UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



þ☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~November 3, 2017~~May 1, 2020



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)



Delaware		94-3292913
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3401 Hillview Avenue
Palo Alto,	CA	94304
(Address of principal executive offices)		(Zip Code)

~~(650)~~ (650) 427-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock	VMW	New York Stock Exchange

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. Yesþ☑ No o☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yesþ☑ No o☐

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.



Large accelerated filer	þ ☑		Accelerated filer	o☐
Non-accelerated filer	☐		Smaller reporting company	☐

~~Non-accelerated filer~~	o	~~(Do not check if a smaller reporting company)~~	~~Smaller reporting company~~	o

Emerging growth company	o			☐

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑

As of ~~December 1, 2017,~~May 29, 2020, the number of shares of common stock, par value $0.01per share, of the registrant outstanding was ~~403,138,064,~~419,050,230, of which ~~103,138,064~~111,828,394 shares were Class A common stock and ~~300,000,000~~307,221,836 were ClassB common stock.

TABLE OF CONTENTS



		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Statements of Income ~~(Loss)~~	3

	Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~	4

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statements of Cash Flows	6

	~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Stockholders’ Equity	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2825

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4138

Item 4.	Controls and Procedures	4138

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	4340

Item 1A.	Risk Factors	4340

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6261

Item 6.	Exhibits	62

	SIGNATURE	63

	~~EXHIBIT INDEX~~	64

VMware, ~~vCloud, vCloud Air, NSX,~~Pivotal, vSphere, Nyansa, CloudHealth, VMware Cloud, Carbon Black, Workspace ONE, Horizon, VeloCloud, vRealize VMware vSAN, NSX, Heptio, Tanzu, VMworld, and VMware ~~Cloud, Workspace ONE, AirWatch, Horizon, Horizon Suite, vSphere, vRealize, Photon, Photon OS and vSphere Integrated Containers~~Foundation are registered trademarks or trademarks of VMware or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME ~~(LOSS)~~

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

(unaudited)


													Transition Period			Three Months Ended
	Three Months Ended						Nine Months Ended						January 1 to			May 1,			May 3,
	November 3,			September 30,			November 3,			September 30,			February 3,			2020			2019⁽¹⁾
	2017			2016			2017			2016			2017
Revenue:
Revenue⁽²⁾⁽³⁾:
License	$	785		$	691		$	2,127		$	1,907		$	125		$	660		$	646
Subscription and SaaS																572			411
Services	1,191			1,087			3,485			3,153			371			1,502			1,393
Total revenue	1,976			1,778			5,612			5,060			496			2,734			2,450
Operating expenses⁽¹⁾:
Operating expenses⁽²⁾⁽⁴⁾:
Cost of license revenue	38			40			116			121			13			40			36
Cost of subscription and SaaS revenue																126			94
Cost of services revenue	240			226			721			658			80			318			299
Research and development	449			389			1,298			1,109			150			665			590
Sales and marketing	607			564			1,862			1,708			231			917			868
General and administrative	175			178			486			516			63			246			209
Realignment and loss on disposition	2			—			88			52			—			4			—
Operating income (loss)	465			381			1,041			896			(41		)
Operating income																418			354
Investment income	33			21			82			56			8			5			14
Interest expense	(28		)	(7		)	(41		)	(20		)	(2		)	(49		)	(34		)
Other income (expense), net	(2		)	(8		)	51			(8		)	1			(6		)	17
Income (loss) before income tax	468			387			1,133			924			(34		)
Income tax provision (benefit)	25			68			124			179			(26		)
Net income (loss)	$	443		$	319		$	1,009		$	745		$	(8	)
Net income (loss) per weighted-average share, basic for Classes A and B	$	1.09		$	0.76		$	2.47		$	1.76		$	(0.02	)
Net income (loss) per weighted-average share, diluted for Classes A and B	$	1.07		$	0.75		$	2.44		$	1.75		$	(0.02	)
Income before income tax																368			351
Income tax benefit																(18		)	(14		)
Net income																386			365
Less: Net loss attributable to non-controlling interests																—			(15		)
Net income attributable to VMware, Inc.																$	386		$	380
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B																$	0.92		$	0.91
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B																$	0.92		$	0.89
Weighted-average shares, basic for Classes A and B	406,733			421,704			407,856			423,341			408,625			418,383			417,636
Weighted-average shares, diluted for Classes A and B	413,013			425,008			413,957			425,851			408,625			421,513			426,697
__________
⁽¹⁾ Includes stock-based compensation as follows:
Cost of license revenue	$	—		$	—		$	1		$	2		$	—
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal Software, Inc. (“Pivotal”) acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).																⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal Software, Inc. (“Pivotal”) acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).
⁽²⁾ Effective the fourth quarter of fiscal 2020, revenue recognized from subscription and SaaS offerings, as well as the related cost of subscription and SaaS revenue, are being presented separately (refer to Note A).																⁽²⁾ Effective the fourth quarter of fiscal 2020, revenue recognized from subscription and SaaS offerings, as well as the related cost of subscription and SaaS revenue, are being presented separately (refer to Note A).
⁽³⁾ Includes related party revenue as follows (refer to Note C):																⁽³⁾ Includes related party revenue as follows (refer to Note C):
License																$	323		$	279
Subscription and SaaS																115			72
Services																444			326
⁽⁴⁾ Includes stock-based compensation as follows:
Cost of subscription and SaaS revenue																$	4		$	3
Cost of services revenue	13			13			38			38			5			22			18
Research and development	96			80			266			224			31			125			102
Sales and marketing	52			51			150			146			19			72			63
General and administrative	21			26			58			62			7			49			30

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(in millions)

(unaudited)

Transition Period
Three Months Ended Nine Months Ended January 1 to
November 3, September 30, November 3, September 30, February 3,
2017 2016 2017 2016 2017
Net income (loss) $ 443
$ 319
$ 1,009
$ 745
$ (8 )
Other comprehensive income (loss):
Changes in market value of available-for-sale securities:
Unrealized gains (losses), net of tax provision (benefit) of ($3), ($2), $5, $12 and $1 (6 ) (4 ) 9
19
2
Reclassification of losses realized during the period, net of tax benefit of $—, $—, $2, $3 and $— —
—
3
4
—
Net change in market value of available-for-sale securities (6 ) (4 ) 12
23
2
Changes in market value of effective foreign currency forward contracts:
Unrealized gains (losses), net of tax provision of $— for all periods (1 ) —
3
—
3
Reclassification of (gains) losses realized during the period, net of tax benefit of $3, $—, $—, $— and $— (1 ) —
(2 ) 1
—
Net change in market value of effective foreign currency forward contracts (2 ) —
1
1
3
Total other comprehensive income (loss) (8 ) (4 ) 13
24
5
Total comprehensive income (loss), net of taxes $ 435
$ 315
$ 1,022
$ 769
$ (3 )



	Three Months Ended
	May 1,			May 3,
	2020			2019⁽¹⁾
Net income	$	386		$	365
Other comprehensive income (loss):
Changes in market value of effective foreign currency forward contracts:
Unrealized gains (losses), net of tax provision (benefit) of ($2) and $—	(13		)	4
Foreign currency translation adjustments	(1		)	—
Total other comprehensive income (loss)	(14		)	4
Comprehensive income, net of taxes	372			369
Less: Net loss attributable to the non-controlling interests	—			(15		)
Comprehensive income attributable to VMware, Inc.	$	372		$	384
__________
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)


						Transition Period
	November 3,		December 31,			February 3,			May 1,			January 31,
	2017		2016			2017			2020			2020
ASSETS
Current assets:
Cash and cash equivalents	$	6,012	$	2,790		$	3,220		$	5,946		$	2,915
Short-term investments	5,600		5,195			5,173
Accounts receivable, net of allowance for doubtful accounts of $2, $2 and $2	900		1,856			1,192
Accounts receivable, net of allowance for doubtful accounts of $6 and $7									1,535			1,883
Due from related parties, net	254		132			93			767			1,457
Other current assets	160		362			173			457			436
Total current assets	12,926		10,335			9,851			8,705			6,691
Property and equipment, net	1,031		1,049			1,042			1,292			1,280
Other assets	282		248			249			2,328			2,266
Deferred tax assets	641		462			716			5,658			5,556
Intangible assets, net	443		517			507			1,106			1,172
Goodwill	4,271		4,032			4,032			9,353			9,329
Total assets	$	19,594	$	16,643		$	16,397		$	28,442		$	26,294
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	99	$	125		$	53		$	195		$	208
Accrued expenses and other	926		898			887			1,922			2,151
Current portion of long-term debt and other borrowings									2,748			2,747
Unearned revenue	3,500		3,531			3,349			5,182			5,218
Total current liabilities	4,525		4,554			4,289			10,047			10,324
Notes payable to Dell	270		1,500			1,500
Note payable to Dell									270			270
Long-term debt	3,962		—			—			4,712			2,731
Unearned revenue	2,147		2,093			1,991			4,036			4,050
Income tax payable									816			817
Operating lease liabilities									787			746
Other liabilities	416		399			401			346			347
Total liabilities	11,320		8,546			8,181			21,014			19,285
Contingencies (refer to Note J)
Contingencies (refer to Note D)
Stockholders’ equity:
Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 103,819, 108,351 and 110,060 shares	1		1			1
Class B convertible common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares	3		3			3
Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 112,068 and 110,484 shares									1			1
Class B convertible common stock, par value $0.01; authorized 1,000,000 shares; issued and outstanding 307,222 shares									3			3
Additional paid-in capital	879		1,721			1,843			2,047			2,000
Accumulated other comprehensive income (loss)	9		(9		)	(4		)
Accumulated other comprehensive loss									(18		)	(4		)
Retained earnings	7,382		6,381			6,373			5,395			5,009
Total stockholders’ equity	8,274		8,097			8,216			7,428			7,009
Total liabilities and stockholders’ equity	$	19,594	$	16,643		$	16,397		$	28,442		$	26,294

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)


							Transition Period
	Nine Months Ended						January 1 to			Three Months Ended
	November 3,			September 30,			February 3,			May 1,			May 3,
	2017			2016			2017			2020			2019⁽¹⁾
Operating activities:
Net income (loss)	$	1,009		$	745		$	(8	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income										$	386		$	365
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	246			261			29			244			201
Stock-based compensation	513			472			62			272			216
Excess tax benefits from stock-based compensation	—			(7		)	(5		)
Deferred income taxes, net	100			(24		)	(254		)	(98		)	(18		)
Amortization of debt discount and debt issuance costs	1			—			—
Loss on disposition	80			—			—
Gain on disposition of strategic investments	(38		)	(1		)	—
Impairment of strategic investments	5			12			—
Gain on extinguishment of debt	(6		)	—			—
(Gain) loss on Dell stock purchase	2			—			(1		)
Loss on disposal of assets	1			12			—
Unrealized (gain) loss on equity securities, net										(6		)	3
(Gain) loss on disposition of assets, revaluation and impairment, net										6			(5		)
Other	2			(1		)	—			(4		)	1
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	293			513			664			352			438
Other assets	(27		)	(22		)	190
Other current assets and other assets										(171		)	(125		)
Due to/from related parties, net	(162		)	55			39			690			614
Accounts payable	39			(26		)	(68		)	(10		)	16
Accrued expenses and other liabilities	27			(64		)	(41		)	(249		)	(356		)
Income taxes payable	(63		)	(26		)	38			15			(45		)
Unearned revenue	342			18			(284		)	(53		)	90
Net cash provided by operating activities	2,364			1,917			361			1,374			1,395
Investing activities:
Additions to property and equipment	(164		)	(109		)	(18		)	(87		)	(73		)
Purchases of available-for-sale securities	(3,339		)	(3,337		)	(38		)
Sales of available-for-sale securities	1,745			1,769			43
Maturities of available-for-sale securities	1,207			1,015			20
Purchases of strategic investments										(5		)	—
Proceeds from disposition of assets	—			3			—			4			22
Purchases of strategic investments	(33		)	(33		)	—
Proceeds from sales of strategic investments	6			1			—
Business combinations, net of cash acquired	(236		)	(59		)	—
Business combinations, net of cash acquired, and purchases of intangible assets										(38		)	(45		)
Net cash paid on disposition of a business	(47		)	—			—			—			(4		)
Increase in restricted cash	—			(2		)	—
Net cash provided by (used in) investing activities	(861		)	(752		)	7
Net cash used in investing activities										(126		)	(100		)
Financing activities:
Proceeds from issuance of common stock	104			106			61			106			134
Net proceeds from issuance of long-term debt	3,961			—			—			1,984			—
Repayment of notes payable to Dell	(1,225		)	—			—
Payment to acquire non-controlling interests	—			(4		)	—
Repurchase of common stock	(1,280		)	(1,016		)	—			(181		)	(591		)
Excess tax benefits from stock-based compensation	—			7			5
Shares repurchased for tax withholdings on vesting of restricted stock	(271		)	(97		)	(4		)	(115		)	(204		)
Principal payments on finance lease obligations										(1		)	—
Net cash provided by (used in) financing activities	1,289			(1,004		)	62			1,793			(661		)
Net increase in cash and cash equivalents	2,792			161			430
Cash and cash equivalents at beginning of the period	3,220			2,493			2,790
Cash and cash equivalents at end of the period	$	6,012		$	2,654		$	3,220
Effect of exchange rate changes on cash, cash equivalents and restricted cash										(1		)	—
Net increase in cash, cash equivalents and restricted cash										3,040			634
Cash, cash equivalents and restricted cash at beginning of the period										3,031			3,596
Cash, cash equivalents and restricted cash at end of the period										$	6,071		$	4,230
Supplemental disclosures of cash flow information:
Cash paid for interest	$	19		$	21		$	—		$	74		$	62
Cash paid for taxes, net	87			212			3			76			88
Non-cash items:
Changes in capital additions, accrued but not paid	$	19		$	(15	)	$	(6	)	$	(7	)	$	3
__________
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).										⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions)

