements with Dell
On September 6, 2016,Pursuant to the Tax Matters Agreement, VMware entered into an amendedand Dell agreed to terminate the former tax sharing agreement as amended on December 30, 2019 (the “Tax Sharing Agreement”, together with Dell, in connection with,the Tax Matters Agreement and effective as of, the Dell Acquisition.Letter Agreement (as defined below), the “Tax Agreements”). The Tax Matters Agreement governs the Company’s and Dell’s respective rights and obligations, both for pre-Spin-Off periods and post-Spin-Off periods, regarding income and other taxes, and related matters, including tax liabilities and benefits, attributes and returns.
AlthoughPrior to the Spin-Off, although VMware’s financial results arewere included in the Dell consolidated tax return for U.S. federal income tax purposes, VMware��sVMware’s income tax provision isor benefit was calculated primarily as though VMware werewas a separate taxpayer. However, undertaxpayer, with certain circumstances, transactions between VMware and Dell arebeing assessed using consolidated tax return rules.
VMware has made payments to Dell pursuant to thewas jointly and severally liable for tax sharing agreement. The following table summarizes the payments made during the periods presented (table in millions):
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
| Payments from VMware to Dell, net | $ | 243 |
| | $ | 54 |
| | $ | 373 |
| | $ | — |
|
Payments from VMwareobligation on Dell’s consolidated tax returns, and, as such, net amount due to Dell under the Tax Sharing Agreement of $451 million was included in income tax sharing agreement relatepayable on the consolidated balance sheets as of January 29, 2021. This amount was primarily related to VMware’s portion of federal income taxes on Dell’s consolidatedestimated tax return as well as state tax payments for combined states. The timing of the tax payments due to and from related parties is governed by the tax sharing agreement. The amounts that VMware pays to Dell for its portion of federal income taxes on Dell’s consolidated tax return differobligation resulting from the amounts VMware would owemandatory one-time transition tax on a separate tax return basis and the difference is recognized as a componentaccumulated earnings of additional paid-in capital, generally in the period in which the consolidated tax return is filed. The difference between the amount of tax calculated on a separate tax return basis and the amount of tax calculated pursuant to the tax sharing agreement that was recorded in additional paid-in capital during the years ended February 1, 2019 and February 2, 2018 and the Transition Period was not significant. During the year ended December 31, 2016, the difference between the amount of tax calculated on a separate return basis and the amount of tax calculated pursuant to the tax sharing agreement was recorded in additional paid-in capital as an increase of $15 million.foreign subsidiaries (the “Transition Tax”).
As a result of the activity underSpin-Off, VMware is no longer a member of the Dell consolidated tax sharing agreement withgroup and the Company’s U.S. federal income tax will be reported separately from that of the Dell amountsconsolidated tax group. VMware and Dell have agreed to indemnify one another, pursuant to the Tax Matters Agreement, for certain tax liabilities or tax benefits relating to periods prior to the Spin-Off. Amounts due to and due from Dell netunder the Tax Matters Agreement were reclassified to current and non-current portions of due to related parties and due from related parties, respectively, on the consolidated balance sheets as of theJanuary 28, 2022. Certain adjustments to these amounts that will be recognized in future periods presented consisted of the following (table in millions):will be recorded with an offset
|
| | | | | | | |
| | February 1, | | February 2, |
| | 2019 | | 2018 |
| Income tax due to Dell | $ | 646 |
| | $ | 781 |
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to other income (expense), net on the consolidated statements of income. The actual amount that VMware may receive from or pay to Dell could vary depending on the outcome of tax matters arising from Dell’s future tax audits, which may not be resolved for several years.
Income taxAmounts due to and due from Dell pursuant to the Tax Matters Agreement consisted of the following as of January 28, 2022 (table in millions):
| | | | | | | |
| January 28, | | |
| 2022 | | |
| Due from related parties: | | | |
| Current | $ | 6 | | | |
| Non-current | 199 | | | |
| Due to related parties: | | | |
| Current | $ | 61 | | | |
| Non-current | 909 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
As of January 28, 2022, amounts due to Dell as of February 1, 2019 and February 2, 2018pursuant to the Tax Matters Agreement primarily related to VMware’s estimated tax obligation resulting from the Transition Tax.Tax of $504 million and uncertain tax positions of $276 million. The U.S. Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Tax ActAct”) included a deferral election for an eight-year installment payment method on the Transition Tax. The Company expects to pay the remainder of its Transition Tax as of January 28, 2022 over a period of sevenfour years.
VMware has made payments to Dell pursuant to the Tax Agreements. The following table summarizes the payments made during the periods presented (table in millions):
| | | | | | | | | | | | | | | | | |
| For the Year Ended |
| January 28, | | January 29, | | January 31, |
| 2022 | | 2021 | | 2020 |
Payments from VMware to Dell, net(1) | $ | 36 | | | $ | 307 | | | $ | 159 | |
| | | | | |
(1) Included refunds received from Dell of $60 million during the year ended January 28, 2022.
Payments from VMware to Dell under the Tax Agreements relate to VMware’s portion of federal income taxes on Dell’s consolidated tax return, state tax payments for combined states and estimated tax obligation resulting from the Transition Tax. The timing of the tax payments due to and from Dell is governed by the Tax Agreements. VMware’s portion of the Transition Tax is governed by a letter agreement between Dell, EMC and VMware executed on April 1, 2019 (the “Letter Agreement”). Prior to the Spin-Off, VMware’s portion of federal income taxes on Dell’s consolidated tax return differed from the amounts VMware owed on a separate tax return basis and VMware’s payments to Dell generally were capped at the amount that VMware would have paid on a separate tax return basis. The difference between the amount of tax calculated on a separate tax return basis and the amount of tax calculated pursuant to the Tax Agreements was recorded as a decrease in additional paid-in capital of $67 million and $46 million, respectively, during the years ended January 28, 2022 and January 29, 2021. The difference between the amount of tax calculated on a separate tax return basis and the amount of tax calculated pursuant to the Tax Agreements was recorded as an increase in additional paid-in capital of $85 million during the year ended January 31, 2020, primarily due to a reduction in Transition Tax liability based on the terms of the Letter Agreement and certain tax attribute determination made by Dell.
Pivotal Tax Sharing Agreement with Dell
Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for tax benefits that Dell realized due to Pivotal’s inclusion on such returns. Payments received from Dell were recognized as a component of additional paid-in capital. During the year ended January 31, 2020, $25 million was recognized in additional paid-in capital related to Pivotal’s tax sharing agreement with Dell. There were no payments received from Dell during each of the years ended January 28, 2022 and January 29, 2021.
In April 2019, Pivotal and Dell amended their tax sharing agreement with regard to the treatment of certain 2017 Tax Act implications not explicitly covered by the original terms of the tax sharing agreement. The amendment resulted in a one-time payment of $27 million by Dell to Pivotal in August 2019.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties associated with unrecognized tax benefits, for the periods presented is as follows (table in millions):
| | | | | | | | | | | | For the Year Ended |
| | | | | | | | Transition Period | | January 28, | | January 29, | | January 31, |
| | For the Year Ended | | January 1 to | | 2022 | | 2021 | | 2020 |
| Balance, beginning of the year | | Balance, beginning of the year | $ | 508 | | | $ | 479 | | | $ | 385 | |
| Tax positions related to current year: | | Tax positions related to current year: | |
| Additions | | Additions | 68 | | | 65 | | | 116 | |
| | February 1, | | February 2, | | December 31, | | February 3, | |
| Tax positions related to prior years: | | Tax positions related to prior years: | |
| | 2019 | | 2018 | | 2016 | | 2017 | |
| Balance, beginning of the year/period | $ | 302 |
| | $ | 263 |
| | $ | 245 |
| | $ | 260 |
| |
| Tax positions related to current year/period: | | | | | | | | |
| Additions | 57 |
| | 63 |
| | 45 |
| | 3 |
| |
| Tax positions related to prior years/period: | | | | | | | | |
| Additions | 43 |
| | 1 |
| | 9 |
| | — |
| Additions | 2 | | | 12 | | | 98 | |
| Reductions | — |
| | (2 | ) | | (8 | ) | | (1 | ) | Reductions | (10) | | | (25) | | | (7) | |
| Settlements | (4 | ) | | (9 | ) | | (16 | ) | | — |
| Settlements | (25) | | | (14) | | | (28) | |
| Reductions resulting from a lapse of the statute of limitations | (8 | ) | | (24 | ) | | (14 | ) | | — |
| Reductions resulting from a lapse of the statute of limitations | (10) | | | (14) | | | (83) | |
| Foreign currency effects | (8 | ) | | 10 |
| | (1 | ) | | 1 |
| Foreign currency effects | (6) | | | 5 | | | (2) | |
| Balance, end of the year/period | $ | 382 |
| | $ | 302 |
| | $ | 260 |
| | $ | 263 |
| |
| Balance, end of the year | | Balance, end of the year | $ | 527 | | | $ | 508 | | | $ | 479 | |
Of the net unrecognized tax benefits, including interest and penalties, of $296$242 million and $208$352 million as of February 1, 2019 and February 2, 2018, respectively, approximately $266 million and $185 million, respectively, would, if recognized, benefit VMware's annual effective income tax rate. The $296 million and $208 million of net unrecognized tax benefits were included in income tax payable on the consolidated balance sheets as of February 1, 2019January 28, 2022 and February 2, 2018,January 29, 2021, respectively. Approximately $397 million and $341 million, respectively, would, if recognized, benefit VMware's annual effective income tax rate. VMware includes interest expense and penalties related to income tax matters in the income tax provision. VMware had accrued $56$60 million and $41$48 million of interest and penalties associated with unrecognized tax benefits as of February 1, 2019January 28, 2022 and of February 2, 2018, respectively. Income tax expense included interest and penalties associated with uncertain tax positions of $15 million and $10 million during the years ended February 1, 2019 and December 31, 2016,January 29, 2021, respectively. Interest and penalties associated with uncertain tax positions included in income tax expense (benefit) were not significant during the yearyears ended February 2, 2018January 28, 2022, January 29, 2021 and January 31, 2020. Unrecognized tax benefits that VMware and Dell have agreed to indemnify one another for, pursuant to the Transition Period.Tax Matters Agreement as a result of the Spin-Off, are recorded in the non-current portion of due to related parties on the consolidated balance sheets and were $276 million as of January 28, 2022.