(unaudited)



Three Months Ended May 1, 2020	Class A Common Stock				Class B Convertible Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests		Stockholders’ Equity
Three Months Ended May 1, 2020	Shares		Par Value		Shares	Par Value		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests		Stockholders’ Equity
Balance, January 31, 2020	110		$	1	307	$	3	$	2,000		$	5,009	$	(4	)	$	—	$	7,009
Proceeds from issuance of common stock	1		—		—	—		110			—		—			—		110
Repurchase and retirement of common stock	(2	)	—		—	—		(181		)	—		—			—		(181		)
Issuance of restricted stock	3		—		—	—		—			—		—			—		—
Shares withheld for tax withholdings on vesting of restricted stock	—		—		—	—		(154		)	—		—			—		(154		)
Stock-based compensation								272										272
Total other comprehensive income (loss)	—		—		—	—		—			—		(14		)	—		(14		)
Net income	—		—		—	—		—			386		—			—		386
Balance, May 1, 2020	112		$	1	307	$	3	$	2,047		$	5,395	$	(18	)	$	—	$	7,428



Three Months Ended May 3, 2019⁽¹⁾	Class A Common Stock				Class B Convertible Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests			Stockholders’ Equity
Three Months Ended May 3, 2019⁽¹⁾	Shares		Par Value		Shares	Par Value		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interests			Stockholders’ Equity
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	—		—		—	—		—			2			—			—			2
Proceeds from issuance of common stock	1		—		—	—		103			—			—			—			103
Repurchase and retirement of common stock	(3	)	—		—	—		(591		)	—			—			—			(591		)
Issuance of restricted stock	2		—		—	—		—			—			—			—			—
Shares withheld for tax withholdings on vesting of restricted stock	(1	)	—		—	—		(207		)	—			—			—			(207		)
Stock-based compensation	—		—		—	—		194			—			—			22			216
Investment from Dell, net	—		—		—	—		16			—			—			9			25
Total other comprehensive income (loss)	—		—		—	—		—			—			4			—			4
Transactions with Pivotal’s non-controlling stockholders	—		—		—	—		(14		)	—			—			40			26
Net income (loss)	—		—		—	—		—			380			—			(15		)	365
Balance, May 3, 2019	110		$	1	300	$	3	$	2,460		$	(714	)	$	2		$	1,082		$	2,834
__________
⁽¹⁾ Adjusted to reflect the recast of prior period information due to the Pivotal acquisition in fiscal 2020, which was accounted for as a transaction between entities under common control (refer to Note A).

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. IT is ~~a leader in virtualization~~working at an accelerated pace to harness new technologies, platforms and cloud ~~infrastructure~~models, ultimately guiding businesses through a digital transformation. To take on these challenges, VMware is working with customers in the areas of hybrid and ~~business mobility solutions that~~multi-cloud, modern applications, networking, security and digital workspaces. VMware’s software provides a flexible digital foundation to enable ~~businesses to transform the way they build, deliver and consume information technology resources~~customers in ~~a manner that is based on~~ their specific needs. VMware’s virtualization infrastructure solutions, which include a suite of products and services designed to deliver a software-defined data center, run on industry-standard desktop computers, servers and mobile devices and support a wide range of operating system and application environments, as well as networking and storage infrastructures.

~~Change in Fiscal Year End~~

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- or 53-week period 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”). VMware’s first full fiscal year 2018 under the revised fiscal calendar is a 52-week year that began on February 4, 2017 and will end on February 2, 2018.

The Company has included its unaudited condensed consolidated financial statements for the Transition Period in this report on Form 10-Q. As permitted under SEC rules, prior-period financial statements have not been recast, as management believes (i) the three and nine months ended September 30, 2016 are comparable to the three and nine months ended November 3, 2017 and (ii) recasting prior-period results was not practicable or cost justified.digital transformations.

Accounting Principles

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Retrospective Combination of Historical Financial Statements

In December 2019, VMware completed the acquisition of Pivotal, which was, at the time, a subsidiary of VMware’s parent company, Dell Technologies Inc. (“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 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 condensed consolidated financial statements of VMware and notes thereto are presented on a combined basis, as both VMware and Pivotal were under common control for all periods presented.

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, for a fair statement of VMware’s condensed consolidated results of operations, financial position and cash flows for the periods presented. Results of operations are not necessarily indicative of the results that may be expected for the full fiscal year ~~2018.~~2021. Certain information and footnote disclosures typically included in annual consolidated financial statements have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in VMware’s Annual Report on Form 10-K filed on ~~February 24, 2017.~~ March 26, 2020.

Effective September7, 2016, Dell ~~Technologies Inc. (“Dell”)~~ (formerly Denali Holding Inc.) acquired EMC Corporation (“EMC”), VMware’s parent company, including EMC’s majority control of ~~VMware (the “Dell Acquisition”). As a result of the Dell Acquisition, EMC became a wholly-owned subsidiary of Dell and VMware became an indirectly held, majority-owned subsidiary of Dell.~~VMware. As of ~~November 3, 2017,~~May 1, 2020, Dell controlled ~~81.9%~~80.6% of VMware’s outstanding common stock and ~~97.6%~~97.4% of the combined voting power of VMware’s outstanding common stock, including 31 million shares of VMware’s Class A common stock and all of VMware’s ClassB common stock.

As 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.~~

Management believes the assumptions underlying the condensed consolidated financial statements are reasonable. However, the amounts recorded for VMware’s ~~intercompany~~related party transactions with Dell and its consolidated subsidiaries may not be considered arm’s length with an unrelated third party. Therefore, the condensed 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.

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of VMware and ~~its subsidiaries.~~ subsidiaries in which VMware has a controlling financial interest. The portion of results of operations attributable to the non-controlling interests for Pivotal prior to the acquisition was included in net loss attributable to non-controlling interests on the condensed consolidated

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

statements of income for the periods presented. As part of the acquisition of Pivotal, VMware acquired the non-controlling interests in Pivotal from the holders of Pivotal Class A common stock, and as of May 1, 2020 and January 31, 2020 held 100% of the controlling financial interest in Pivotal. The cumulative portion of the results of operations and changes in the net assets of Pivotal attributable to the non-controlling interests through the acquisition date were reclassified to additional paid-in capital on the condensed consolidated balance sheet as of January 31, 2020.

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 condensed consolidated statements of cash flows based upon the nature of the underlying transaction.

Intra-Group Transfer of Intellectual Property

During the first quarter of fiscal 2021, the Company completed an intra-group transfer of certain of its intellectual property rights (the “IP”) to the Company’s Irish subsidiary, resulting in a discrete tax benefit of $59 million recognized with a deferred tax asset. This deferred tax asset was recognized as a result of the book and tax basis difference on the IP transferred and was based on the IP’s current fair value.

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, ~~and rebates,~~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.

~~New Accounting Pronouncements~~

~~Topic 606, Revenue from Contracts~~As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with ~~Customers~~

During May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). In 2016, the FASB issued ASU 2016-08, ASU 2016-10certainty and ~~ASU 2016-12, which provide interpretive clarifications on the guidance~~therefore require increased judgment. These estimates and assumptions may change in ~~Topic 606 (collectively, “Topic 606”). The updated revenue standard replaces all existing revenue recognition guidance under GAAP~~future periods and establishes common principles for recognizing revenue for all industries. It also provides guidance on the accounting for costs to fulfill or obtain a customer contract. The core principle underlying the updated standard is the recognition of revenue based on consideration expected towill be entitled from the transfer of goods or services to a customer. The updated standard is effective for interim and annual periods beginning after December 15, 2017 and permits the use of either the full retrospective or cumulative effect transition method.

~~VMware plans to adopt Topic 606 using the full retrospective transition method when it becomes effective for the Company~~recognized in the ~~first~~condensed 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, the Company’s future financial statements could be affected.

Subscription and SaaS Revenue

Effective with the fourth quarter of fiscal ~~2019. Currently,~~2020, VMware ~~defers all~~presented new revenue and cost of revenue line items entitled “subscription and SaaS revenue” and “cost of subscription and SaaS revenue.” Previously, subscription and software-as-a-service (“SaaS”) revenue was referred to as “hybrid cloud subscription and SaaS revenue” and was allocated between license revenue and services revenue in the condensed consolidated statements of income. In light of the Company’s recent acquisitions, management decided to separately present revenue recognized from subscription and SaaS offerings as management believes it provides a more meaningful representation of the nature of its revenue. Revenue and related costs from prior periods were reclassified to conform to the current presentation.

The following table summarizes the prior period reclassifications for revenue and the corresponding costs resulting from the presentation of the new revenue line item (amounts in millions):



	Three Months Ended
	May 3, 2019
	As Previously Reported		Reclassification For New Revenue Line			Pivotal Adjustments⁽¹⁾		As Adjusted
Revenue:
License	$	869	$	(223	)	$	—	$	646
Subscription and SaaS	—		285			126		411
Services	1,397		(62		)	58		1,393
Operating expenses:
Cost of license revenue	50		(14		)	—		36
Cost of subscription and SaaS revenue	—		69			25		94
Cost of services revenue	302		(55		)	52		299

⁽¹⁾Includes adjustments related to the ~~sale~~recast of ~~its perpetual licenses in~~prior periods resulting from the ~~event certain revenue recognition criteria are not met. This would include transactions that offer undelivered future products including emerging products that are offered as part~~acquisition of ~~product promotions where vendor-specific objective evidence (“VSOE”) of fair value has not been established.~~However, under Topic 606, the Company would generally expect that substantially all license revenue related to the sale of its perpetual licenses will be recognized upon delivery, including arrangements that also include offers of future products, such as emerging products that are offered as part of product promotions. Topic 606 is also expected to impact the timing and recognition of costs to obtain contracts with customers, such as commissions. Under the updated standard, incremental costs to obtain contracts with customers are deferred and recognized over the expected period of benefit. As a result, VMware expects deferred commission costs recognized on the consolidated balance sheets to be material upon adoption. The Company is continuing to evaluate the effects that Topic 606 will have on its consolidated financial statements and related disclosures, and its preliminary assessments are subject to change.Pivotal.

~~ASU No. 2016-02, Leases~~

During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The updated standard also requires additional disclosure regarding leasing arrangements. It is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures, and expects that most of its lease commitments will be subject to the updated standard and recognized as lease liabilities and right-of-use assets upon adoption.

~~ASU No. 2016-16, Income Taxes~~

During October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires entities to recognize at the transaction date the income tax consequences of intra-entity asset transfers. Previous guidance required the tax effects from intra-entity asset transfers to be deferred until that asset is sold to a third party or recovered through use. The updated standard is effective for annual and interim periods beginning after December 15, 2017 and requires a modified retrospective transition method. While the Company is continuing to assess the potential effects, the updated standard could have a material impact on the Company’s consolidated financial statements due to the changed treatment of the income tax consequences of business combinations and asset transfers with the Company’s international entities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

~~ASU No. 2016-09, Compensation~~Recently Adopted Accounting Standards

Effective February 1, 2020, VMware adopted ~~ASU~~Accounting Standards Update No. ~~2016-09, Compensation–Stock Compensation~~2016-13, Financial Instruments-Credit Losses (Topic ~~718)~~326), which requires the measurement and recognition of current expected credit losses for financial assets. The standard did not have a material impact on the Company’s condensed consolidated financial statements.

B. Revenue, Unearned Revenue and Remaining Performance Obligations

Revenue

Contract Assets

A contract asset is recognized when a ~~prospective basis, effective February 4, 2017. Prior periods have not been reclassified~~conditional right to ~~conform~~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’s right to ~~the fiscal 2018 presentation. Net excess tax benefits recognized in connection with stock-based awards~~invoice. Contract assets are ~~now~~classified as accounts receivables upon invoicing. Contract assets are included in other current assets on the ~~income tax provision~~condensed consolidated balance sheets. Contract assets were $37 million and $26 million as of May 1, 2020 and January 31, 2020, 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.

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 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 May 1, 2020, customer deposits related to customer prepayments and cloud credits of $257 million were included in accrued expenses and other, and $138 million were included in other liabilities on the condensed consolidated balance sheets. As of January 31, 2020, customer deposits related to customer prepayments and cloud credits of $247 million were included in accrued expenses and other, and $143 million were included in other liabilities on the condensed 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 May 1, 2020 and January 31, 2020 were $18 million and $13 million, respectively. Deferred commissions included in other assets were $950 million and $938 million as of May 1, 2020 and January 31, 2020, respectively.

Amortization expense for deferred commissions was included in sales and marketing on the condensed consolidated statements of income ~~(loss). Net excess tax benefits~~and was $100 million and $88 million during the three months ended May 1, 2020 and May 3, 2019, respectively.

Unearned Revenue

Unearned revenue as of the periods presented consisted of the following (table in millions):



	May 1,		January 31,
	2020		2020
Unearned license revenue	$	15	$	19
Unearned subscription and SaaS revenue	1,579		1,534
Unearned software maintenance revenue	6,611		6,700
Unearned professional services revenue	1,013		1,015
Total unearned revenue	$	9,218	$	9,268

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 contractual term as of May 1, 2020 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 three ~~and nine~~ months ended ~~November~~May 1, 2020 were $1.7 billion and $1.8 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses.