The Dell-owned EMCDell consolidated group is routinely under audit by the Internal Revenue Service (“IRS”).IRS, including for years during which VMware was a part of the Dell-owned EMC consolidated group. All U.S. federal income tax matters have been concluded for years through 2011, exceptfiscal 2016 while VMware was part of the Dell-owned EMC consolidated group. The IRS has started its examination of fiscal years 2015 through 2019 for any matters under appeal.the Dell consolidated group, of which VMware was part beginning with fiscal 2017. In addition, VMware is under corporate income tax audits in various states and non-U.S. jurisdictions. Consistent withPursuant to the Company’s historical practices under the tax sharing agreement with EMC,Tax Agreements, when VMware becomes subject to federal tax audits asfor periods during which it was a member of Dell’s consolidated group, the tax sharing agreement provides that Dell has the authority to control the audit and represent Dell’s and VMware’s interests to the IRS.
Open tax years subject to examinations for larger non-U.S. jurisdictions vary beginning in 2008. Open tax years for Ireland, the largest non-U.S. jurisdiction, begin in 2010. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. When considering the outcomes and the timing of tax examinations, the expiration of statutes of limitations for specific jurisdictions, or the timing and result of ruling requests from taxing authorities, it is reasonably possible that total unrecognized tax benefits could be potentially reduced by approximately $84$20 million within the next 12 months.
P.Q. Stockholders’ Equity
Special Dividend
On JulyNovember 1, 2018, VMware’s board of directors declared a conditional $112021, VMware paid an $11.5 billion Special Dividend, payable pro-ratapro rata, to VMware stockholderseach of the holders of Class A Stock and Class B Stock as of the record date. During the fourth quarter of fiscal 2019, the conditions of the Special Dividend
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
were met.Record Date. The Special Dividend was paid on December 28, 2018recorded as a reduction to stockholders of record asretained earnings and then to additional paid-in capital until each of the closerespective balances were reduced to zero. The remaining amount was recorded to accumulated deficit. Automatically as a result of business on December 27, 2018 in the amount of $26.81 per outstandingSpin-Off, each share of VMwareClass B Stock converted into 1 fully paid and non-assessable share of Class A Stock and Class A Stock became, and remains, the sole outstanding class of VMware’s common stock. Refer to Note A for more information regarding the Spin-Off.
StockEquity awards that were outstanding at the time of the Special Dividend were adjusted pursuant to existing anti-dilution provisions in the Company’s stock plan documents that provide for equitable adjustments to be determined by VMware’s
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Compensation and Corporate Governance Committee in the event of an extraordinary cash dividend. A conversion ratio based on the per share dividend amount and VMware’s closing stock price on December 28, 2018November 1, 2021 was used to adjust the stockequity awards outstanding at the time of the Special Dividend. The anti-dilution adjustments to awards included increasingproportionately increased the number of outstanding restricted stock units and stock options as well as reducingand reduced the exercise prices of outstanding stock options by a conversion ratio of 1.2191, resulting in an increase of 4.2 million restricted stock units and stock options. The adjustments did not result in incremental stock-based compensation expense as the anti-dilutive adjustments were required by the Company’s equity incentive plan.
VMware Class B Common Stock Conversion Rights
Each share of Class B common stock is convertible into one share of Class A common stock. If VMware’s Class B common stock is distributed to security holders of Dell in a qualified distribution, the Class B shares will no longer be convertible into shares of Class A common stock unless a stockholder vote is obtained after certain conditions are satisfied. Prior to any such distribution, all Class B shares automatically convert into shares of Class A common stock if Dell transfers such shares to a third party that is not a successor or a Dell subsidiary or at such time as the number of shares of common stock owned by Dell or its successor falls below 20% of the outstanding shares of VMware’s common stock. As of February 1, 2019, 300.0 million shares of Class A common stock were reserved for conversion.
VMware Equity Plan
In June 2007, VMware adopted its 2007 Equity and Incentive Plan (the “2007 Plan”). As of February 1,On June 25, 2019 and July 23, 2021, VMware amended its 2007 Plan to increase the number of shares available for issuance by 13.0 million shares and 15.0 million shares of Class A Stock, respectively. As of January 28, 2022, 183.7 million shares have been authorized shares underfor issuance or substituted in the course of business combinations pursuant to the terms of the 2007 Plan was 132.2 million,since its inception, including 6.116.6 million shares that were automatically added pursuant to the share reserve pursuant to anti-dilution provisions of the 2007 Plan triggered by paymentpayments of the Special Dividendspecial dividend during fiscal 2019 and fiscal 2022 (the “Anti-Dilution Adjustment”). The number of shares underlying outstanding equity awards that VMware assumes in the course of business acquisitions are also added to the 2007 Plan reserve on an as-converted basis. VMware has assumed 6.5 million shares, which accordingly have been added to authorized shares under the 2007 Plan reserve.
Awards under the 2007 Plan may be in the form of stock-based awards, such as restricted stock units, or stock options. VMware’s Compensation and Corporate Governance Committee determines the vesting schedule for all equity awards. Generally, restricted stock grants made under the 2007 Plan have a three-year to four-year period over which they vest and vest 25% the first year and semi-annually thereafter. The per share exercise price for a stock option awarded under the 2007 Plan shall not be less than 100% of the per share fair market value of VMware Class A common stockStock on the date of grant. Most optionsOptions granted under the 2007 Plan vest 25% after the first year and monthly thereafter over the following three years and expire between six and seven years from the date of grant. VMware utilizes both authorized and unissued shares to satisfy all shares issued under the 2007 Plan. As of February 1, 2019,January 28, 2022, there was an aggregate of 11.836.5 million shares of common stock available for issuance pursuant to future grants under the 2007 Plan, including 2.59.5 million shares included in the Anti-Dilution Adjustment.
Pivotal Equity Plan
Prior to the acquisition of Pivotal, Pivotal granted stock-based awards, such as restricted stock units or stock options to its employees. Pivotal’s restricted stock grants generally vested over four years and options granted generally vested over 48 months. Upon completion of the acquisition by VMware, no further awards will be granted under the plan. Pivotal’s outstanding unvested RSUs and options on the date of the acquisition were converted to VMware RSUs and options and valued at their historical carrying amounts.
VMware Stock Repurchases
VMware purchases stock from time to time in open market transactions, subject to market conditions. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including VMware’s stock price, cash requirements for operations and business combinations, corporate, legal and regulatory requirements and other market and economic conditions. VMware is not obligated to purchase any shares under its stock repurchase programs. Purchases canmay be discontinued at any time VMware believes additional purchases are not warranted. From time to time, VMware also purchases stock in private transactions, such as those with Dell. All shares repurchased under VMware’s stock repurchase programs are retired.
During August 2017, VMware’s board of directors authorized the repurchase of up to $1,000 million of Class A common stock through August 31, 2018. On July 1, 2018, VMware’s board of directors extended authorization of the existing stock repurchase program through August 31, 2019. As of February 1, 2019, the cumulative authorized amount remaining for stock repurchases was $834 million.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes stock repurchase authorizations approved by VMware’s board of directors, which were open or completed during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 20162020 (amounts in table in millions):
| | | | | | | | | | | | | | | | | | | | |
| Announcement Date | | Amount Authorized | | Expiration Date | | Status |
October 7, 2021(1) | | $ | 2,000 | | | February 2, 2024 | | Open |
| July 15, 2020 | | 1,000 | | | January 28, 2022 | | Terminated(2) |
| May 29, 2019 | | 1,500 | | | January 28, 2022(3) | | Completed in fiscal 2022 |
| August 14, 2017 | | 1,000 | | | August 31, 2019 | | Completed in fiscal 2020 |
| | | | | | |
| | | | | | |
Announcement Date | | Amount Authorized | | Expiration Date | | Status |
August 14, 2017 | | $1,000 | | August 31, 2019 | | Open |
January 26, 2017 | | 1,200 | | February 2, 2018 | | Completed in fiscal 2018 |
April 18, 2016 | | 1,200 | | December 31, 2016 | | Completed in fiscal 2016 |
January 27, 2015 | | 1,000 | | December 31, 2017 | | Completed in fiscal 2016 |
| | | | | | |
| | | | | | |
| | | | | | |
(1) The October 2021 authorization was effective as of November 1, 2021.
(2) The July 2020 authorization, under which $183 million remained unpurchased, was terminated on November 1, 2021.
(3) In July 2020, VMware’s Board of Directors extended its authorization of the existing stock repurchase program through January 28, 2022.
In the aggregate, $1.7 billion remained available for repurchase as of January 28, 2022.
The following table summarizes stock repurchase activity including shares purchased from Dell, during the periods presented (aggregate purchase price in millions, shares in thousands):
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | For the Year Ended | | | For the Year Ended |
| | February 1, | | February 2, | | December 31, | | | January 28, | | January 29, | | January 31, |
| | 2019 | | 2018 | | 2016 | | | 2022 | | 2021 | | 2020 |
Aggregate purchase price(1) | $ | 42 |
| | $ | 1,449 |
| | $ | 1,575 |
| Aggregate purchase price(1) | | $ | 1,169 | | | $ | 945 | | | $ | 1,334 | |
| Class A common shares repurchased | 286 |
| | 13,977 |
| | 21,281 |
| |
| Class A Stock repurchased | | Class A Stock repurchased | | 8,197 | | | 6,944 | | | 7,664 | |
| Weighted-average price per share | $ | 148.07 |
| | $ | 103.66 |
| | $ | 73.99 |
| Weighted-average price per share | | $ | 142.61 | | | $ | 136.13 | | | $ | 174.02 | |
(1) The aggregate purchase price of repurchased shares is classified as a reduction to additional paid-in capital.
There were no repurchases of VMware’s Class A common stock duringcapital until the Transition Period.balance is reduced to zero and the excess is recorded as a reduction to retained earnings (accumulated deficit).
VMware and Pivotal Restricted Stock
VMware’s restricted stock primarily consists of RSU awards which have been granted to employees. The value of an RSU grant is based on VMware’s stock price on the date of the grant. The shares underlying the RSU awards are not issued until the RSUs vest. Upon vesting, each RSU converts into one1 share of VMware’s Class A common stock.Stock.
VMware’s restricted stock also includes PSU awards which have been granted to certain VMware executives and employees. The PSU awards includehave performance conditions and, in certain cases, a time-based or market-based vesting component. Upon vesting, PSU awards convert into VMware’s Class A common stockStock at various ratios ranging from 0.50.4 to 2.0 shares per PSU, depending upon the degree of achievement of the performance or market-based target designated by each award. If minimum performance thresholds are not achieved, then no shares are issued.
Pivotal’s restricted stock consisted of RSU awards. The value of the grant was based on Pivotal’s stock price on the date of the grant. Upon the completion of the acquisition by VMware, all outstanding Pivotal RSUs were converted to VMware RSUs using a conversion ratio of 0.1.
The following table summarizes restricted stock activity since February 1, 2019 (units in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| VMware | | Pivotal |
| Number of Units | | Weighted-Average Grant Date Fair Value
(per unit) | | Number of Units | | Weighted-Average Grant Date Fair Value
(per unit) |
Outstanding, February 1, 2019(1) | 18,215 | | | $ | 90.06 | | | 9,501 | | | $ | 15.77 | |
Granted(2) | 9,074 | | | 157.07 | | | 20,504 | | | 16.02 | |
| Vested | (8,179) | | | 80.28 | | | (4,009) | | | 15.56 | |
Forfeited(3) | (1,636) | | | 101.29 | | | (25,996) | | | 16.01 | |
| Outstanding, January 31, 2020 | 17,474 | | | 128.38 | | | — | | | — | |
| Granted | 11,201 | | | 149.63 | | | n/a | | n/a |
| Vested | (8,296) | | | 114.59 | | | n/a | | n/a |
| Forfeited | (2,589) | | | 137.55 | | | n/a | | n/a |
| Outstanding, January 29, 2021 | 17,790 | | | 147.46 | | | n/a | | n/a |
| Granted | 12,400 | | | 141.46 | | | n/a | | n/a |
| Special Dividend adjustment | 4,068 | | | n/a | | n/a | | n/a |
| Vested | (7,593) | | | 134.00 | | | n/a | | n/a |
| Forfeited | (3,663) | | | 146.13 | | | n/a | | n/a |
| Outstanding, January 28, 2022 | 23,002 | | | 123.06 | | | n/a | | n/a |
| | | | | | | |
(1) The weighted-average grant date fair value of outstanding restricted stock as of February 1, 2019 reflected the adjustments to the awards as a result of the special dividend in July 2018.
(2) Restricted stock granted under the 2007 Plan included 2.2 million RSU awards issued for outstanding unvested RSUs as part of the Pivotal acquisition.
(3) Restricted stock forfeited under the Pivotal equity plan included 21.7 million RSU awards that were converted to VMware RSU awards as part of the Pivotal acquisition, using a conversion ratio of 0.1.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes restricted stock activity since January 1, 2016 (units in thousands):
|
| | | | | | |
| | Number of Units | | Weighted-Average Grant Date Fair Value (per unit) |
| Outstanding, January 1, 2016 | 18,693 |
| | $ | 77.29 |
|
| Granted | 12,742 |
| | 60.90 |
|
| Vested | (7,188 | ) | | 77.18 |
|
| Forfeited | (3,381 | ) | | 75.93 |
|
| Outstanding, December 31, 2016 | 20,866 |
| | 67.54 |
|
| Vested | (256 | ) | | 77.07 |
|
| Forfeited | (159 | ) | | 68.11 |
|
| Outstanding, February 3, 2017 | 20,451 |
| | 67.41 |
|
| Granted | 7,838 |
| | 93.84 |
|
| Vested | (9,070 | ) | | 67.89 |
|
| Forfeited | (1,859 | ) | | 72.68 |
|
| Outstanding, February 2, 2018 | 17,360 |
| | 78.62 |
|
| Granted | 6,663 |
| | 146.61 |
|
| Special Dividend adjustment | 3,236 |
| | n/a |
|
| Vested | (7,370 | ) | | 75.45 |
|
| Forfeited | (1,674 | ) | | 86.90 |
|
Outstanding, February 1, 2019(1) | 18,215 |
| | 90.06 |
|
| |
(1)
| The weighted-average grant date fair value of outstanding RSU awards as of February 1, 2019 reflects the adjustments to the awards as a result of the Special Dividend. |
As of February 1, 2019,January 28, 2022, the 18.223.0 million units outstanding included 17.122.0 million of RSUs and 1.11.0 million of PSUs. The above table includes RSUs issued for outstanding unvested RSUs in connection with business combinations.
Restricted stock that is expected to vest as of February 1, 2019January 28, 2022 was as follows (units in thousands, aggregate intrinsic value in millions):
| | | | | | | | | | | | | | | | | |
| Number of Units | | Weighted-Average Remaining Contractual Term
(in years) | | Aggregate Intrinsic Value(1) |
| Expected to vest | 19,885 | | | 1.30 | | $ | 2,568 | |
|
| | | | | | | | |
| | Number of Units | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) |
| Expected to vest | 16,196 |
| | 2.30 | | $ | 2,438 |
|
| |
(1)
| The aggregate intrinsic value represents the total pre-tax intrinsic values based on VMware's closing stock price of $150.51 as of February 1, 2019, which would have been received by the RSU holders had the RSUs been issued as of February 1, 2019. |
The aggregate vesting date fair value of VMware’s restricted stock that vested during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 20162020, was $1.1 billion, $1.1 billion and the Transition Period was $1,061 million, $946 million, $468 million and $21 million,$1.4 billion, respectively. As of February 1, 2019,January 28, 2022, restricted stock representing 18.223.0 million shares of VMware’s Class A common stockStock were outstanding, with an aggregate intrinsic value of $2,742 million$3.0 billion based on VMware’s closing stock price as of January 28, 2022.
The aggregate vesting date fair value of Pivotal’s restricted stock that vested during the year ended January 31, 2020, prior to the acquisition, was $68 million. No restricted stock vested during the year ended February 1, 2019.
VMware and Pivotal Employee Stock Purchase PlanPlans
In June 2007, VMware adopted its 2007 Employee Stock Purchase Plan (the “ESPP”), which is intended to be qualified under Section 423 of the Internal Revenue Code. On June 25, 2019 and July 23, 2021, VMware amended its ESPP to increase the number of shares authorized for issuance by 9.0 million shares and 5.0 million shares of Class A Stock, respectively. As of February 1, 2019,January 28, 2022, the number of authorized shares under the ESPP was a total of 23.337.3 million shares. Under the ESPP, eligible VMware employees are granted options to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. The option period is generally twelve months and includes two embedded six-month option periods. Options are exercised at the end of each embedded option period. If the fair market value of the stock is lower on the first day of the second embedded
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
option period than it was at the time of grant, then the twelve-month option period expires and each enrolled participant is granted a new twelve-month option. As of February 1, 2019, 6.8January 28, 2022, 15.2 million shares of VMware Class A common stockStock were available for issuance under the ESPP.