Revenue recognized during the three months ended May 3, ~~2017~~2019 was $1.5 billion and did not include amounts for performance obligations that were ~~$32 million~~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 ~~$76 million, respectively. Prior~~certain unfulfilled orders against accepted customer contracts at the end of any given period.

As of May 1, 2020, the aggregate transaction price allocated to ~~adopting~~remaining performance obligations was $10.1 billion, of which approximately 54% is expected to be recognized as revenue over the ~~updated standard, such amounts were~~next twelve months and the remainder thereafter. As of January 31, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.3 billion, of which approximately 54% was expected to be recognized ~~in additional paid-in capital on~~as revenue during fiscal 2021, and the ~~Company’s consolidated balance sheets.~~

Additionally, all tax-related cash flows resulting from stock-based awards are reported as operating activities in the statements of cash flows. Prior to adopting the updated standard, excess tax benefits were reported as a cash inflow from financing activities in the statements of cash flows.remainder thereafter.

B.C. Related Parties

The information provided below includes a summary of ~~the~~ transactions ~~entered into~~ with Dell and Dell’s consolidated subsidiaries ~~including EMC. Transactions prior to September 7, 2016 reflect transactions only with EMC and its consolidated subsidiaries.~~(collectively, “Dell”).

Transactions with Dell

VMware and Dell engaged in the following ongoing ~~intercompany~~related party transactions, which resulted in revenue and receipts, and unearned revenue for VMware:

Pursuant to original equipment manufacturer and reseller arrangements, ~~with~~ Dell ~~Dell~~integrates or bundles VMware’s products and services with Dell’s products and sells them to end users. Dell also ~~resells~~acts as a distributor, purchasing VMware’s standalone products and services for resale to ~~end users and other~~end-user customers through VMware-authorized resellers. ~~Reseller revenue~~Revenue under these arrangements is presented net of related marketing development funds and rebates paid to Dell.

~~Dell purchases products and services from VMware for its internal use.~~

In addition, VMware provides professional services to end users based upon contractual agreements with Dell.

~~Pursuant to an ongoing distribution agreement, VMware acts as the selling agent for certain~~Dell purchases products and services ~~of Pivotal Software, Inc. (“Pivotal”), a subsidiary of Dell, in exchange~~from VMware for ~~an agency fee. Under this agreement, cash is collected from the end user by~~its internal use.

From time to time, VMware and ~~remitted~~Dell enter into agreements to ~~Pivotal, net of the contractual agency fee.~~

collaborate on technology projects, and Dell pays VMware ~~provides various~~for services ~~to Pivotal. Support~~or reimburses VMware for costs incurred by VMware, ~~are reimbursed to VMware and are recorded as a reduction to the costs incurred by VMware.~~in connection with such projects.

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
	Three Months Ended				As of
	May 1,		May 3,		May 1,		January 31,
	2020		2019		2020		2020
Reseller revenue	$	864	$	665	$	3,975	$	3,787
Internal-use revenue	18		12		46		57
Collaborative technology project receipts	3		2		n/a		n/a

Revenue and Receipts Unearned Revenue
Transition Period As of
Three Months Ended Nine Months Ended January 1 to Transition Period
November 3, September 30, November 3, September 30, February 3, November 3, December 31, February 3,
2017 2016 2017 2016 2017 2017 2016 2017
Reseller revenue $ 294
$ 98
$ 799
$ 261
$ 44
$ 911
$ 637
$ 616
Internal-use revenue 16
5
25
24
7
19
15
18
Professional services revenue 27
28
82
79
3
—
—
—
Agency fee revenue —
1
1
3
—
—
—
—
Reimbursement for services to Pivotal —
—
—
1
—
n/a
n/a
n/a

~~Table~~Customer deposits resulting from transactions with Dell were $184 million and $194 million as of ~~Contents~~

~~VMware, Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

May 1, 2020 and January 31, 2020, respectively.

VMware and Dell engaged in the following ongoing ~~intercompany~~related party transactions, which resulted in costs to VMware:

VMware purchases and leases products and purchases services from Dell.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 costs are included as expenses on VMware’s condensed 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 United States (“U.S.”) that are recorded as expenses on VMware’s condensed consolidated statements of ~~income (loss).~~income.

In certain geographic regions, Dell files a consolidated indirect tax return, which includes value added taxes and other indirect taxes collected by VMware from its customers. VMware remits the indirect taxes to Dell, and Dell remits 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 ~~costs from~~payments for such arrangements during the periods presented consisted of the following (table in millions):



	Three Months Ended
	May 1,		May 3,
	2020		2019
Purchases and leases of products and purchases of services⁽¹⁾	$	44	$	80
Dell subsidiary support and administrative costs	27		37

Transition Period
Three Months Ended Nine Months Ended January 1 to
November 3, September 30, November 3, September 30, February 3,
2017 2016 2017 2016 2017
Purchases and leases of products and purchases of services $ 34
$ 24
$ 103
$ 58
$ 14
Dell subsidiary support and administrative costs 30
30
92
74
13
⁽¹⁾Amount includes indirect taxes that were remitted to Dell during the periods 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.

~~During the second quarter of fiscal 2018,~~From time to time, VMware ~~acquired Wavefront, Inc. (“Wavefront”). Upon closing of the acquisition,~~and Dell ~~was paid $20 million in cash~~also enter into joint marketing, sales, branding and product development arrangements, for ~~its ownership interest in Wavefront.~~which both parties may incur costs.

Dell Financial Services (“DFS”)

DFS provided financing to certain of VMware’s end ~~customers based on~~users at the ~~customer’s~~end users’ discretion. Upon acceptance of the financing arrangement by both VMware’s end ~~customer~~users and DFS, amounts classified as trade accounts receivable are reclassified to due from related parties, net on the condensed consolidated balance sheets. Revenue recognized on transactions financed through DFS was recorded net of financing fees. Financing fees ~~which~~on arrangements accepted by both parties were $6$13 million and ~~$15~~$12 million during the three ~~and nine~~ months ended ~~November~~May 1, 2020 and May 3, ~~2017,~~2019, respectively. ~~Financing fees during the three and nine months ended September 30, 2016 and the Transition Period were not significant.~~

Tax Sharing Agreement with Dell

~~VMware has~~Payments made ~~payments~~ to Dell pursuant to athe tax sharing ~~agreement. The following table summarizes the payments made~~agreement were $25 million and $37 million during the ~~periods presented (table in millions):~~three months ended May 1, 2020 and May 3, 2019, respectively.

Transition Period
Three Months Ended Nine Months Ended January 1 to
November 3, September 30, November 3, September 30, February 3,
2017 2016 2017 2016 2017
Payments from VMware to Dell $ —
$ 54
$ 12
$ 148
$ —

~~The timing of the tax payments due to and from related parties is governed by a tax sharing agreement.~~ Payments from VMware to Dell under the tax sharing agreement relate to VMware’s portion of federal income taxes on Dell’s consolidated 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. VMware’s portion of the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (the “Transition Tax”) is governed by a letter agreement between Dell, EMC and VMware executed during the first quarter of fiscal 2020. In December 2019, VMware amended the tax sharing agreement with Dell in connection with, and effective as of, the Pivotal acquisition. The tax sharing agreement with Dell, as amended and subject to certain exceptions, generally limits VMware’s maximum annual tax liability to Dell to the amount VMware would owe on a separate tax return basis. Subject to this cap for periods following the Pivotal acquisition, the amounts that VMware pays to Dell for its portion of federal income taxes on Dell’s consolidated tax return differ from the amounts VMware would owe on a separate tax return basis and the difference is ~~presented~~recognized as a component of ~~stockholders’ equity. The difference between~~additional paid-in capital, generally in the ~~amount of~~period in which the consolidated tax ~~calculated on a separate~~ return basis and the amount of tax calculated pursuant to the tax sharing agreement was estimated at up to $14 million and $16 million during the three and nine months ended November 3, 2017, respectively, subject to final verification, and wasis filed.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

~~$13 million during~~As a result of the ~~nine months ended September 30, 2016. The difference between the amount of tax calculated on a separate return basis and the amount of tax calculated pursuant to~~activity under the tax sharing agreement ~~was~~with Dell, amounts due to Dell were $515 million and $529 million as of May 1, 2020 and January 31, 2020, respectively, primarily related to VMware’s estimated tax obligation resulting from the Transition Tax. The Company expects to pay the remainder of its Transition Tax over a period of six years.

Pivotal Tax Sharing Agreement with Dell

Pivotal continues to file 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. This has reduced the amount of benefit or expense received by Pivotal since the IPO to the amount of benefit or expense Dell realizes from Pivotal’s inclusion on unitary state tax returns. Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for the tax benefits derived from the inclusion of its losses in certain Dell U.S. federal and state group returns. Payments received from Dell were recognized as a component of additional paid-in capital.

In April 2019, Pivotal and Dell amended their tax sharing agreement with regard to the treatment of certain U.S. Tax Cuts and Jobs Act implications not ~~significant~~explicitly covered by the original terms of the tax sharing agreement. The amendment resulted in $27 million recognized as a component of additional paid-in capital during the three months ended ~~September 30, 2016 and the Transition Period.~~May 3, 2019.

Due To/From Related Parties, Net

Amounts due to and from related parties, net as of the periods presented consisted of the following (table in millions):



	May 1,		January 31,
	2020		2020
Due from related parties, current	$	899	$	1,618
Due to related parties, current⁽¹⁾	132		161
Due from related parties, net, current	$	767	$	1,457

Transition Period
November 3, December 31, February 3,
2017 2016 2017
Due (to) related parties $ (84 ) $ (71 ) $ (85 )
Due from related parties 338
203
178
Due from related parties, net $ 254
$ 132
$ 93

Income tax related asset, net $ —
$ 181
$ —
Income tax due (to) related parties (17 ) —
(21 )
⁽¹⁾ Includes an immaterial amount related to the Company’s current operating lease liabilities due to related parties.

The Company also recognized an immaterial amount related to non-current operating lease liabilities due to related parties. This amount has been included in operating lease liabilities on the condensed consolidated balance sheets as of May 1, 2020 and January 31, 2020.

Amounts in due from related parties, net, excluding DFS and tax obligations, include the current portion of amounts due to and due from related parties. Amounts included in due from related parties, net ~~which are unrelated to DFS and tax obligations,~~ are generally settled in cash within 60 days of each quarter-end.

~~Stock Purchase Arrangements with Dell~~

On March 29, 2017, VMware and Dell entered into a stock purchase agreement (the “2017 Purchase Agreement”) pursuant to which VMware and Dell may commit to purchases by VMware of VMware Class A common stock from Dell.

On August 23, 2017, VMware entered into a stock purchase commitment pursuant to the 2017 Purchase Agreement to purchase $300 million of VMware Class A common stock from Dell. During the third quarter of fiscal 2018, VMware paid Dell $300 million in exchange for 2.7 million shares. The aggregate number of shares purchased was determined based upon a volume-weighted average price during a defined period, less an agreed upon discount. On November 3, 2017, the stock purchase with Dell was completed.

On March 29, 2017, VMware entered into a stock purchase commitment pursuant to the 2017 Purchase Agreement to purchase $300 million of VMware Class A common stock from Dell. During the first quarter of fiscal 2018, VMware paid Dell $300 million in exchange for an initial delivery of 2.7 million shares, or approximately 80% of the expected total shares to be received and retired under the arrangement. On May 10, 2017, the stock purchase with Dell was completed and VMware received an additional 0.7 million shares. The aggregate number of 3.4 million shares purchased was determined based upon the volume-weighted average price during a defined period, less an agreed upon discount.

On December 15, 2016, VMware entered into a stock purchase agreement to purchase $500 million of VMware Class A common stock from Dell. VMware purchased 4.8 million shares for $375 million through December 31, 2016. On February 15, 2017, the stock purchase agreement with Dell was completed. A total of $500 million was paid in exchange for 6.2 million shares. The aggregate number of shares purchased was determined based upon the volume-weighted average price during a defined period, less an agreed upon discount.

Notes Payable to Dell

~~On January 21, 2014, VMware entered into a note exchange agreement with Dell providing for the issuance~~As 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,~~January 31, 2020, VMware ~~repaid two of the notes~~had an outstanding promissory note 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 three and nine months ended November 3, 2017, VMware recognized a gain on extinguishment of debt of $6 million, which was recorded in other income (expense), net on the condensed consolidated statements of income (loss). The remaining note payable of $270 million due December 1, ~~2022~~2020. The note may be prepaid without penalty or premium.

Interest is payable quarterly in arrears at the annual rate of 1.75%. During the three ~~and nine~~ months ended ~~November~~May 1, 2020 and May 3, ~~2017, $2 million and $15 million, respectively, of~~2019, interest expense on the notes payable to Dell was ~~recognized. During the three and nine months ended September 30, 2016 and the Transition Period, $7 million, $20 million and $2 million, respectively, of interest expense was recognized.~~not significant.