The following table summarizes ESPP activity for VMware during the periods presented (cash proceeds in millions, shares in thousands):
| | | | | | | | | | Transition Period | | | | | | | | | | | | | | | |
| | For the Year Ended | | January 1 to | | For the Year Ended |
| | February 1, | | February 2, | | December 31, | | February 3, | | January 28, | | January 29, | | January 31, |
| | 2019 | | 2018 | | 2016 | | 2017 | | 2022 | | 2021 | | 2020 |
| Cash proceeds | $ | 161 |
| | $ | 65 |
| | $ | 103 |
| | $ | 60 |
| Cash proceeds | $ | 236 | | | $ | 207 | | | $ | 172 | |
| Class A common shares purchased | 1,895 |
| | 903 |
| | 2,657 |
| | 1,468 |
| |
| Class A Stock purchased | | Class A Stock purchased | 2,116 | | | 2,025 | | | 1,489 | |
| Weighted-average price per share | $ | 84.95 |
| | $ | 72.40 |
| | $ | 38.78 |
| | $ | 40.65 |
| Weighted-average price per share | $ | 111.31 | | | $ | 102.44 | | | $ | 115.51 | |
As of February 1, 2019, $79January 28, 2022, $112 million of ESPP withholdings were recorded as a liability in accrued expenses and other on the consolidated balance sheets for the purchase that occurred on February 28, 2019.2022.
Prior to the acquisition of Pivotal, Pivotal granted options to eligible Pivotal employees to purchase shares of its Class A stock at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value of the Pivotal stock at the time of exercise. Pivotal’s ESPP activity was not material during the year ended January 31, 2020.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware and Pivotal Stock Options
The following table summarizes stock option activity for VMware and Pivotal since JanuaryFebruary 1, 20162019 (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| VMware | | Pivotal |
| Number of Shares | | Weighted-Average Exercise Price
(per share) | | Number of Shares | | Weighted-Average Exercise Price
(per share) |
Outstanding, February 1, 2019(1) | 1,969 | | | $ | 36.50 | | | 45,901 | | | $ | 8.31 | |
Granted(2) | 1,571 | | | 73.19 | | | — | | | — | |
| | | | | | | |
Forfeited(3) | (149) | | | 52.83 | | | (10,822) | | | 10.65 | |
| Expired | — | | | — | | | (128) | | | 10.10 | |
Exercised(4) | (776) | | | 39.94 | | | (34,951) | | | 7.59 | |
| Outstanding, January 31, 2020 | 2,615 | | | 56.58 | | | — | | | — | |
| Granted | 31 | | | 43.20 | | | n/a | | n/a |
| | | | | | | |
| Forfeited | (156) | | | 70.75 | | | n/a | | n/a |
| | | | | | | |
| Exercised | (1,247) | | | 52.34 | | | n/a | | n/a |
| Outstanding, January 29, 2021 | 1,243 | | | 58.68 | | | n/a | | n/a |
| Granted | 4 | | | 97.91 | | | n/a | | n/a |
| Special Dividend adjustment | 147 | | | n/a | | n/a | | n/a |
| Forfeited | (104) | | | 63.73 | | | n/a | | n/a |
| | | | | | | |
| Exercised | (604) | | | 57.19 | | | n/a | | n/a |
| Outstanding, January 28, 2022 | 686 | | | 46.95 | | | n/a | | n/a |
|
| | | | | | | | | | | | | |
| | VMware Stock Options | | EMC Stock Options |
| | Number of Shares | | Weighted-Average Exercise Price (per share) | | Number of Shares | | Weighted-Average Exercise Price (per share) |
| Outstanding, January 1, 2016 | 3,164 |
| | $ | 64.56 |
| | 1,063 |
| | $ | 16.54 |
|
| Options relating to employees transferred (to) from EMC | — |
| | — |
| | 19 |
| | 15.90 |
|
| Granted | 66 |
| | 6.53 |
| | — |
| | — |
|
| Forfeited | (259 | ) | | 77.42 |
| | — |
| | — |
|
| Expired | (476 | ) | | 80.52 |
| | (17 | ) | | 14.44 |
|
| Exercised | (418 | ) | | 13.41 |
| | (1,065 | ) | | 16.56 |
|
| Outstanding, December 31, 2016 | 2,077 |
| | 67.75 |
| | — |
| | — |
|
| Forfeited | (9 | ) | | 79.45 |
| | — |
| | — |
|
| Exercised | (77 | ) | | 23.72 |
| | — |
| | — |
|
| Outstanding, February 3, 2017 | 1,991 |
| | 69.38 |
| | — |
| | — |
|
| Granted | 745 |
| | 13.79 |
| | — |
| | — |
|
| Forfeited | (36 | ) | | 55.44 |
| | — |
| | — |
|
| Expired | (3 | ) | | 93.87 |
| | — |
| | — |
|
| Exercised | (1,050 | ) | | 53.50 |
| | — |
| | — |
|
| Outstanding, February 2, 2018 | 1,647 |
| | 54.63 |
| | — |
| | — |
|
| Granted | 574 |
| | 16.07 |
| | — |
| | — |
|
| Special Dividend adjustment | 348 |
| | n/a |
| | — |
| | — |
|
| Forfeited | (31 | ) | | 24.44 |
| | — |
| | — |
|
| Exercised | (569 | ) | | 46.73 |
| | — |
| | — |
|
Outstanding, February 1, 2019(1) | 1,969 |
| | 36.50 |
| | — |
| | — |
|
| |
(1)
| The weighted-average exercise price of options outstanding as of February 1, 2019 reflects the adjustments to the options as a result of the Special Dividend. |
(1)The above table includes stockweighted-average exercise price of options outstanding as of February 1, 2019 reflected the adjustments to the options as a result of the special dividend in July 2018.
(2) Stock options granted under the 2007 Plan included 0.6 million options issued for unvested options as part of the Pivotal acquisition.
(3) Stock options forfeited under the Pivotal equity plan included 6.2 million options converted to VMware options as part of the Pivotal acquisition, using a conversion ratio of 0.1.
(4) Stock options exercised under the Pivotal equity plan included $22.4 million of vested options that were settled in conjunction withcash as part of the Pivotal acquisition.
Options granted during the periods presented relate to unvested stock options assumed in business combinations. Ascombinations, and as a result, the weighted-average exercise price per share may vary from the VMware stock price at time of grant.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The stock options outstanding as of February 1, 2019January 28, 2022 had an aggregate intrinsic value of $224$56 million based on VMware’s closing stock price as of February 1, 2019.January 28, 2022.
Options outstanding that are exercisable and that have vested and are expected to vest as of February 1, 2019January 28, 2022 were as follows (outstanding options in thousands, aggregate intrinsic value in in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| VMware Stock Options |
| Outstanding Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term
(in years) | | Aggregate Intrinsic Value(1) |
| Exercisable | 623 | | | $ | 46.96 | | | 5.35 | | $ | 51 | |
| Vested and expected to vest | 685 | | | 46.91 | | | 5.49 | | 56 | |
(1) The aggregate intrinsic values represent the total pre-tax intrinsic values based on VMware's closing stock price of $129.14 as of January 28, 2022, which would have been received by the option holders had all in-the-money options been exercised as of that date.
|
| | | | | | | | | | | | |
| | VMware Stock Options |
| | Outstanding Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) |
| Exercisable | 1,084 |
| | $ | 55.49 |
| | 3.15 | | $ | 103 |
|
| Vested and expected to vest | 1,969 |
| | 36.50 |
| | 5.55 | | 224 |
|
| |
(1)VMware, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) | The aggregate intrinsic values represent the total pre-tax intrinsic values based on VMware's closing stock price of $150.51 as of February 1, 2019, which would have been received by the option holders had all in-the-money options been exercised as of that date. |
The total fair value of VMware stock options that vested during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 20162020 was $35$26 million, $32$92 million $29and $64 million, respectively, and was not materialrespectively. Total fair value of Pivotal stock options that vested during the Transition Period.year ended January 31, 2020 was $27 million.
The VMware stock options exercised during the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 20162020 had a pre-tax intrinsic value of $56$55 million, $62$111 million and $22$103 million, respectively, and was not materialrespectively. The Pivotal options exercised during the Transition Period.
year ended January 31, 2020 had a pre-tax intrinsic value of $278 million. The pre-tax intrinsic value of EMC stockPivotal options held by VMware employees that were exercised during the year ended DecemberJanuary 31, 2016 was $13 million.2020 includes vested options that were settled in cash as part of the Pivotal acquisition.
VMware Shares Repurchased for Tax Withholdings
During the years ended February 1, 2019, February 2, 2018January 28, 2022, January 29, 2021 and DecemberJanuary 31, 2016,2020, VMware repurchased 2.6 million, 3.33.0 million 2.6and 3.0 million, respectively, of Class A common stock,Stock, for $373$378 million, $348$413 million $167and $521 million, respectively, to cover tax withholding obligations in connection with such equity awards. Shares repurchased to cover tax withholding obligations during the Transition Period were not material. These amounts may differ from the amounts of cash remitted for tax withholding obligations on the consolidated statements of cash flows due to the timing of payments. Pursuant to the respective award agreements, these shares were withheld in conjunction with the net share settlement upon the vesting of restricted stockRSUs and restricted stock units (including PSUs)PSUs during the period. The value of the withheld shares including restricted stock units, was classified as a reduction to additional paid-in capital.
Net excess tax benefitsExcess Tax Benefits
VMware adopted ASU 2016-09, Compensation–Stock Compensation (Topic 718), on a prospective basis, effective February 4, 2017. Net excess tax benefits recognized in connection with stock-based awards are included in income tax provision on the consolidated statements of income (loss).income. Net excess tax benefits recognized were $103$17 million, $41 million and $106$182 million during the years ended February 1, 2019January 28, 2022, January 29, 2021 and February 2, 2018,January 31, 2020, respectively.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-Based Compensation
The following table summarizes the components of total stock-based compensation included in VMware’s consolidated statements of income (loss) during the periods presented (table in millions):
| | | | | | | | | | Transition Period | | | | | | | | | | | | | | | |
| | For the Year Ended | | January 1 to | | For the Year Ended |
| | February 1, | | February 2, | | December 31, | | February 3, | | January 28, | | January 29, | | January 31, |
| | 2019 | | 2018 | | 2016 | | 2017 | | 2022 | | 2021 | | 2020 |
| Cost of license revenue | $ | 1 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| Cost of license revenue | $ | 1 | | | $ | 1 | | | $ | 1 | |
| Cost of subscription and SaaS revenue | | Cost of subscription and SaaS revenue | 21 | | | 19 | | | 13 | |
| Cost of services revenue | 51 |
| | 50 |
| | 52 |
| | 5 |
| Cost of services revenue | 92 | | | 99 | | | 83 | |
| Research and development | 371 |
| | 355 |
| | 305 |
| | 31 |
| Research and development | 528 | | | 524 | | | 459 | |
| Sales and marketing | 203 |
| | 197 |
| | 195 |
| | 19 |
| Sales and marketing | 302 | | | 322 | | | 293 | |
| General and administrative | 105 |
| | 79 |
| | 82 |
| | 7 |
| General and administrative | 131 | | | 157 | | | 168 | |
| Stock-based compensation | 731 |
| | 683 |
| | 636 |
| | 62 |
| Stock-based compensation | 1,075 | | | 1,122 | | | 1,017 | |
| Income tax benefit | (228 | ) | | (232 | ) | | (183 | ) | | (19 | ) | Income tax benefit | (202) | | | (231) | | | (347) | |
| Total stock-based compensation, net of tax | $ | 503 |
| | $ | 451 |
| | $ | 453 |
| | $ | 43 |
| Total stock-based compensation, net of tax | $ | 873 | | | $ | 891 | | | $ | 670 | |
As of February 1, 2019,January 28, 2022, the total unrecognized compensation cost for stock options and restricted stock was $1,294 million$2.1 billion and will be recognized through fiscal 20232027 with a weighted-average remaining period of 1.5 years. Stock-based compensation related to VMware equity awards held by VMware employees is recognized on VMware’s consolidated statements of income (loss) over the awards’ requisite service periods.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value of VMware Stock Options
The fair value of each option to acquire VMware Class A common stockStock granted during the periods presented was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
| | | | | | | | | | | |
| | For the Year Ended |
| | February 1, | | February 2, | | December 31, |
| VMware Stock Options | 2019 | | 2018 | | 2016 |
| Dividend yield | None |
| | None |
| | None |
|
| Expected volatility | 31.9 | % | | 29.1 | % | | 31.9 | % |
| Risk-free interest rate | 2.9 | % | | 1.7 | % | | 0.9 | % |
| Expected term (in years) | 3.2 |
| | 3.3 |
| | 3.1 |
|
| Weighted-average fair value at grant date | $ | 143.01 |
| | $ | 83.62 |
| | $ | 49.64 |
|
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| VMware Employee Stock Purchase Plan | 2019 | | 2018 | | 2016 | | 2017 |
| Dividend yield | None |
| | None |
| | None |
| | None |
|
| Expected volatility | 33.5 | % | | 22.6 | % | | 38.3 | % | | 25.0 | % |
| Risk-free interest rate | 2.0 | % | | 1.2 | % | | 0.5 | % | | 0.8 | % |
| Expected term (in years) | 0.8 |
| | 0.9 |
| | 0.7 |
| | 0.8 |
|
| Weighted-average fair value at grant date | $ | 34.72 |
| | $ | 21.93 |
| | $ | 13.57 |
| | $ | 21.18 |
|
There were no options to acquire VMware Class A common stock granted during the Transition Period. | | | | | | | | | | | | | | | | | |
| For the Year Ended |
| January 28, | | January 29, | | January 31, |
| VMware Stock Options | 2022 | | 2021 | | 2020 |
| Dividend yield | NaN | | NaN | | NaN |
| Expected volatility | 35.0 | % | | 38.8 | % | | 34.0 | % |
| Risk-free interest rate | 0.3 | % | | 0.4 | % | | 1.5 | % |
| Expected term (in years) | 2.9 | | 2.6 | | 2.7 |
| Weighted-average fair value at grant date | $ | 62.99 | | | $ | 102.55 | | | $ | 98.00 | |
| VMware Employee Stock Purchase Plan | | | | | |
| Dividend yield | NaN | | NaN | | NaN |
| Expected volatility | 36.5 | % | | 36.1 | % | | 27.4 | % |
| Risk-free interest rate | 0.1 | % | | 1.0 | % | | 1.7 | % |
| Expected term (in years) | 0.7 | | 0.7 | | 0.6 |
| Weighted-average fair value at grant date | $ | 37.95 | | | $ | 33.60 | | | $ | 35.66 | |
The weighted-average grant date fair value of VMware stock options can fluctuate from period to period primarily due to higher valued options assumed through business combinations with exercise prices lower than the fair market value of VMware’s stock on the date of grant.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For equity awards granted duringunder the years ended February 1, 2019, February 2, 2018 and December 31, 2016,VMware equity plan, volatility was based on an analysis of historical stock prices and implied volatilitiesvolatility of VMware’s Class A common stock.Stock. The expected term iswas based on historical exercise patterns and post-vesting termination behavior, the term of the option period for grants made under the ESPP, or the weighted-average remaining term for options assumed in acquisitions. VMware’s expected dividend yield input was zero as the Company has not historically paid, nor expects in the future to pay, regular dividends on its common stock. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options.
Accumulated Other Comprehensive Income (Loss)Loss
The changes in components of accumulated other comprehensive income (loss)loss during the periods presented were as follows (tables in millions):
|
| | | | | | | | | | | |
| | Unrealized Gain (Loss) on
Available-for-Sale Securities | | Unrealized Gain (Loss) on
Forward Contracts | | Total |
| Balance, February 3, 2017 | $ | (6 | ) | | $ | 2 |
| | $ | (4 | ) |
| Unrealized gains (losses), net of tax provision (benefit) of ($5), $— and ($5) | (12 | ) | | 1 |
| | (11 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income (loss), net of tax (provision) benefit of $2, $— and $2 | 3 |
| | (3 | ) | | — |
|
| Other comprehensive income (loss), net | (9 | ) | | (2 | ) | | (11 | ) |
| Balance, February 2, 2018 | (15 | ) | | — |
| | (15 | ) |
| Adjustments related to adoption of ASU 2016-01 and 2018-02 | (15 | ) | | — |
| | (15 | ) |
| Unrealized gains (losses), net of tax (benefit) of $—, $—, and $— | — |
| | 2 |
| | 2 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income (loss), net of tax (provision) benefit of $10, $— and $10 | 31 |
| | (1 | ) | | 30 |
|
| Other comprehensive income (loss), net | 31 |
| | 1 |
| | 32 |
|
| Balance, February 1, 2019 | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
Unrealized gains and losses on VMware’s available-for-sale securities are reclassified to investment income on the consolidated statements of income (loss) in the period that such gains and losses are realized. | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | |
Forward Contracts | | Foreign Currency Translation Adjustments | | Total |
| Balance, January 31, 2020 | | | $ | — | | | $ | (4) | | | $ | (4) | |
| Unrealized gains (losses), net of tax provision (benefit) of $—, $— and $— | | | (1) | | | — | | | (1) | |
| | | | | | | |
| Other comprehensive income (loss), net | | | (1) | | | — | | | (1) | |
| Balance, January 29, 2021 | | | (1) | | | (4) | | | (5) | |
| | | | | | | |
| Unrealized gains (losses), net of tax provision (benefit) of $—, $— and $— | | | (1) | | | — | | | (1) | |
| Amounts reclassified from accumulated other comprehensive loss to the consolidated statements of income, net of tax (provision) benefit of $—, $— and — | | | 1 | | | — | | | 1 | |
| Other comprehensive income (loss), net | | | — | | | — | | | — | |
| Balance, January 28, 2022 | | | $ | (1) | | | $ | (4) | | | $ | (5) | |
The effective portion of gains or losses resulting from changes in the fair value of forward contracts designated as cash flow hedging instruments is reclassified to its related operating expense line item on the consolidated statements of income (loss) in the same period that the underlying expenses are incurred. The amounts recorded to theirthe related operating expense functional
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
line items on the consolidated statements of income (loss) were not significant to the individual functional line items during the periods presented.