D. Commitments and Contingencies

Litigation

On April 25, 2019, Cirba Inc. (“Cirba”) filed a lawsuit against VMware in the United States District Court for the District of Delaware (the “Delaware Court”), alleging 2 patent infringement claims and 3 trademark infringement-related claims. On May 6, 2019, Cirba filed a motion seeking a preliminary injunction tied to one of the two patents it alleges VMware infringes. Following a hearing on August 6, 2019, the Delaware Court denied Cirba’s preliminary injunction motion and set the case for trial in mid-January 2020. On August 20, 2019, VMware filed counterclaims against Cirba, asserting among other claims that Cirba is infringing 4 VMware patents. The Delaware Court severed those claims from the January 2020 trial on Cirba’s claims, and the trial on VMware’s patent claims is currently set for September 2021. On October 22, 2019, VMware filed a separate patent infringement lawsuit against Cirba in the United States District Court for the Eastern District of Virginia, asserting that Cirba infringes 4 additional VMware patents. The trial on Cirba’s claims in the Delaware Court was completed on January 23, 2020, and on January 24, 2020, the jury returned a verdict finding that VMware willfully infringed the 2 asserted patents and awarding approximately $237 million in damages. The jury further found that VMware was not liable on Cirba’s trademark infringement-related claims. A total of $237 million has been accrued for the Delaware action, which reflects the estimated losses that are considered both probable and reasonably estimable at this time. The parties held a hearing with the Delaware Court on their post-trial motions on May 15, 2020, and the Delaware Court has taken those motions under

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VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

~~C. Business Combinations, Definite-Lived Intangible Assets, Net~~advisement. The Company intends to vigorously defend itself in this matter, including, if necessary, via an appeal. Cirba has expressed its intent to seek a permanent injunction, enhanced damages, and ~~Goodwill~~

~~Business Combinations~~

~~During~~attorneys’ fees in the ~~second quarter~~Delaware action. As noted above, the Company intends to pursue arguments both in the Delaware Court and, if necessary, the Federal Circuit to overturn the jury’s verdict. Final resolution of ~~fiscal 2018, VMware completed~~this matter could be materially different from the acquisitions of Wavefront and Apteligent, Inc., which were not material to the condensed consolidated financial statements. These acquisitions are a part of a strategy to accelerate the development of VMware’s Cloud servicesamount accrued. The amount accrued for this matter is included in accrued expenses and other technologies. 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 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 ownership interest to fair value, which was $49 million. The gain recognized in the step acquisition is not expected to be taxable and resulted in a discrete tax benefit of $13 million during the second quarter of fiscal 2018. Upon closing of the acquisition, Dell was paid $20 million in cash for its 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.

~~Definite-Lived Intangible Assets, Net~~

~~As of the periods presented, definite-lived intangible assets consisted of the following (amounts in tables in millions):~~

November 3, 2017
Weighted-Average Useful Lives
(in years) Gross Carrying Amount Accumulated Amortization Net Book Value
Purchased technology 6.5 $ 663
$ (438 ) $ 225
Leasehold interest 34.9 149
(27 ) 122
Customer relationships and customer lists 8.2 135
(75 ) 60
Trademarks and tradenames 8.5 63
(29 ) 34
Other 5.7 5
(3 ) 2
Total definite-lived intangible assets $ 1,015
$ (572 ) $ 443

December 31, 2016
Weighted-Average Useful Lives
(in years) Gross Carrying Amount Accumulated Amortization Net Book Value
Purchased technology 6.6 $ 641
$ (358 ) $ 283
Leasehold interest 34.9 149
(24 ) 125
Customer relationships and customer lists 8.3 132
(62 ) 70
Trademarks and tradenames 8.7 61
(23 ) 38
Other 5.7 4
(3 ) 1
Total definite-lived intangible assets $ 987
$ (470 ) $ 517

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

Transition Period February 3, 2017
Weighted-Average Useful Lives
(in years) Gross Carrying Amount Accumulated Amortization Net Book Value
Purchased technology 6.5 $ 641
$ (366 ) $ 275
Leasehold interest 34.9 149
(24 ) 125
Customer relationships and customer lists 8.3 132
(64 ) 68
Trademarks and tradenames 8.7 61
(23 ) 38
Other 5.7 4
(3 ) 1
Total definite-lived intangible assets $ 987
$ (480 ) $ 507

Amortization expense on definite-lived intangible assets was $34 million and $100 million during the three and nine months ended November 3, 2017, respectively, and $33 million and $99 million during the three and nine months ended September 30, 2016, respectively. Amortization expense on definite-lived intangible assets was $10 million during the Transition Period.

Based on intangible assets recorded as of November 3, 2017 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):

Remainder of 2018 $ 34
2019 124
2020 100
2021 46
2022 31
Thereafter 108
Total $ 443

~~Goodwill~~

~~The following table summarizes the changes in the carrying amount of goodwill during the nine months ended November 3, 2017 (table in millions):~~

Balance, February 3, 2017 $ 4,032
Increase in goodwill related to business combinations 239
Balance, November 3, 2017 $ 4,271

VMware previously evaluated goodwill for impairment during the fourth quarter of each year. Effective January 1, 2017, the Company changed its fiscal year end from December 31 of each calendar year to a 52- or 53-week period ending on the Friday nearest to January 31 of each year. During the third quarter of fiscal 2018, VMware changed the date of its annual goodwill impairment test from the fourth quarter to the third quarter. Management believes this voluntary change is preferable as the timing of its annual goodwill impairment test during the third quarter aligns with Dell’s. The goodwill impairment test date change was applied prospectively for the fiscal year beginning February 3, 2017 and had no effect on the Company’s condensed consolidated financial statements as of November 3, 2017 and December 31, 2016.

~~D. Realignment and Loss on Disposition~~

~~Disposition of VMware vCloud Air Business~~

During the second quarter of fiscal 2018, VMware completed the sale of its VMware vCloud Air business (“vCloud Air”) to OVH US LLC (“OVH”). Losses recognized in connection with this transaction were $2 million and $88 million during the three and nine months ended November 3, 2017, respectively, and were recorded in realignment and loss on disposition on the condensed consolidated statements of income (loss). Losses recognized on the disposition of vCloud Air include the impairment of fixed assets identified as part of the sale, as well as the costs associated with certain transition services, which primarily

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

include employee-related expenses and costs associated with data-center colocation services. Transition services are to be provided over a period of 18 months, starting from the date of the sale. The losses recognized on the disposition of vCloud Air are deductible for tax purposes and resulted in a discrete tax benefit of $12 million during the second quarter of fiscal 2018.

~~Realignment~~

On January 22, 2016, VMware approved a plan to streamline its operations, with plans to reinvest the associated savings in field, technical and support resources related to growth products. As a result of these actions, approximately 800 positions were eliminated during the nine months ended September 30, 2016. VMware recognized $49 million of severance-related realignment expenses during the nine months ended September 30, 2016 on the condensed consolidated statements of income. Additionally, VMware consolidated certain facilities as part of this plan, which resulted in the recognition of $3 million of related expenses during the nine months ended September 30, 2016. Actions associated with this plan were substantially completed by December 31, 2016.

~~The following table summarizes the activity for the accrued realignment expenses for the period presented (table in millions):~~

Nine Months Ended September 30, 2016

Balance as of
January 1, 2016
Realignment Utilization
Balance as of
September 30, 2016
Severance-related costs $ 3
$ 49
$ (51 ) $ 1
Costs to exit facilities —
3
(1 ) 2
Total $ 3
$ 52
$ (52 ) $ 3

~~E. 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 per share is computed by dividing net income by the weighted-average number of common shares outstanding and potentially dilutive securities outstanding during the period, as calculated using the treasury stock method. Potentially dilutive securities primarily include unvested restricted stock units, including performance stock units, and stock options, including purchase options under VMware’s employee stock purchase plan. Securities are excluded from the computation of diluted net income (loss) per share if their effect would be anti-dilutive. 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.

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~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):~~

Transition Period
Three Months Ended Nine Months Ended January 1 to
November 3, September 30, November 3, September 30, February 3,
2017 2016 2017 2016 2017
Net income (loss) $ 443
$ 319
$ 1,009
$ 745
$ (8 )
Weighted-average shares, basic for Classes A and B 406,733
421,704
407,856
423,341
408,625
Effect of other dilutive securities 6,280
3,304
6,101
2,510
—
Weighted-average shares, diluted for Classes A and B 413,013
425,008
413,957
425,851
408,625
Net income (loss) per weighted-average share, basic for Classes A and B $ 1.09
$ 0.76
$ 2.47
$ 1.76
$ (0.02 )
Net income (loss) per weighted-average share, diluted for Classes A and B ⁽¹⁾
$ 1.07
$ 0.75
$ 2.44
$ 1.75
$ (0.02 )

⁽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 stock 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):

Transition Period
Three Months Ended Nine Months Ended January 1 to
November 3, September 30, November 3, September 30, February 3,
2017 2016 2017 2016 2017
Anti-dilutive securities:
Employee stock options —
1,655
585
2,027
2,353
Restricted stock units —
3,632
109
2,416
3,259
Total —
5,287
694
4,443
5,612

~~During the three months ended November 3, 2017, there were no anti-dilutive shares.~~

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~~VMware, Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~F. Cash, Cash Equivalents and Investments~~

~~Cash, cash equivalents and investments as of the periods presented consisted of the following (tables in millions):~~

November 3, 2017
Cost or Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
Cash $ 415
$ —
$ —
$ 415
Cash equivalents:
Money-market funds $ 5,503
$ —
$ —
$ 5,503
U.S. Government and agency obligations 5
—
—
5
U.S. and foreign corporate debt securities 89
—
—
89
Total cash equivalents $ 5,597
$ —
$ —
$ 5,597
Short-term investments:
U.S. Government and agency obligations $ 1,000
$ —
$ (4 ) $ 996
U.S. and foreign corporate debt securities 4,347
5
(8 ) 4,344
Foreign governments and multi-national agency obligations 95
—
—
95
Mortgage-backed securities 134
—
(1 ) 133
Marketable available-for-sale equity securities 15
17
—
32
Total short-term investments $ 5,591
$ 22
$ (13 ) $ 5,600

December 31, 2016
Cost or Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
Cash $ 512
$ —
$ —
$ 512
Cash equivalents:
Money-market funds $ 2,235
$ —
$ —
$ 2,235
Time deposits 26
—
—
26
Municipal obligations 17
—
—
17
Total cash equivalents $ 2,278
$ —
$ —
$ 2,278
Short-term investments:
U.S. Government and agency obligations $ 734
$ —
$ (3 ) $ 731
U.S. and foreign corporate debt securities 3,885
2
(18 ) 3,869
Foreign governments and multi-national agency obligations 32
—
—
32
Municipal obligations 365
—
—
365
Asset-backed securities 4
—
—
4
Mortgage-backed securities 196
—
(2 ) 194
Total short-term investments $ 5,216
$ 2
$ (23 ) $ 5,195
Other assets:
Marketable available-for-sale equity securities $ 15
$ 7
$ —
$ 22

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

Transition Period February 3, 2017
Cost or Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
Cash $ 720
$ —
$ —
$ 720
Cash equivalents:
Money-market funds $ 2,471
$ —
$ —
$ 2,471
Time deposits 26
—
—
26
Municipal obligations 3
—
—
3
Total cash equivalents $ 2,500
$ —
$ —
$ 2,500
Short-term investments:
U.S. Government and agency obligations $ 733
$ —
$ (3 ) $ 730
U.S. and foreign corporate debt securities 3,884
3
(16 ) 3,871
Foreign governments and multi-national agency obligations 32
—
—
32
Municipal obligations 350
—
—
350
Asset-backed securities 4
—
—
4
Mortgage-backed securities 188
—
(2 ) 186
Total short-term investments $ 5,191
$ 3
$ (21 ) $ 5,173
Other assets:
Marketable available-for-sale equity securities $ 15
$ 7
$ —
$ 22

VMware evaluated its available-for-sale investments as of November 3, 2017, December 31, 2016 and February 3, 2017 for other-than-temporary declines in fair value and did not consider any to be other-than-temporarily impaired. The realized gains and losses on investments during the three and nine months ended November 3, 2017 and September 30, 2016 and the Transition Period were not significant.

Unrealized losses on cash equivalents and available-for-sale investments, which have been in a net loss position for less than twelve months as of the periods presented, were classified by sector as follows (table in millions):

Transition Period
November 3, 2017 December 31, 2016 February 3, 2017
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. and foreign corporate debt securities $ 2,236
$ (5 ) $ 2,595
$ (18 ) $ 2,287
$ (16 )

As of the periods presented, unrealized losses on cash equivalents and 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 cash equivalents and available-for-sale investments, which have been in a net loss position for twelve months or greater, were not significant for the periods presented.

~~Contractual Maturities~~

~~The contractual maturities of fixed income securities included in short-term investments~~ on the condensed consolidated balance ~~sheets and held~~sheet as of ~~November 3, 2017, consisted of~~May 1, 2020 and January 31, 2020, and the ~~following (table~~charge was included in ~~millions):~~

Amortized
Cost Basis

Aggregate
Fair Value
Due within one year $ 1,978
$ 1,976
Due after 1 year through 5 years 3,406
3,400
Due after 5 years through 10 years 98
98
Due after 10 years 94
94
Total fixed income securities $ 5,576
$ 5,568

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~G. Debt~~

~~Long-term Debt~~

On August 21, 2017, VMware issued three unsecured senior notes (“Senior Notes”) pursuant to a public debt offering. The proceeds from the issuance were $3,961 million, net of debt discount of $9 milliongeneral and ~~debt issuance costs of $30 million.~~

~~The carrying value of the Senior Notes as of November 3, 2017 was as follows (amounts in millions):~~

November 3, Effective Interest Rate
2017
Long-term debt:
2.30% Senior Note Due August 21, 2020 $ 1,250
2.56%
2.95% Senior Note Due August 21, 2022 1,500
3.17%
3.90% Senior Note Due August 21, 2027 1,250
4.05%
Total principal amount 4,000

Less: unamortized discount (9 )
Less: unamortized debt issuance costs (29 )
Net carrying amount $ 3,962

Interest is payable semiannually in arrears, on February 21 and August 21 of each year. During the three and nine months ended November 3, 2017, $26 million of interest expense, which included amortization of discount and issuance costs, was recognizedadministrative on the condensed consolidated ~~statements~~statement of income ~~(loss). The discount~~for the year ended January 31, 2020.