Effective February 3, 2018, VMware adopted ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), on a modified retrospective basis. The standard requires entities to recognize at the transaction date the income tax consequences of intra-entity asset transfers. VMware recorded a cumulative-effect adjustment of $27 million to retained earnings on the consolidated balance sheets as of the beginning of the period of adoption. Subsequent to the adoption, any transfers of intellectual property between VMware’s legal entities will be recorded on the consolidated statements of income (loss) in the period that the transfer occurs.
Effective February 3, 2018, VMware early adopted ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Act from accumulated other comprehensive income (loss) to retained earnings. VMware elected to reclassify income tax effects due to the 2017 Tax Act from accumulated other comprehensive income (loss) to retained earnings on the consolidated balance sheets in the period of adoption. The impact of the reclassification of stranded tax effects was not significant.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Q.R. Segment Information
VMware operates in one1 reportable operating segment,segment; thus, all required financial segment information is included in the consolidated financial statements. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in deciding howorder to allocate resources and assessingassess performance. VMware’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.
Revenue by type during the periods presented was as follows (table in millions):
|
| | | | | | | | | | | | | | | |
| | | | | | | | Transition Period |
| | For the Year Ended | | January 1 to |
| | February 1, | | February 2, | | December 31, | | February 3, |
| | 2019 | | 2018 | | 2016 | | 2017 |
| Revenue: | | | | | | | |
| License | $ | 3,788 |
| | $ | 3,200 |
| | $ | 2,799 |
| | $ | 134 |
|
| Services: | | | | | | | |
| Software maintenance | 4,506 |
| | 4,032 |
| | 3,722 |
| | 353 |
|
| Professional services | 680 |
| | 630 |
| | 552 |
| | 25 |
|
| Total services | 5,186 |
| | 4,662 |
| | 4,274 |
| | 378 |
|
Total revenue(1) | $ | 8,974 |
| | $ | 7,862 |
| | $ | 7,073 |
| | $ | 512 |
|
(1) Includes revenue derived from VMware’s Hybrid Cloud Computing subscription and SaaS offerings, which was $922 million, $704 million, $583 million and $75 million during the years ended February 1, 2019, February 2, 2018 and December 31, 2016 and the Transition Period, respectively. Revenue from Hybrid Cloud Computing offerings consisted primarily of VCPP revenue. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | For the Year Ended |
| | | | | | | | January 28, | | January 29, | | January 31, |
| | | | | | | | | 2022 | | 2021 | | 2020 |
| Revenue: | | | | | | | | | | | | |
| License | | | | | | | | $ | 3,128 | | | $ | 3,033 | | | $ | 3,181 | |
| Subscription and SaaS | | | | | | | | 3,205 | | | 2,587 | | | 1,877 | |
| Total license and subscription and SaaS | | | | | | | | 6,333 | | | 5,620 | | | 5,058 | |
| Services: | | | | | | | | | | | | |
| Software maintenance | | | | | | | | 5,356 | | | 5,105 | | | 4,754 | |
| Professional services | | | | | | | | 1,162 | | | 1,042 | | | 999 | |
| Total services | | | | | | | | 6,518 | | | 6,147 | | | 5,753 | |
| Total revenue | | | | | | | | $ | 12,851 | | | $ | 11,767 | | | $ | 10,811 | |
Revenue by geographic area during the periods presented was as follows (table in millions):
| | | | | | | | | | Transition Period | | | |
| | For the Year Ended | | January 1 to | | | For the Year Ended |
| | February 1, | | February 2, | | December 31, | | February 3, | | | January 28, | | January 29, | | January 31, |
| | 2019 | | 2018 | | 2016 | | 2017 | | | 2022 | | 2021 | | 2020 |
| United States | $ | 4,205 |
| | $ | 3,834 |
| | $ | 3,538 |
| | $ | 250 |
| United States | | $ | 6,232 | | | $ | 5,878 | | | $ | 5,405 | |
| International | 4,769 |
| | 4,028 |
| | 3,535 |
| | 262 |
| International | | 6,619 | | | 5,889 | | | 5,406 | |
| Total | $ | 8,974 |
| | $ | 7,862 |
| | $ | 7,073 |
| | $ | 512 |
| Total | | $ | 12,851 | | | $ | 11,767 | | | $ | 10,811 | |
Revenue by geographic area is based on the ship-to addresses of VMware’s customers. No individual country other than the U.S. accounted for 10% or more of revenue during each of the years ended February 1, 2019, February 2, 2018, DecemberJanuary 28, 2022, January 29, 2021 and January 31, 2016 and the Transition Period.2020.
Long-lived assets by geographic area, which primarily include property and equipment, net, as of the periods presented were as follows (table in millions):
| | | | February 1, | | February 2, | | January 28, | | January 29, |
| | 2019 | | 2018 | | 2022 | | 2021 |
| United States | $ | 831 |
| | $ | 784 |
| United States | $ | 882 | | | $ | 864 | |
| International | 106 |
| | 117 |
| International | 241 | | | 241 | |
| Total | $ | 937 |
| | $ | 901 |
| Total | $ | 1,123 | | | $ | 1,105 | |
No individual country other than the U.S. accounted for 10% or more of these assets as of February 1, 2019January 28, 2022. As of January 29, 2021, the U.S. and February 2, 2018.India accounted for approximately 80% and 10% of these assets, respectively.
VMware’s product and service solutions are organized into three main product groups:helping customers in the following areas:
Software-Defined Data Center
Hybrid Cloud Computing
End-User Computing
• Application Modernization
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• Cloud Management
• Cloud Infrastructure
• Networking
• Security
• Anywhere Workspace
VMware develops and markets product and service offerings within each of these three product groups.areas. Additionally, synergies are leveraged across these three product areas. VMware’s products and service solutionsservices from each of its product groupsarea may also be bundled as part of an enterprise agreement arrangement or packaged together and sold as a suite.solution. Accordingly, it is not practicable to determine revenue by each of the three product groupsareas described above.
R. Transition Period
Comparable Financial Information
In conjunction with VMware’s change in fiscal year end, the Company had a Transition Period of 34 days that began on January 1, 2017 and ended on February 3, 2017. The most comparable prior-year period, the one month ended January 31, 2016, had a duration of 31 days.
The following table presents certain financial information during the periods presented (table in millions, except per share amounts and shares in thousands):
|
| | | | | | | |
| | | | Comparable Period |
| | Transition Period | | January 1 to |
| | January 1 to | | January 31, |
| | February 3, | | 2016 |
| | 2017 | | (Unaudited) |
| Total revenue | $ | 512 |
| | $ | 469 |
|
| Operating income (loss) | (42 | ) | | 25 |
|
| Income tax provision (benefit) | (30 | ) | | 5 |
|
| Net income (loss) | (5 | ) | | 24 |
|
| | | | |
| Net income (loss) per weighted-average share, basic for Classes A and B | $ | (0.01 | ) | | $ | 0.05 |
|
| Net income (loss) per weighted-average share, diluted for Classes A and B | $ | (0.01 | ) | | $ | 0.05 |
|
| | | | |
| Weighted-average shares, basic for Classes A and B | 408,625 |
| | 422,067 |
|
Weighted-average shares, diluted for Classes A and B(1) | 408,625 |
| | 423,092 |
|
(1) During the Transition Period, VMware incurred a net loss. As a result, all potentially dilutive securities were anti-dilutive and excluded from the computation of diluted net loss per share.
S. Selected Quarterly Financial Data (unaudited)
Quarterly financial data for fiscal 2019 and 2018 were as follows (tables in millions, except per share amounts): |
| | | | | | | | | | | | | | | |
| Fiscal 2019 | Q1 2019 | | Q2 2019 | | Q3 2019 | | Q4 2019 |
| Total Revenue | $ | 2,008 |
| | $ | 2,174 |
| | $ | 2,200 |
| | $ | 2,591 |
|
| Net income | 942 |
| | 664 |
| | 334 |
| | 502 |
|
| Net income per share, basic | $ | 2.33 |
| | $ | 1.58 |
| | $ | 0.82 |
| | $ | 1.22 |
|
| Net income per share, diluted | $ | 2.29 |
| | $ | 1.56 |
| | $ | 0.81 |
| | $ | 1.21 |
|
|
| | | | | | | | | | | | | | | |
| Fiscal 2018 | Q1 2018 | | Q2 2018 | | Q3 2018 | | Q4 2018 |
| Total Revenue | $ | 1,765 |
| | $ | 1,932 |
| | $ | 1,938 |
| | $ | 2,226 |
|
| Net income (loss) | 245 |
| | 406 |
| | 395 |
| | (387 | ) |
| Net income (loss) per share, basic | $ | 0.60 |
| | $ | 0.99 |
| | $ | 0.97 |
| | $ | (0.96 | ) |
| Net income (loss) per share, diluted | $ | 0.59 |
| | $ | 0.98 |
| | $ | 0.96 |
| | $ | (0.96 | ) |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, amended (the “Exchange Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Management has assessed the effectiveness of our internal control over financial reporting as of February 1, 2019January 28, 2022 based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of February 1, 2019,January 28, 2022, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The effectiveness of our internal control over financial reporting as of February 1, 2019January 28, 2022 has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8 of this Annual Report on Form 10-K.