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 Department of Justice and ~~issuance costs are amortized over~~ the ~~term~~General Services Administration during June 2015. In this matter, the California AG is investigating the accuracy of the ~~Senior Notes.~~

Company’s sales practices with departments and agencies within the State of California. The ~~Senior Notes~~Company has held meetings with the California AG’s representatives, and discussions are ~~redeemable in whole~~ongoing. The Company is unable at ~~any time or in part from~~this time to ~~time at VMware’s option, subject~~assess whether or 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~~what extent it may be ~~required to repurchase~~found liable and, if found liable, what the notes at a repurchase price equal to 101% of the aggregate principal plus any accrued and unpaid interest on the date of purchase. The Senior Notes rank equally in right of payment with VMware’s other unsecured and unsubordinated indebtedness. The Senior Notes also include 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.

~~Refer to Note B for information regarding the notes payable to Dell.~~

~~Revolving Credit Facility~~

On September 12, 2017, 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, whichdamages may be, ~~used for general corporate purposes. Commitments under the Credit Facility are available for~~and believes a ~~period of five years, which may be extended, subject to the satisfaction of certain conditions, by up to two one-year periods.~~ A~~s of November 3, 2017, there were no outstanding borrowings under the Credit Facility. The credit agreement contains certain representations, warranties and covenants.~~ Commitment fees, interest rates and other terms of borrowing under the Credit Facility may vary based on VMware’s external credit ratings. The amount paid in connection with the ongoing commitment fee, which is payable quarterly in arrears, was not significant during the three and nine months ended November 3, 2017.

~~H. 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 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are noted as being 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

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~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 November 3, 2017, December 31, 2016 and February 3, 2017, 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, short-term investments and derivatives that were required to be measured at fair value as of the periods presented (tables in millions):

November 3, 2017
Level 1 Level 2 Total
Cash equivalents:

Money-market funds $ 5,503
$ —
$ 5,503
U.S. Government and agency obligations 5
—
5
U.S. and foreign corporate debt securities —
89
89
Total cash equivalents $ 5,508
$ 89
$ 5,597
Short-term investments:
U.S. Government and agency obligations $ 728
$ 268
$ 996
U.S. and foreign corporate debt securities —
4,344
4,344
Foreign governments and multi-national agency obligations —
95
95
Mortgage-backed securities —
133
133
Marketable available-for-sale equity securities 32
—
32
Total short-term investments $ 760
$ 4,840
$ 5,600
Other current assets:
Forward contracts $ —
$ 5
$ 5

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~~VMware, Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

December 31, 2016
Level 1 Level 2 Total
Cash equivalents:
Money-market funds $ 2,235
$ —
$ 2,235
Time deposits —
26
26
Municipal obligations —
17
17
Total cash equivalents $ 2,235
$ 43
$ 2,278
Short-term investments:
U.S. Government and agency obligations $ 441
$ 290
$ 731
U.S. and foreign corporate debt securities —
3,869
3,869
Foreign governments and multi-national agency obligations —
32
32
Municipal obligations —
365
365
Asset-backed securities —
4
4
Mortgage-backed securities —
194
194
Total short-term investments $ 441
$ 4,754
$ 5,195
Other current assets:
Derivative due to stock purchase with Dell $ —
$ 8
$ 8
Other assets:
Marketable available-for-sale equity securities $ 22
$ —
$ 22

Transition Period February 3, 2017
Level 1 Level 2 Total
Cash equivalents:
Money-market funds $ 2,471
$ —
$ 2,471
Time deposits —
26
26
Municipal obligations —
3
3
Total cash equivalents $ 2,471
$ 29
$ 2,500
Short-term investments:
U.S. Government and agency obligations $ 445
$ 285
$ 730
U.S. and foreign corporate debt securities —
3,871
3,871
Foreign governments and multi-national agency obligations —
32
32
Municipal obligations —
350
350
Asset-backed securities —
4
4
Mortgage-backed securities —
186
186
Total short-term investments $ 445
$ 4,728
$ 5,173
Other current assets:
Derivative due to stock purchase with Dell $ —
$ 9
$ 9
Other assets:
Marketable available-for-sale equity securities $ 22
$ —
$ 22

During the first quarter of fiscal 2018, marketable available-for-sale equity securities were reclassified to short-term investments on the condensed consolidated balance sheets, as restrictions on the Company’s ability to sell the common stock lapse within twelve months of the balance sheet date. As of December 31, 2016 and February 3, 2017, these securities were classified as other assets on the condensed consolidated balance sheets.

The notes payable to Dell and the Senior Notes were not adjusted to fair value. The fair value of the notes payable to Dell was approximately $255 million, $1,489 million and $1,492 million as of November 3, 2017, December 31, 2016 and February 3, 2017, respectively. The fair value of the Senior Notes was approximately $4,008 million as of November 3, 2017.

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~~VMware, Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~Fair value for both the notes 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. The net impact to the condensed consolidated statements of income (loss)material 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~~probable 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 $57 million, $35 million and $36 million as of November 3, 2017, December 31, 2016 and February 3, 2017, respectively, and are included in other assets and other liabilities on the condensed consolidated balance sheets.

~~Assets Measured and Recorded at Fair Value on a Non-Recurring Basis~~

VMware holds strategic investments in its portfolio accounted for using the cost method. These strategic investments are periodically assessed for other-than-temporary impairment. VMware uses Level 3 inputs as part of its impairment analysis, including pre- and post-money valuations of recent financing events, the impact of financing events on its ownership percentages, and other available information relevant to the issuer’s historical and forecasted performance. The estimated fair value of these investments is considered in VMware’s impairment review if any events or changes in circumstances occur that might have a significant adverse effect on their value. If VMware determines that an other-than-temporary impairment has occurred, VMware writes down the investment to its fair value.

During the three and nine months ended September 30, 2016, VMware determined that certain strategic investments were considered to be other-than-temporarily impaired and accordingly, approximately $7 million and $12 million, respectively, was recognized as an impairment charge. Impairment charges recognized during the three and nine months ended November 3, 2017 and the Transition Period were not significant. Strategic investments are included in other assets on the condensed consolidated balance sheets. The carrying value of VMware’s strategic investments was $148 million, $139 million and $139 million as of November 3, 2017, December 31, 2016 and February 3, 2017, respectively.

~~I. 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, 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) on the condensed consolidated balance sheets and is subsequently reclassified to the related operating expense line item on the condensed consolidated statements of income (loss) in the same period that the underlying expenses are incurred. During the three and nine months ended November 3, 2017 and September 30, 2016 and the Transition Period, the effective portion of gains or losses reclassified to the condensed consolidated statements of income (loss) was not significant. Interest charges or “forward points” on VMware’s forward contracts are excluded from the assessment of hedge effectiveness and are recorded in other income (expense), net on the condensed consolidated statements of income (loss) as incurred.

These forward contracts have contractual maturities of twelve months or less, and as of November 3, 2017, December 31, 2016 and February 3, 2017, outstanding forward contracts had a total notional value of $67 million, $22 million and $250 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract.

~~During the three and nine months ended November 3, 2017 and September 30, 2016 and the Transition Period, all cash flow hedges were considered effective.~~

~~Forward Contracts Not Designated as Hedges~~

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applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are reported in other income (expense), net on the condensed consolidated statements of income (loss).

These forward contracts have a contractual maturity of one month, and as of November 3, 2017, December 31, 2016 and February 3, 2017, outstanding forward contracts had a total notional value of $722 million, $875 million and $834 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract.

During the nine months ended November 3, 2017 and September 30, 2016 and the Transition Period, VMware recognized losses of $33 million, $12 million and $18 million, respectively, relating to the settlement of forward contracts. Losses recognized during the three months ended November 3, 2017 and September 30, 2016 were not significant. Gains and losses are recorded in other income (expense), net on the condensed consolidated statements of income (loss).

The combined gains and losses related to forward contracts and the underlying foreign currency denominated assets and liabilities resulted in a net loss of $6 million and a net gain of $8 million during the three and nine months ended November 3, 2017, respectively. Net losses during the three and nine months ended September 30, 2016 and the Transition Period were not significant. ~~Net gains and losses are recorded in other income (expense), net on the condensed consolidated statements of income (loss).~~

~~J. Contingencies~~

~~Litigation~~

On March 27, 2015, Phoenix Technologies (“Phoenix”) filed a complaint against VMware in the U.S. District Court for the Northern District of California asserting claims for copyright infringement and breach of contract relating to a version of Phoenix’s BIOS software that VMware licensed from Phoenix. Following trial, the jury issued its verdict on June 12, 2017, finding that VMware did not infringe on any of the four bases asserted by Phoenix. The Court entered judgment in VMware’s favor, and the parties have filed post-trial motions.reasonably estimable. The Company intends to ~~continue~~ vigorously ~~defending itself~~defend against this ~~lawsuit.~~matter.

~~On March 4, 2015, Christoph Hellwig, a software developer who alleged that software code he wrote is used in a component~~In December 2019, the staff of the ~~Company’s vSphere product, filed a lawsuit against~~Enforcement Division of the SEC requested documents and information related to VMware’s backlog and associated accounting and disclosures. VMware ~~in the Hamburg Regional Court in Germany alleging copyright infringement for failing to comply~~is fully cooperating with the ~~terms~~SEC’s investigation and is unable to predict the outcome 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. Mr. Hellwig has appealed the Regional Court’s decision. No hearing schedule has yet been set by the appellate court.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 condensed 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 ~~November 3, 2017,~~May 1, 2020, other than the Cirba litigation, amounts accrued relating to these other matters arising as part of the ordinary course of business were considered ~~immaterial.~~not material. VMware does not believe that any liability from any reasonably ~~foreseeable~~possible disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on its condensed consolidated financial statements.

Contractual Commitments

22From time to time, VMware enters into arrangements with minimum purchase commitments in the ordinary course of business. New material purchase commitments in fiscal 2021 have totaled $1.2 billion. Minimum payments under these new commitments as of June 8, 2020 are $250 million for fiscal 2022, $250 million for fiscal 2023 and $700 million prior to the end of fiscal 2024.

E. Business Combination, Definite-Lived Intangible Assets, Net and Goodwill

Business Combination

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 is 0t expected to be deductible for tax purposes. The identifiable intangible assets, which primarily consisted of completed technology, have estimated useful lives of one year to four years.

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(unaudited)

~~K. Unearned Revenue~~Definite-Lived Intangible Assets, Net

~~Unearned revenue~~As of the periods presented, definite-lived intangible assets consisted of the following (amounts in tables in millions):



	May 1, 2020
	Weighted-Average Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	5.7	$	921	$	(412	)	$	509
Customer relationships and customer lists	11.4	741		(227		)	514
Trademarks and tradenames	7.6	132		(64		)	68
Other	2.0	21		(6		)	15
Total definite-lived intangible assets		$	1,815	$	(709	)	$	1,106



	January 31, 2020
	Weighted-Average Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	5.7	$	1,030	$	(488	)	$	542
Customer relationships and customer lists	11.4	739		(200		)	539
Trademarks and tradenames	7.6	131		(58		)	73
Other	2.0	22		(4		)	18
Total definite-lived intangible assets		$	1,922	$	(750	)	$	1,172

Amortization expense on definite-lived intangible assets was $80 million and $69 million during the three months ended May 1, 2020 and May 3, 2019, respectively.

Based on intangible assets recorded as of May 1, 2020 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):



Remainder of 2021	$	230
2022	264
2023	214
2024	168
2025	91
Thereafter	139
Total	$	1,106

Goodwill

The following table summarizes the changes in the carrying amount of goodwill during the three months ended May 1, 2020 (table in millions):



Balance, January 31, 2020	$	9,329
Increase in goodwill related to business combination	24
Balance, May 1, 2020	$	9,353

F. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common stock outstanding and potentially dilutive securities outstanding during the period, as calculated using the

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(unaudited)

treasury stock method. Potentially dilutive securities primarily include unvested restricted stock units (“RSUs”), including performance stock unit (“PSU”) awards, and stock options, including purchase options under VMware’s employee stock purchase plan, which included Pivotal’s employee stock purchase plan through the date of acquisition. Securities are excluded from the computation of diluted net income per share if their effect would be anti-dilutive. VMware uses the two-class method to calculate net income per share as both classes share the same rights in dividends; therefore, basic and diluted earnings per share are the same for both classes.

The following table sets forth the computations of basic and diluted net income per share during the periods presented (table in millions, except per share amounts and shares in thousands):



	Three Months Ended
	May 1,		May 3,
	2020		2019
Net income attributable to VMware, Inc.	$	386	$	380

Weighted-average shares, basic for Classes A and B	418,383		417,636
Effect of other dilutive securities	3,130		9,061
Weighted-average shares, diluted for Classes A and B	421,513		426,697
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B	$	0.92	$	0.91
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B	$	0.92	$	0.89

The following table sets forth the weighted-average common share equivalents of Class A common stock that were excluded from the diluted net income per share calculations during the periods presented because their effect would have been anti-dilutive (shares in thousands):



	Three Months Ended
	May 1,	May 3,
	2020	2019
Anti-dilutive securities:
Employee stock options	550	—
Restricted stock units	6,167	81
Total	6,717	81

G. Cash, Cash Equivalents, and Restricted Cash

Cash and Cash Equivalents

Cash and cash equivalents totaled $5.9 billion and $2.9 billion as of May 1, 2020 and January 31, 2020, respectively. Cash equivalents were $5.1 billion as of May 1, 2020, and consisted of money-market funds of $5.1 billion and demand and time deposits of $28 million. Cash equivalents were $2.3 billion as of January 31, 2020, and consisted of money-market funds of $2.2 billion and demand and time deposits of $102 million.