Changes in Internal ControlsControl Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended February 1, 2019January 28, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
| |
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 9B. OTHER INFORMATION
Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934
VMware’s affiliate, Dell Technologies Inc. and its subsidiaries, included the following disclosure in their annual report for the period ended January 28, 2022:
“Set forth below is a description of matters reported by us pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r) of the Exchange Act. Concurrently with the filing of this annual report, we are filing a notice pursuant to Section 13(r) of the Exchange Act that such matters have been disclosed in this annual report.
On March 2, 2021, the U.S. government designated the Russian Federal Security Service (the “FSB”) as a blocked party under Executive Order 13382. On the same day, the U.S. Department of the Treasury’s Office of Foreign Assets
Control issued General License No. 1B (the “OFAC General License”), which generally authorizes U.S. companies to engage in certain licensing, permitting, certification, notification and related transactions with the FSB to the extent such activities are required for the importation, distribution or use of information technology products in the Russian Federation.
As permitted under the OFAC General License, our subsidiary Dell LLC and other subsidiaries periodically file notifications with the FSB in connection with the importation and distribution of our products in the Russian Federation. During our fiscal quarter ended January 28, 2022, Dell LLC filed notifications with the FSB. No payments were issued or received, and no gross revenue or net profits were generated, in connection with these filing activities. Dell Technologies and its subsidiaries do not sell products or provide services to the FSB. To the extent permitted by applicable law, including by the OFAC General License, we expect to continue to file notifications with the FSB to qualify our products for importation and distribution in the Russian Federation.”
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We will furnish to the Securities and Exchange Commission a definitive Proxy Statement no later than 120 days after the close of the fiscal year ended February 1, 2019.January 28, 2022. The information required by this item is incorporated herein by reference to the Proxy Statement. Also see “Executive Officers of the Registrant”“Information About Our Executive Officers” in Part I of this Annual Report on Form 10-K.
We have a code of ethics that applies to all of our employees, including our executive officers. Our Business Conduct Guidelines (available on our website) satisfy the requirements set forth in Item 406 of Regulation S-K and apply to all relevant persons set forth therein. We intend to disclose on our website at www.vmware.com amendments to, and, if applicable, waivers of, our code of ethics.
| |
ITEM 11. | EXECUTIVE COMPENSATION |
ITEM 11.EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the section of the Company’sour Proxy Statement entitled “Compensation of Executive Officers.”
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS |
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the section of the Company’sour Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the section of the Company’sour Proxy Statement entitled “Our Board of Directors and Nominees” and “Transactions with Related Persons.”
| |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section of the Company’sour Proxy Statement entitled “Ratification of Selection of Independent Auditor.”
PART IV
| |
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Annual Report on Form 10-K:
1.Financial Statements: The information relating to our financial statements, and Report of Independent Registered Public Accounting Firm required by this Item is filed as part of this Annual Report on Form 10-K in Item 8, entitled “Financial Statements and Supplementary Data.”
2.Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
3.Exhibits: The exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | |
Exhibit
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | | |
| 3.1 | | | | | 8-K | | 001-33622 | | 3.1 | | 11/1/21 | |
| 3.2 | | | | | 8-K | | 001-33622 | | 3.2 | | 11/1/21 | |
| 4.1 | | | | | S-1/A-4 | | 333-142368 | | 4.1 | | 7/27/07 | |
| 4.2 | | | | | 8-K | | 001-33622 | | 4.1 | | 8/21/17 | |
| 4.3 | | | | | 8-K | | 001-33622 | | 4.4 | | 8/21/17 | |
| 4.4 | | | | | 8-K | | 001-33622 | | 4.2 | | 4/7/20 | |
| 4.5 | | | | | 8-K | | 001-33622 | | 4.3 | | 4/7/20 | |
| 4.6 | | | | | 8-K | | 001-33622 | | 4.4 | | 4/7/20 | |
| 4.7 | | | | | 8-K | | 001-33622 | | 4.2 | | 8/2/21 | |
| 4.8 | | | | | 8-K | | 001-33622 | | 4.3 | | 8/2/21 | |
| 4.9 | | | | | 8-K | | 001-33622 | | 4.4 | | 8/2/21 | |
| 4.10 | | | | | 8-K | | 001-33622 | | 4.5 | | 8/2/21 | |
| 4.11 | | | | | 8-K | | 001-33622 | | 4.6 | | 8/2/21 | |
| 4.12* | | | | | | | | | | | |
| 10.1*+ | | | | | | | | | | | |
| 10.2*+ | | | | | | | | | | | |
| 10.3+ | | | | 10-K | | 001-33622 | | 10.26 | | 2/25/14 | |
| 10.4+ | | | | 10-K | | 001-33622 | | 10.18 | | 3/26/20 | |
|
| | | | | | | | | | | |
| |
| | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| 3.1 |
| | | | 10-Q | | 001-33622 | | 3.1 | | 6/9/17 |
| 3.2 |
| | | | 8-K | | 001-33622 | | 3.1 | | 2/23/17 |
| 4.1 |
| | | | S-1/A-4 | | 333-142368 | | 4.1 | | 7/27/07 |
| 4.2 |
| | | | 8-K | | 001-33622 | | 4.1 | | 8/21/17 |
| 4.3 |
| | | | 8-K | | 001-33622 | | 4.2 | | 8/21/17 |
| 4.4 |
| | | | 8-K | | 001-33622 | | 4.3 | | 8/21/17 |
| 4.5 |
| | | | 8-K | | 001-33622 | | 4.4 | | 8/21/17 |
| 10.1 |
| | | | 10-K | | 001-33622 | | 10.1 | | 3/29/18 |
| 10.2* |
| | | | | | | | | | |
| 10.3 |
| | | | 10-Q | | 001-33622 | | 10.32 | | 11/7/16 |
| 10.4 |
| | | | S-1/A-1 | | 333-142368 | | 10.4 | | 6/11/07 |
| 10.5 |
| | | | 10-Q | | 001-33622 | | 10.5 | | 11/9/15 |
| 10.6*+ |
| | | | | | | | | | |
| 10.7+ |
| | | | 10-Q | | 001-33622 | | 10.7 | | 6/9/17 |
| 10.8 |
| | | | 10-K | | 001-33622 | | 10.8 | | 3/29/18 |
| 10.9+ |
| | | | 10-Q | | 001-33622 | | 10.9 | | 8/5/15 |
| 10.10+ |
| | | | 10-Q | | 001-33622 | | 10.10 | | 9/7/17 |
| 10.11+ |
| | | | 10-Q | | 001-33622 | | 10.11 | | 6/9/17 |
| 10.12+ |
| | | | 10-Q | | 001-33622 | | 10.12 | | 6/11/18 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | |
Exhibit
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | | |
| 10.5+ | | | | 10-Q | | 001-33622 | | 10.12 | | 6/11/18 | |
| 10.6*+ | | | | | | | | | | | |
| 10.7*+ | | | | | | | | | | | |
| 10.8+ | | | | 10-Q | | 001-33622 | | 10.7 | | 6/9/17 | |
| 10.9*+ | | | | | | | | | | | |
| 10.10*+ | | | | | | | | | | | |
| 10.11+ | | | | 10-Q | | 001-33622 | | 10.3 | | 12/3/21 | |
| 10.12+ | | | | 8-K | | 001-33622 | | 10.1 | | 5/12/21 | |
| 10.13+ | | | | 8-K | | 001-33622 | | 10.2 | | 5/12/21 | |
| 10.14 | | | | | 10-Q | | 001-33622 | | 10.25 | | 8/3/11 | |
| 10.15 | | | | | 10-Q | | 001-33622 | | 10.26 | | 8/3/11 | |
| 10.16 | | | | | 10-Q | | 001-33622 | | 10.30 | | 5/1/14 | |
| 10.17 | | | | | 8-K | | 001-33622 | | 10.1 | | 7/2/18 | |
| 10.18 | | | | | 8-K | | 001-33622 | | 10.5 | | 11/1/21 | |
| 10.19 | | | | | 10-Q | | 001-33622 | | 10.32 | | 6/10/19 | |
| 10.20 | | | | | 8-K | | 001-33622 | | 10.1 | | 4/14/21 | |
| 10.21 | | | | | 8-K | | 001-33622 | | 2.1 | | 4/14/21 | |
| 10.22 | | | | | 8-K | | 001-33622 | | 10.6 | | 11/1/21 | |
| 10.23 | | | | | 8-K | | 001-33622 | | 10.1 | | 11/1/21 | |