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(unaudited)

Restricted Cash

The following table provides a reconciliation of the Company’s cash and cash equivalents, and current and non-current portion of restricted cash reported on the condensed consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash as of May 1, 2020 and January 31, 2020 (table in millions):



	May 1,		January 31,
	2020		2020
Cash and cash equivalents	$	5,946	$	2,915
Restricted cash within other current assets	94		83
Restricted cash within other assets	31		33
Total cash, cash equivalents and restricted cash	$	6,071	$	3,031

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. Debt

Unsecured Senior Notes

On April 7, 2020, VMware issued three series of unsecured senior notes pursuant to a public debt offering. The proceeds from the issuance were $2.0 billion, net of debt discount of $3 million and debt issuance costs of $17 million. VMware also has three series of unsecured senior notes issued on August 21, 2017 and outstanding as of May 1, 2020 (collectively with the notes issued April 7, 2020, the “Senior Notes”).

The carrying value of the Senior Notes as of the periods presented ~~consisted~~was as follows (amounts in millions):



	May 1,			January 31,			Effective Interest Rate
	2020			2020			Effective Interest Rate
Senior Notes issued August 21, 2017:
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%
Senior Notes issued April 7, 2020:
4.50% Senior Note Due May 15, 2025	750			—			4.70%
4.65% Senior Note Due May 15, 2027	500			—			4.80%
4.70% Senior Note Due May 15, 2030	750			—			4.86%
Total principal amount	6,000			4,000
Less: unamortized discount	(8		)	(5		)
Less: unamortized debt issuance costs	(31		)	(16		)
Net carrying amount	5,961			3,979
Current portion of long-term debt and other borrowings	1,249			1,248
Long-term debt	$	4,712		$	2,731

Interest on the Senior Notes issued on April 7, 2020 is payable semiannually in arrears, on May 15 and November 15 of each year, beginning November 15, 2020. Interest on the Senior Notes issued on August 21, 2017 is payable semiannually in arrears, on February 21 and August 21 of each year. The interest rate on each note issued on April 7, 2020 is subject to adjustment based on certain rating events. During each of the three months ended May 1, 2020 and May 3, 2019, interest expense was $39 million and $32 million, respectively. Interest expense, which included amortization of discount and issuance costs, was recognized on the condensed consolidated statements of 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, subject to a make-whole premium. In addition, upon the occurrence of certain change-of-control triggering events and certain downgrades of the

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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 repurchase. The Senior Notes rank equally in right of payment with VMware’s other unsecured and unsubordinated indebtedness. The Senior Notes 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.

On May 11, 2020, subsequent to the first quarter of fiscal 2021, 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 is not material and will be recognized in other income (expense), net on the condensed consolidated statements of income during the second quarter of fiscal 2021.

Refer to Note C for disclosure regarding the note payable to Dell.

Revolving Credit Facilities

On September 12, 2017, VMware entered into an unsecured credit agreement establishing a revolving credit facility with a syndicate of lenders that provides the Company with a borrowing capacity of up to $1.0 billion, for general corporate purposes. Commitments under the 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 2 one-year periods. As of May 1, 2020 and January 31, 2020, there was 0 outstanding borrowing under the revolving credit facility. The credit agreement contains certain representations, warranties and covenants. Commitment fees, interest rates and other terms of borrowing under the revolving credit facility may vary based on VMware’s external credit ratings. The amount paid in connection with the ongoing commitment fee, which is payable quarterly in arrears, was not significant during the three months ended May 1, 2020 and May 3, 2019.

Senior Unsecured Term Loan Facility

On September 26, 2019, VMware entered into a senior unsecured term loan facility (the “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. The Term Loan matures on the 364^th day following the initial funding under the Term Loan. The Term Loan bears interest at the London interbank offered rate plus 0.75% to 1.25%, or an alternate base rate plus 0.00% to 0.25%, depending on VMware’s external credit ratings. As of May 1, 2020, the weighted-average interest rate on the outstanding Term Loan was 1.36%.

As of May 1, 2020 and January 31, 2020, the outstanding balance on the Term Loan of $1.5 billion, net of unamortized debt issuance costs, was included in current portion of long-term debt and other borrowings on the condensed consolidated balance sheets, with no remaining amount available for additional borrowings. The Term Loan contains certain representations, warranties and covenants. Interest expense for the Term Loan, including amortization of issuance costs, was not significant during the three months ended May 1, 2020.

I. 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 not 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.

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(unaudited)

The following tables set forth the fair value hierarchy of VMware’s cash equivalents that were required to be measured at fair value as of the periods presented (tables in millions):



	May 1, 2020
	Level 1		Level 2		Total
Cash equivalents:
Money-market funds	$	5,109	$	—	$	5,109
Demand deposits and time deposits⁽¹⁾	—		28		28
Total cash equivalents	$	5,109	$	28	$	5,137



	January 31, 2020
	Level 1		Level 2		Total
Cash equivalents:
Money-market funds	$	2,158	$	—	$	2,158
Demand deposits and time deposits⁽¹⁾	—		102		102
Total cash equivalents	$	2,158	$	102	$	2,260

⁽¹⁾Demand deposits and time deposits were valued at amortized cost, which approximated fair value.

The note payable to Dell, the Senior Notes and the Term Loan were not adjusted to fair value. The fair value of the note payable to Dell was approximately $265 million and $269 million as of May 1, 2020 and January 31, 2020, respectively. The fair value of the Senior Notes was approximately $6.2 billion and $4.1 billion as of May 1, 2020 and January 31, 2020, respectively. The fair value of the Term Loan approximated its carrying value as of May 1, 2020 and January 31, 2020 due to its short-term nature. Fair value for the note payable to Dell, the Senior Notes and the Term Loan 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. There is no net impact to the condensed consolidated statements of income since changes in the fair value of the assets 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 $108 million and $106 million as of May 1, 2020 and January 31, 2020, respectively, and were included in other assets and other liabilities on the condensed consolidated balance sheets, respectively.

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 May 1, 2020 and January 31, 2020, investments in privately held companies, which consisted primarily of equity securities, had a carrying value of $168 million and $159 million, respectively, and were included in other assets on the condensed consolidated balance sheets. Unrealized gains and losses recognized by the Company on these securities were not significant during the three months ended May 1, 2020 and May 3, 2019, respectively. All gains and losses on these securities, whether realized or unrealized, are recognized in other income (expense), net on the condensed consolidated statements of income.

J. 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, credit spreads 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

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(unaudited)

fair value of these instruments is initially reported in accumulated other comprehensive loss on the condensed consolidated balance sheets and is subsequently reclassified to the related operating expense line item on the condensed consolidated statements of income in the same period that the underlying expenses are incurred. During the three months ended May 1, 2020 and May 3, 2019, the effective portion of gains or losses reclassified to the condensed consolidated statements of income was not significant. Interest charges or forward points on VMware’s forward contracts were excluded from the assessment of hedge effectiveness and were recorded to the related operating expense line item on the condensed consolidated statements of income in the same period that the interest charges are incurred.

These forward contracts have contractual maturities of twelve months or less, and as of May 1, 2020 and January 31, 2020, outstanding forward contracts had a total notional value of $370 million and $480 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract.

During the three months ended May 1, 2020 and May 3, 2019, 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 condensed consolidated statements of income.

These forward contracts generally have a contractual maturity of one month, and as of May 1, 2020 and January 31, 2020, outstanding forward contracts had a total notional value of $3.3 billion and $1.1 billion, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract.

During the three months ended May 1, 2020 and May 3, 2019, VMware recognized gains of $15 million and $27 million, respectively, related to the settlement of forward contracts. Gains and losses are recorded in other income (expense), net on the condensed consolidated statements of 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 three months ended May 1, 2020 and May 3, 2019. Net gains and losses are recorded in other income (expense), net on the condensed consolidated statements of income.

K. Leases

VMware has operating and finance leases primarily related to office facilities and equipment, which have remaining lease terms of one month to 26 years. During the three months ended May 1, 2020 and May 3, 2019, lease expense recorded in the condensed consolidated statements of income was $57 million and $48 million, respectively.

The components of lease expense during the period presented were as follows (table in millions):



	Three Months Ended
	May 1,		May 3,
	2020		2019
Operating lease expense	$	46	$	40

Finance lease expense:
Amortization of ROU assets	$	2	$	—
Total finance lease expense	$	2	$	—

Short-term lease expense	$	1	$	1

Variable lease expense	$	8	$	7
Total lease expense	$	57	$	48

From time to time, VMware enters into lease arrangements with Dell. Lease expense incurred for arrangements with Dell was not significant during the three months ended May 1, 2020 and May 3, 2019.

The Company subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income was not significant for all periods presented.

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(unaudited)

Supplemental cash flow information related to operating and finance leases during the period presented was as follows (table in millions):



	Three Months Ended
	May 1,		May 3,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	43	$	46
Financing cash flows from finance leases	1		—
ROU assets obtained in exchange for lease liabilities:
Operating leases	$	74	$	15
Finance leases	1		—

Supplemental balance sheet information related to operating and finance leases as of the period presented was as follows (table in millions):

Transition Period
November 3, December 31, February 3,
2017 2016 2017
Unearned license revenue $ 503
$ 503
$ 484
Unearned software maintenance revenue 4,623
4,628
4,405
Unearned professional services revenue 521
493
451
Total unearned revenue $ 5,647
$ 5,624
$ 5,340



	May 1, 2020
	Operating Leases		Finance Leases
ROU assets, non-current⁽¹⁾	$	920	$	57

Lease liabilities, current⁽²⁾	$	101	$	4
Lease liabilities, non-current⁽³⁾	787		52
Total lease liabilities	$	888	$	56

~~Unearned license revenue~~



	January 31, 2020
	Operating Leases		Finance Leases
ROU assets, non-current⁽¹⁾	$	886	$	58

Lease liabilities, current⁽²⁾	$	109	$	4
Lease liabilities, non-current⁽³⁾	746		55
Total lease liabilities	$	855	$	59

⁽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 condensed consolidated balance sheets.

⁽²⁾Current lease liabilities are included primarily in accrued expenses and other on the condensed consolidated balance sheets. An immaterial amount is ~~generally recognized upon delivery of existing or future products or services, or is otherwise recognized ratably over~~presented in due from related parties, net on the condensed consolidated balance sheets.

⁽³⁾ Non-current operating lease liabilities are presented as operating lease liabilities on the condensed consolidated balance sheets. Non-current finance lease liabilities are included in other liabilities on the condensed consolidated balance sheets.

Lease term and discount rate related to operating and finance leases as of the ~~arrangement. Future products include, in some cases, emerging products that are offered~~period presented were as ~~part~~follows:



	May 1,		January 31,
	2020		2020
Weighted-average remaining lease term (in years)
Operating leases	12.9		13.3
Finance leases	9.0		9.2
Weighted-average discount rate
Operating leases	3.7	%	3.8	%
Finance leases	2.9	%	3.1	%

Table of ~~product promotions where the purchaser of an existing product is entitled to receive the~~Contents

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following represents VMware’s future ~~product at no additional charge. To the extent the future product has not been delivered~~minimum lease payments under non-cancellable operating and VSOE of fair value cannot be established, revenue for the entire order is deferred until all product delivery obligations have been fulfilled. In the event the arrangement does not include professional services and if the customer is granted the right to receive unspecified future products or VSOE of fair value on the software maintenance elementfinance leases as of the arrangement does not exist, then unearned license revenue may also be recognized ratably. Unearned license revenue derived from commitments to future products that have not been delivered represents a significant portion of total unearned license revenueperiod presented (table in millions):



	May 1, 2020
	Operating Leases			Finance Leases
2021	$	102		$	4
2022	148			6
2023	133			7
2024	105			7
2025	79			6
Thereafter	597			34
Total future minimum lease payments	1,164			64
Less: Imputed interest	(276		)	(8		)
Total lease liabilities⁽¹⁾	$	888		$	56

⁽¹⁾ Total lease liabilities as of ~~November 3, 2017. Upon adoption~~May 1, 2020 excluded legally binding lease payments for leases signed but not yet commenced of Topic 606, VMware expects total unearned revenue to decline as a result of transactions that include offers for future products, such as emerging products that are offered as part of VMware’s product promotions.

Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized ratably over the contract period. The weighted-average remaining term as of November 3, 2017 was approximately two years. Unearned professional services revenue results primarily from prepaid professional services, including training, and is generally recognized as the services are delivered.

Unearned license and software maintenance revenue will fluctuate based upon a variety of factors including sales volume, the timing of both product promotion offers and delivery of the future products offered, and the amount of arrangements sold with ratable revenue recognition. Additionally, the amount of unearned revenue derived from transactions denominated in a foreign currency is affected by fluctuations in the foreign currencies in which VMware invoices.

In connection with the disposition of vCloud Air, approximately $35 million of total unearned revenue, which included $18 million of unearned license revenue, was transferred to OVH during the second quarter of fiscal 2018. Refer to Note D for further information.$290 million.

L. Stockholders’ Equity

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 ~~can~~may 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.

~~Table~~During May 2019, VMware’s board of ~~Contents~~

~~VMware, Inc.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

directors authorized the repurchase of up to $1.5 billion of Class A common stock through January 29, 2021, of which $819 million remained available for repurchase as of May 1, 2020.

The following table summarizes stock repurchase activity ~~including shares purchased from Dell,~~ during the periods presented (aggregate purchase price in millions, shares in thousands):



	Three Months Ended
	May 1,		May 3,
	2020		2019
Aggregate purchase price⁽¹⁾	$	181	$	591
Class A common stock repurchased	1,540		3,264
Weighted-average price per share	$	117.52	$	180.96

Three Months Ended Nine Months Ended
November 3, September 30, November 3, September 30,
2017 2016 2017 2016
Aggregate purchase price^(1)(2)(3)
$ 855
$ 1,016
$ 1,280
$ 1,016
Class A common shares repurchased 7,771
13,999
12,598
13,999
Weighted-average price per share $ 110.00
$ 72.57
$ 101.59
$ 72.57

⁽¹⁾The aggregate purchase price of repurchased shares is classified as a reduction to additional paid-in ~~capital.~~

⁽²⁾ ~~The aggregate purchase price of $855 million during~~capital until the ~~three months ended November 3, 2017 includes~~balance is reduced to zero and the ~~purchase price associated with the delivery of 2.7 million shares under the August 23, 2017 purchase commitment with Dell.~~

⁽³⁾The aggregate purchase price of $1,280 million during the nine months ended November 3, 2017 includes the purchase price associated with the final delivery of 1.4 million shares under the December 15, 2016 stock purchase agreement with Dell and 3.4 million and 2.7 million shares under the March 29, 2017 and August 23, 2017 purchase commitments pursuantexcess is recorded as a reduction to ~~the 2017 Purchase Agreement with Dell, respectively.~~

~~VMware did not repurchase any shares of its Class A common stock during the Transition Period.~~retained earnings.

VMware Restricted Stock

VMware’s restricted stock primarily consists of ~~restricted stock unit (“RSU”)~~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 ~~one~~1 share of ~~VMware~~VMware’s Class A common stock.

VMware’s restricted stock also includes ~~performance stock unit (“PSU”)~~PSU awards ~~which have been~~ granted to certain VMware executives and employees. ~~The~~ PSU awards ~~include~~have 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 stock at various ratios ranging from ~~0.5~~0.1 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes restricted stock activity since January ~~1, 2017~~31, 2020 (units in thousands):



	Number of Units		Weighted-Average Grant Date Fair Value (per unit)
Outstanding, January 31, 2020	17,474		$	128.38
Granted	743		108.24
Vested	(3,153	)	101.52
Forfeited	(761	)	125.02
Outstanding, May 1, 2020	14,303		133.35

Number of Units
Weighted-Average Grant Date Fair Value
(per unit)
Outstanding, January 1, 2017 20,866
$ 67.54
Vested (256 ) 77.07
Forfeited (159 ) 68.11
Outstanding, February 3, 2017 20,451
67.41
Granted 7,000
90.45
Vested (7,603 ) 67.39
Forfeited (1,471 ) 71.80
Outstanding, November 3, 2017 18,377
75.93

The ~~total~~aggregate vesting date fair value of ~~VMware~~VMware’s restricted stock that vested during the ~~nine~~three months ended ~~November 3, 2017 and the Transition Period~~May 1, 2020, was ~~$764 million and $21 million, respectively.~~$394 million. As of ~~November 3, 2017,~~May 1, 2020, restricted stock representing ~~18.4~~14.3 million shares of VMware’s Class A common stock were outstanding, with an aggregate intrinsic value of ~~$2,167 million~~$1.8 billion based on VMware’s closing stock price as of ~~November~~May 1, 2020.

Net Excess Tax Benefits

Net excess tax benefits recognized in connection with stock-based awards are included in income tax benefit on the condensed consolidated statements of income. Net excess tax benefits recognized during the three months ended May 1, 2020 and May 3, ~~2017.~~

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

2019 were $13 million and $82 million, respectively.

Accumulated Other Comprehensive Income (Loss)

The changes in components of accumulated other comprehensive income (loss) during the periods presented were as follows (tables in millions):



	Unrealized Gain (Loss) on Forward Contracts			Foreign Currency Translation Adjustments			Total
Balance, January 31, 2020	$	—		$	(4	)	$	(4	)
Unrealized gains (losses), net of tax provision (benefit) of ($2), $—, and ($2)	(13		)	—			(13		)
Foreign currency translation adjustments	—			(1		)	(1		)
Other comprehensive income (loss), net	(13		)	(1		)	(14		)
Balance, May 1, 2020	$	(13	)	$	(5	)	$	(18	)

	Unrealized Gain (Loss) on Forward Contracts			Foreign Currency Translation Adjustment			Total
Balance, February 1, 2019	$	2		$	(4	)	$	(2	)
Unrealized gains (losses), net of tax provision (benefit) of $—	4			—			4
Other comprehensive income (loss), net	4			—			4
Balance, May 3, 2019	$	6		$	(4	)	$	2

Unrealized Gain (Loss) on
Available-for-Sale Securities Unrealized Gain (Loss) on
Forward Contracts Total
Balance, January 1, 2017 $ (8 ) $ (1 ) $ (9 )
Unrealized gains, net of tax provision of $1, $— and $1 2
3
5
Balance, February 3, 2017 $ (6 ) $ 2
$ (4 )
Unrealized gains, net of tax provision of $5, $—, and $5 9
3
12
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income, net of tax benefit of $2, $— and $2 3
(2 ) 1
Other comprehensive income, net 12
1
13
Balance, November 3, 2017 $ 6
$ 3
$ 9

Unrealized Gain (Loss) on
Available-for-Sale Securities Unrealized Gain (Loss) on
Forward Contracts Total
Balance, January 1, 2016 $ (7 ) $ (1 ) $ (8 )
Unrealized gains, net of tax provision of $12, $—, and $12 19
—
19
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income, net of tax (provision) of ($3), $—, and ($3) 4
1
5
Balance, September 30, 2016 $ 16
$ —
$ 16

Unrealized gains and losses on VMware’s available-for-sale securities are reclassified to investment income on the condensed consolidated statements of income (loss) in the period that such gains and losses are realized.

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 condensed consolidated statements of income ~~(loss)~~ in the same period that the underlying expenses are incurred. The amounts recorded to ~~their~~the related operating expense functional line items on the condensed consolidated statements of income ~~(loss)~~ were not significant to the individual functional line items during the periods presented.

M. Segment Information

VMware operates in ~~one~~1 reportable operating ~~segment,~~segment; thus, all required financial segment information is included in the condensed 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 how~~order to allocate resources and ~~assessing~~ assess

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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):



	Three Months Ended
	May 1,		May 3,
	2020		2019
Revenue:
License	$	660	$	646
Subscription and SaaS	572		411
Total license and subscription and SaaS	1,232		1,057
Services:
Software maintenance	1,245		1,148
Professional services	257		245
Total services	1,502		1,393
Total revenue	$	2,734	$	2,450

Revenue by geographic area during the periods presented was as follows (table in millions):



	Three Months Ended
	May 1,		May 3,
	2020		2019
United States	$	1,363	$	1,196
International	1,371		1,254
Total	$	2,734	$	2,450

Transition Period
Three Months Ended Nine Months Ended January 1 to
November 3, September 30, November 3, September 30, February 3,
2017 2016 2017 2016 2017
United States $ 978
$ 916
$ 2,800
$ 2,587
$ 248
International 998
862
2,812
2,473
248
Total $ 1,976
$ 1,778
$ 5,612
$ 5,060
$ 496

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

Revenue by geographic area is based on the ship-to addresses of VMware’s customers. No individual country other than the ~~United States~~U.S. accounted for 10% or more of revenue during the three ~~and nine~~ months ended ~~November~~May 1, 2020 and May 3, ~~2017 and September 30, 2016 and the Transition Period.~~2019.

Long-lived assets by geographic area, which primarily include property and equipment, net, as of the periods presented were as follows (table in millions):



	May 1,		January 31,
	2020		2020
United States	$	865	$	860
International	213		209
Total	$	1,078	$	1,069

Transition Period
November 3, December 31, February 3,
2017 2016 2017
United States $ 744
$ 784
$ 777
International 122
132
131
Total $ 866
$ 916
$ 908

No individual country other than the ~~United States~~U.S. accounted for 10% or more of these assets as of ~~November 3, 2017, December 31, 2016~~May 1, 2020 and ~~February 3, 2017.~~

~~N. 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):~~

Transition Period Comparable Period
January 1 to January 1 to
February 3, January 31,
2017 2016
Total revenue $ 496
$ 470
Operating income (loss) (41 ) 22
Income tax provision (benefit) (26 ) 4
Net income (loss) (8 ) 22

Net income (loss) per weighted-average share, basic for Classes A and B $ (0.02 ) $ 0.05
Net income (loss) per weighted-average share, diluted for Classes A and B $ (0.02 ) $ 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

~~Income Taxes~~

The Company’s net deferred tax assets were $462 million and $716 million as of December 31, 2016 and February 3, 2017, respectively. The increase from December 31, 2016 to February 3, 2017 primarily resulted from higher deferred tax assets related to unearned revenue which were $324 million and $566 million as of December 31, 2016 and February 3, 2017, respectively. The increase in deferred tax assets was a result of the Dell Acquisition and VMware’s new fiscal year calendar. VMware believes it is more-likely-than-not that the net deferred tax assets as of December 31, 2016 and February 3, 2017 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.2020.

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~O. Subsequent Event~~

During November 2017, VMware entered into a definitive agreement to acquire VeloCloud Networks, Inc. (“VeloCloud”), a provider of cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. The acquisition of VeloCloud will enable VMware to build on its network virtualization platform, VMware NSX, and to expand its networking portfolio. The cash payment upon the closing of the transaction is estimated to be approximately $470 million; however, the determination of the purchase price is dependent upon various factors at the date of closing and cannot be reasonably estimated until such time. The transaction is expected to close during the fourth quarter of fiscal 2018 and is subject to regulatory approvals and customary closing conditions.


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis ~~(“MD&A”)~~ is provided in addition to the accompanying condensed consolidated financial statements and notes to assist in understanding our results of operations and financial condition. Financial information as of ~~November 3, 2017~~May 1, 2020 should be read in conjunction with our consolidated financial statements for the year ended ~~December~~January 31, ~~2016~~2020 contained in our Annual Report on Form 10-K filed on ~~February 24, 2017.~~March 26, 2020.

In December 2019, VMware completed the acquisition of Pivotal Software, Inc. (“Pivotal”), which was, at the time, a subsidiary of VMware’s parent company, Dell Technologies Inc. (“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 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. As such, prior period financial information has been recast. The recast financial statements combine VMware’s historical financial results with those of Pivotal.

Additionally, effective with the fourth quarter of fiscal 2020, VMware presented new revenue and cost of revenue line items entitled, “subscription and SaaS revenue” and “cost of subscription and SaaS revenue.” Previously, subscription and software-as-a-service (“SaaS”) revenue was referred to as “hybrid cloud subscription and SaaS revenue” and was allocated between license revenue and services revenue on the condensed consolidated statements of income. In light of the Company’s recent acquisitions, management decided to separately present revenue recognized from subscription and SaaS offerings as management believes it provides a more meaningful representation of the nature of its revenue. Revenue and its related costs from prior periods were reclassified to conform to the current presentation.

Period-over-period changes are calculated based upon the respective underlying, non-rounded data. We refer to our fiscal years ended January 29, 2021 and January 31, 2020 as “fiscal 2021” and “fiscal 2020,” 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.”

Overview

~~The information~~We originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. Information technology (“IT”) ~~industry~~driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. IT is ~~transforming, moving from a hardware-based traditional model~~working at an accelerated pace to ~~one of a software-defined infrastructure. We are a leader in virtualization~~harness new technologies, platforms and cloud ~~infrastructure~~models, ultimately guiding businesses through a digital transformation. To take on these challenges, we are working with customers in the areas of hybrid and ~~business mobility solutions utilized by organizations~~multi-cloud, modern applications, networking, security and digital workspaces. Our software provides a flexible digital foundation to enable customers in their digital transformations.

We help ~~transform the way they build, deliver and consume IT resources.~~

~~Over the years, we have increased our product offerings beyond compute virtualization to include offerings that allow organizations to~~customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments by ~~leveraging synergies~~offering solutions across three ~~product~~ categories: Software-Defined Data Center (“SDDC”), Hybrid ~~Cloud~~and Multi-Cloud Computing and Digital Workspace—End-User ~~Computing. Our~~Computing (“EUC”). This portfolio supports and addresses the ~~four~~ key IT priorities of our ~~customers:~~customers including accelerating their cloud journey, modernizing ~~data centers, integrating public clouds,~~their applications, empowering digital workspaces, transforming networking and ~~transforming~~embracing intrinsic security. VMware enables customers to digitally transform their operations as they ready their applications, infrastructure and employees for constantly evolving business needs.

We sell our solutions using enterprise agreements (“EAs”) or as part of our non-EA, or transactional, business. EAs are comprehensive volume license offerings, offered both directly by us and through certain channel partners that also provide for multi-year maintenance and support. 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 ~~are~~form the ~~basis for the~~foundation of our customers’ private cloud ~~environment~~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. ~~While overall~~During the three months ended May 1, 2020, we saw a decline in sales of our ~~VMware vSphere (“vSphere”) offerings have remained strong,~~SDDC solutions which were negatively impacted by the ~~majority of~~COVID-19 pandemic. Future sales growth rates may fluctuate period to period, depending largely upon the extent to which SDDC technologies are included in our license sales originate from products and services solutions across our portfolio beyond our compute products. We continue to experience growth in sales of VMware NSX (“NSX”), our network virtualization solution, and VMware vSAN (“vSAN”) products.larger EAs.