| 10.24 | | | Stockholders Agreement, dated as of November 1, 2021, by and among VMware, Inc., Michael S. Dell, Susan Lieberman Dell Separate Property Trust, SL SPV-2, L.P., Silver Lake Partners IV, L.P., Silver Lake Technology Investors IV, L.P., Silver Lake Partners V DE (AIV), L.P., Silver Lake Group, L.L.C. and Silver Lake Technology Investors V, L.P. | | 8-K | | 001-33622 | | 10.2 | | 11/1/21 | |
| 10.25 | | | Registration Rights Agreement, dated as of November 1, 2021, by and among VMware, Inc., Michael S. Dell, Susan Lieberman Dell Separate Property Trust, SL SPV-2, L.P., Silver Lake Partners IV, L.P., Silver Lake Technology Investors IV, L.P., Silver Lake Partners V DE (AIV), L.P., Silver Lake Group, L.L.C. and Silver Lake Technology Investors V, L.P. | | 8-K | | 001-33622 | | 10.3 | | 11/1/21 | |
|
| | | | | | | | | | | |
| |
| | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| 10.13 |
| | | | 10-Q | | 001-33622 | | 10.24 | | 8/3/11 |
| 10.14 |
| | | | 10-Q | | 001-33622 | | 10.25 | | 8/3/11 |
| 10.15 |
| | | | 10-Q | | 001-33622 | | 10.26 | | 8/3/11 |
| 10.16+ |
| | | | 10-Q | | 001-33622 | | 10.16 | | 9/7/17 |
| 10.17+ |
| | | | 10-K | | 001-33622 | | 10.26 | | 2/25/14 |
| 10.18+ |
| | | | 10-Q | | 001-33622 | | 10.18 | | 12/10/18 |
| 10.19+ |
| | | | 10-K | | 001-33622 | | 10.19 | | 2/24/17 |
| 10.20 |
| | | | 10-Q | | 001-33622 | | 10.30 | | 5/1/14 |
| 10.21 |
| | | | 10-Q | | 001-33622 | | 10.34 | | 5/1/14 |
| 10.22+ |
| | | | 10-Q | | 001-33622 | | 10.22 | | 12/10/18 |
| 10.23+ |
| | | | 10-Q | | 001-33622 | | 10.23 | | 6/11/18 |
| 10.24+ |
| | | | 10-Q | | 001-33622 | | 10.30 | | 9/7/17 |
| 10.25+ |
| | | | 10-K | | 001-33622 | | 10.32 | | 2/24/17 |
| 10.26+ |
| | | | 10-K | | 001-33622 | | 10.33 | | 2/24/17 |
| 10.27 |
| | | | 8-K | | 001-33622 | | 10.1 | | 3/30/17 |
| 10.28+ |
| | | | 10-Q | | 001-33622 | | 10.34 | | 9/7/17 |
| 10.29 |
| | | | 8-K | | 001-33622 | | 10.1 | | 7/2/18 |
| 10.30+ |
| | | | 8-K | | 001-33622 | | 99.1 | | 9/18/18 |
| 10.31 |
| | | | 8-K | | 001-33622 | | 10.1 | | 11/15/18 |
| 21* |
| | | | | | | | | | |
| 23* |
| | | | | | | | | | |
| 31.1* |
| | | | | | | | | | |
| 31.2* |
| | | | | | | | | | |
|
| | | | | | | | | | | |
|
| | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date |
| | | | | | | | | | |
32.1ǂ |
| | | | | | | | | | |
32.2ǂ |
| | | | | | | | | | |
101.INS* |
| | XBRL Instance Document | | | | | | | | |
101.SCH* |
| | XBRL Taxonomy Extension Schema | | | | | | | | |
101.CAL* |
| | XBRL Taxonomy Extension Calculation Linkbase | | | | | | | | |
101.DEF* |
| | XBRL Taxonomy Extension Definition Linkbase | | | | | | | | |
101.LAB* |
| | XBRL Taxonomy Extension Label Linkbase | | | | | | | | |
101.PRE* |
| | XBRL Taxonomy Extension Presentation Linkbase | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | |
Exhibit
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | | |
| 10.26 | | | | | 8-K | | 001-33622 | | 10.4 | | 11/1/21 | |
| 10.27 | | | Term Loan Credit Agreement, dated as of September 2, 2021, among VMware, Inc., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Securities LLC, BofA Securities, Inc., Barclays Bank PLC and Citibank, N.A., as Joint Lead Arrangers and Joint Bookrunners, Bank of America, N.A., as Syndication Agent and Barclays Bank PLC and Citibank, N.A., as Co-Documentation Agents | | 10-Q | | 001-33622 | | 10.3 | | 9/3/21 | |
| 21* | | | | | | | | | | | |
| 23* | | | | | | | | | | | |
| 24 | | | | | | | | | | | | |
| 31.1* | | | | | | | | | | | |
| 31.2* | | | | | | | | | | | |
| 32.1ǂ | | | | | | | | | | | |
| 32.2ǂ | | | | | | | | | | | |
| 101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema | | | | | | | | | |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase | | | | | | | | | |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase | | | | | | | | | |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase | | | | | | | | | |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase | | | | | | | | | |
| 104 | | | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101) | | | | | | | | | |
+ Indicates management contract or compensatory plan or arrangement
* Filed herewith
ǂ Furnished herewith
| |
ITEM 16. | FORM 10-K SUMMARY |
ITEM 16.FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | VMWARE, INC. |
| | | |
| Dated: | March 24, 2022 | VMWARE, INC.By: | /s/ Rangarajan (Raghu) Raghuram |
| | | |
Dated: | March 29, 2019 | By: | /s/ Patrick Gelsinger |
| | | Patrick Gelsinger
Rangarajan (Raghu) Raghuram
Chief Executive Officer |
| | | |
| Dated: | March 29, 201924, 2022 | By: | /s/ Kevan KryslerJ. Andrew Munk |
| | | Kevan Krysler
Senior Vice President, J. Andrew Munk
Chief Accounting Officer
(Principal Accounting Officer)
|
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Patrick Gelsinger,Rangarajan (Raghu) Raghuram, Amy Olli and Zane Rowe, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities indicated and on the dates indicated.
| | | | | | | | | | | | | | |
| Date | | Signature | | Title |
| | | | |
DateMarch 24, 2022 | | Signature | | Title |
| | | | |
March 29, 2019 | | /s/ Patrick GelsingerRangarajan (Raghu) Raghuram | | Chief Executive Officer and Director (Principal Executive Officer) |
| | Patrick GelsingerRangarajan (Raghu) Raghuram | |
| | | | |
March 29, 201924, 2022 | | /s/ Zane Rowe | | Chief Financial Officer and Executive Vice President (Principal Financial Officer) |
| | Zane Rowe | |
| | | | |
March 29, 201924, 2022 | | /s/ Michael Dell | | Chairman |
| | Michael Dell | |
| | | | |
March 29, 201924, 2022 | | /s/ Anthony Bates | | Director |
| | Anthony Bates | |
| | | | |
March 29, 201924, 2022 | | /s/ Marianne Brown | | Director |
| | Marianne Brown | |
| | | | |
| March 24, 2022 | | /s/ Michael Brown | | Director |
| | Michael Brown | |
| | | | |
March 29, 201924, 2022 | | /s/ Donald Carty | | Director |
| | Donald Carty | |
| | | | |
March 29, 201924, 2022 | | /s/ Kenneth Denman | | Director |
| | Kenneth Denman | |
| | | | |
| March 24, 2022 | | /s/ Egon Durban | | Director |
| | Egon Durban | |
| | | | |
March 29, 201924, 2022 | | /s/ Karen Dykstra | | Director |
| | Karen Dykstra | |
| | | | |
| | | | |
| | | |
| | | | |
| | | | |
| | | |
| | | | |
March 29, 201924, 2022 | | /s/ Paul Sagan | | Director |
| | Paul Sagan | |
VMWARE, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax Valuation Allowance | Balance at Beginning of Period | | Tax Valuation Allowance Charged to Income Tax Provision | | Tax Valuation Allowance Credited to Other Accounts | | Tax Valuation Allowance Credited to Income Tax Provision | | Balance at End of Period |
| Year ended January 28, 2022 income tax valuation allowance | $ | 366 | | | $ | 70 | | | $ | 57 | | | $ | (22) | | | $ | 471 | |
| Year ended January 29, 2021 income tax valuation allowance | 332 | | | 58 | | | (1) | | | (23) | | | 366 | |
| Year ended January 31, 2020 income tax valuation allowance | 283 | | | 89 | | | — | | | (40) | | | 332 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| Tax Valuation Allowance | Balance at Beginning of Period | | Tax Valuation Allowance Charged to Income Tax Provision | | Tax Valuation Allowance Credited to Income Tax Provision | | Balance at End of Period |
| Year ended February 1, 2019 income tax valuation allowance | $ | 200 |
| | $ | 56 |
| | $ | (27 | ) | | $ | 229 |
|
| Year ended February 2, 2018 income tax valuation allowance | 161 |
| | 68 |
| | (29 | ) | | 200 |
|
| Transition Period from January 1, 2017 to February 3, 2017 income tax valuation allowance | 166 |
| | 1 |
| | (6 | ) | | 161 |
|
| Year ended December 31, 2016 income tax valuation allowance | 144 |
| | 31 |
| | (9 | ) | | 166 |
|