Hybrid ~~Cloud~~and Multi-Cloud Computing

Our overarching cloud strategy contains three key components: (i) continue to expand beyond compute virtualization in the private ~~cloud,~~cloud; (ii) extend the private cloud into the public ~~cloud~~cloud; and (iii) connect and secure endpoints across a range of public

clouds. ~~During the nine months ended November 3, 2017, hybrid cloud computing was~~Subscription offerings were primarily comprised of VMware Cloud Provider Program ~~(previously referred~~(“VCPP”) and included VMware Cloud Services, which enable customers to ~~as VMware vCloud Air Network)~~run, manage, connect and ~~VMware vCloud Air (“vCloud Air”) offerings.~~ secure their applications across private and public clouds.

During the ~~second quarter of fiscal 2018, we completed~~three months ended May 1, 2020, revenue growth in our subscription and SaaS offerings was primarily driven by our modern applications platform solutions, VMware Carbon Black Cloud and VCPP offerings. We expect both our VMware Carbon Black Cloud offerings and modern applications platform solutions to contribute to the ~~sale~~growth of our ~~vCloud Air business to OVH US LLC (“OVH”). We continued to see~~ revenue ~~growth~~ derived from subscription and SaaS offerings. In addition, we expect operating margin to be negatively impacted in fiscal 2021 as a result of our ~~VMware Cloud Provider Program offering during~~incremental investment in our subscription and SaaS portfolio, including the ~~third quarter~~recent Carbon Black, Inc. and Pivotal acquisitions.

During the three months ended May 1, 2020, we saw an increase in the portion of our sales occurring through our subscription and SaaS offerings compared to the portion of our on-premises solutions sold with perpetual licenses. As this trend continues, 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 ~~2018.~~period in which sales occur. As a result, the rate of growth in our license revenue, which has historically been viewed as a leading indicator of our business performance, may be less relevant and we believe that the overall growth rate of our combined license and subscription and SaaS revenue will become a better indicator of our future growth prospects.

Digital Workspace—End-User Computing

Our ~~End-User Computing~~complete EUC solution, ~~consists of~~ VMware Workspace ONE (“Workspace ONE”), ~~our~~is a digital workspace platform ~~which includes VMware AirWatch (“AirWatch”)~~powered by Unified Endpoint Management and VMware ~~Horizon (“Horizon”).~~Horizon. Our ~~AirWatch~~Unified Endpoint Management business model includes an on-premises solution that we offer through the sale of perpetual licenses, subscription and ~~an off-premises solution~~SaaS solutions. EUC sales continued to increase during the three months ended May 1, 2020, driven by the sale of perpetual licenses and adoption of our subscription offerings, such as Workspace ONE.

Dell Go-to-Market Initiatives

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 opportunities that ~~we offer as software-as-a-service (“SaaS”). Our mobile and desktop~~benefited our sales during the three months ended May 1, 2020. During the three months ended May 1, 2020, revenue from Dell, including purchases of products and services ~~within Workspace ONE continued to contribute to the growth~~directly from us, as well as through our channel partners, accounted for 32% of our ~~End-User Computing product group during~~consolidated revenue, which included revenue from Dell selling joint solutions as an original equipment manufacturer (“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. On certain transactions, Dell Financial Services (“DFS”) also provided financing to our end users at our end users’ discretion.

COVID-19 Impact

The worldwide spread of COVID-19 has resulted in, and may continue to cause, a global slowdown of economic activity, which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also disrupting sales channels and marketing activities for an unknown period of time until the ~~three and nine months ended November 3, 2017.~~

~~Change in Fiscal Year End~~

Asdisease is contained. While the COVID-19 pandemic has not had a ~~result~~material adverse financial impact on our operations to date, the future impacts of the ~~change~~pandemic and any resulting economic impact are largely unknown and rapidly evolving. We expect this to have a negative impact on our ~~fiscal year from a fiscal year ending~~sales and our results of operations, the size and duration of which we are currently unable to predict. We are closely monitoring the impact of the pandemic on ~~December 31~~all aspects of each calendar year to a fiscal year 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 was a transition period (the “Transition Period”). Our first full fiscal year 2018 is a 52-week year that began on February 4, 2017 and will end on February 2, 2018. As permitted under SEC rules, prior-period financial statements have not been recast as we believe (i) the three and nine months ended September 30, 2016 are comparable to the three and nine months ended November 3, 2017 and (ii) recasting prior-period results was not practicable or cost justified. We have included certain unaudited condensed consolidated financial statements for the Transition Period in this Form 10-Q and will include audited financial statements for the Transition Period in the Form 10-K filed for the fiscal year ended February 2, 2018.our business.

Results of Operations

Approximately 70% of our sales are denominated in the United States (“U.S. ~~dollar, however, in~~”) dollar. 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):


	Three Months Ended								Nine Months Ended								Three Months Ended
	November 3,		September 30,						November 3,		September 30,						May 1,		May 3,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change		2020		2019		$ Change		% Change
Revenue:
License	$	785	$	691	$	94	14	%	$	2,127	$	1,907	$	219	12	%	$	660	$	646	$	14	2	%
Subscription and SaaS																	572		411		162		39
Total license and subscription and SaaS																	1,232		1,057		176		17
Services:
Software maintenance	1,023		947		76		8		3,011		2,753		258		9		1,245		1,148		98		9
Professional services	168		140		28		20		474		400		75		19		257		245		10		4
Total services	1,191		1,087		104		10		3,485		3,153		333		11		1,502		1,393		108		8
Total revenue	$	1,976	$	1,778	$	198	11		$	5,612	$	5,060	$	552	11		$	2,734	$	2,450	$	284	12

Revenue:
United States	$	978	$	916	$	61	7	%	$	2,800	$	2,587	$	213	8	%	$	1,363	$	1,196	$	167	14	%
International	998		862		137		16		2,812		2,473		339		14		1,371		1,254		117		9
Total revenue	$	1,976	$	1,778	$	198	11		$	5,612	$	5,060	$	552	11		$	2,734	$	2,450	$	284	12

~~Hybrid cloud, including VMware Cloud Provider Program~~Revenue from our subscription offerings consisted primarily of VMware’s VCPP cloud-based offerings that are billed to customers on a consumption basis and ~~vCloud Air,~~revenue from modern applications platform solutions and other offerings that are billed on a subscription basis. Revenue from our SaaS offerings ~~which include our AirWatch mobile solutions, increased to greater than 8%~~consisted primarily of our ~~total revenue during the three and nine months ended November 3, 2017 from approximately 8% during the three and nine months ended September 30, 2016.~~Unified Endpoint Management mobile solution within Workspace ONE, our VMware Cloud ~~Provider Program revenue is included in license revenue,~~on AWS offering, and newer SaaS ~~revenue, including vCloud Air~~offerings, such as our Carbon Black offerings, CloudHealth and ~~our AirWatch mobile solutions, is included in both license and services revenue. We completed our sale of the vCloud Air business during the second quarter of fiscal 2018.~~VMware SD-WAN by VeloCloud.

License revenue relating to the sale of perpetual licenses that are part of a multi-year ~~arrangement~~contract is generally recognized upon delivery of the underlying license, whereas revenue derived from our ~~hybrid cloud~~subscription and SaaS offerings is recognized ~~based~~ on a consumption basis or over a period of time.

License Revenue

~~During~~License revenue during the three ~~and nine~~ months ended ~~November 3, 2017,~~May 1, 2020 continued to benefit from growth in our EUC perpetual license offerings. As customers adopt our cloud-based offerings, license revenue ~~benefited~~may be lower and subject to greater fluctuation in the future, driven by a higher percentage of cloud-based offerings being sold as well as the variability of large deals between fiscal quarters, which deals historically have had a large license revenue impact.

Subscription and SaaS Revenue

Subscription and SaaS revenue increased during the three months ended May 1, 2020 compared to the three months ended May 3, 2019. Revenue growth from ~~balanced performance in all major geographies~~our modern applications platform solutions, Workspace ONE and ~~broad strength across our product portfolio. License~~VMware Carbon Black Cloud offerings continued to contribute to subscription and SaaS revenue growth during the three ~~and nine~~ months ended ~~November 3, 2017~~May 1, 2020 compared to the three ~~and nine~~ months ended September 30, 2016 continued to be driven by sales of our NSX and vSAN offerings, as well as growth in our End-User Computing and VMware Cloud Provider Program offerings. Strength in renewals of our EAs also contributed to license revenue growth during the three and nine months ended NovemberMay 3, ~~2017 compared to the three and nine months ended September 30, 2016.~~2019.

Services Revenue

During the three ~~and nine~~ months ended ~~November 3, 2017,~~May 1, 2020, software maintenance revenue ~~benefited~~continued to benefit from ~~strong~~new contracts as well as renewals, ~~of our EAs,~~ maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales. In each period presented, customers purchased, on a weighted-average basis, ~~more than two and a half~~approximately three years of support and maintenance with each new license purchased.

Professional services revenue increased ~~20% and 19%~~4% during the three ~~and nine~~ months ended ~~November 3, 2017, respectively, as~~May 1, 2020 compared to the three ~~and nine~~ months ended ~~September 30, 2016. We have~~May 3, 2019. Services we provide through our technical account managers and our continued ~~our~~ focus on solution deployments, including our ~~products such as NSX~~networking, security, cloud management and ~~vSAN, which attributed~~digital workspace offerings, contributed to the increase in professional services revenue. Our technology strategies and our offerings continued to resonate well with our customers and helped them maintain business continuity in light of the business challenges posed by the COVID-19 pandemic. We continue to also focus on enabling our partners to deliver professional services for our solutions, and as such, our

~~Our~~ professional services revenue ~~will~~may vary ~~based on the delivery channels used in any given period~~ as ~~well as the timing~~we continue to leverage our partners. Timing of service ~~engagements.~~engagements 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 (table in millions):


	November 3,		December 31,		May 1,		January 31,
	2017		2016		2020		2020
Unearned license revenue	$	503	$	503	$	15	$	19
Unearned subscription and SaaS revenue					1,579		1,534
Unearned software maintenance revenue	4,623		4,628		6,611		6,700
Unearned professional services revenue	521		493		1,013		1,015
Total unearned revenue	$	5,647	$	5,624	$	9,218	$	9,268

Unearned ~~license~~subscription and SaaS revenue is generally recognized ~~upon delivery of existing or future products or~~over time as customers consume the services or ~~is otherwise recognized~~ ratably over the term of the arrangement. Future products include, in some cases, emerging products that are offered as part of product promotions where the purchaser of an existing product is entitled to receive the future product at no additional charge. To the extent the future product has not been delivered and vendor-specific objective evidence (“VSOE”) of fair value cannot be established, revenue for the entire order is deferred until all product delivery obligations have been fulfilled. In the event the arrangement does not include professional services and if the customer is granted the right to receive unspecified future products or VSOE of fair value on the software maintenance elementsubscription, commencing upon provisioning of the ~~arrangement does not exist, then~~service. Previously, unearned subscription and SaaS revenue was allocated between unearned license revenue ~~may also be recognized ratably. Unearned license~~and unearned software maintenance revenue ~~derived from commitments~~in prior periods and has been reclassified to future products that have not been delivered represents a significant portion of total unearned license revenue as of November 3, 2017. Upon adoption of Topic 606, we expect total unearned revenue to decline as a result of transactions that include offers for future products, such as emerging products that are offered as part of our product promotions.conform with current period presentation.

Unearned software maintenance revenue is attributable to our maintenance contracts and is generally recognized ~~ratably~~over time on a ratable basis over the contract ~~period.~~duration. The weighted-average remaining contractual term as of ~~November 3, 2017~~May 1, 2020 was approximately two years. Unearned professional services revenue results primarily from prepaid professional services ~~including training,~~ and is generally recognized as the services are ~~delivered.~~performed.

~~Unearned license~~Remaining Performance Obligations and ~~software maintenance revenue will fluctuate based upon a variety of factors including sales volume,~~Backlog

Remaining Performance Obligations

Remaining performance obligations represent the ~~timing of both product promotion offers and delivery~~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 ~~products offered,~~installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.

As of May 1, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.1 billion, of which approximately 54% is expected to be recognized as revenue over the next twelve months and the ~~amount~~remainder thereafter. As of ~~arrangements sold with ratable~~January 31, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.3 billion, of which approximately 54% was expected to be recognized as revenue ~~recognition. Additionally,~~during fiscal 2021, and the ~~amount of unearned revenue derived from transactions denominated in a foreign currency is affected by fluctuations in the foreign currencies in which we invoice.~~

Backlog

Backlog is comprised of unfulfilled ~~orders against~~ purchase orders or unfulfilled executed agreements ~~received~~ at the end of ~~the~~a given period and is ~~presented~~ net of related estimated rebates and marketing development funds. As of ~~November 3, 2017,~~May 1, 2020, our total backlog was ~~approximately $210~~$4 million ~~generally consisting~~and our backlog related to licenses was $2 million. Backlog primarily consists of licenses, maintenance and services. ~~Our~~For our backlog related to licenses, we generally expect to deliver and recognize as revenue during the following quarter. The amount excluded from the remaining performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs was not material as of May 1, 2020.

As of January 31, 2020, total backlog was $18 million and our backlog related to licenses was ~~approximately $90 million, which we expect~~$5 million. The amount excluded from the remaining performance obligations because such contracts are subject to ~~ship and recognize as revenue or unearned revenue during the fourth quarter of fiscal 2018. Total and license backlog at the beginning and end~~cancellation until fulfillment of the ~~quarter were comparable.~~performance obligation occurs was not material as of January 31, 2020.

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 ~~as of any particular date,~~ is indicative of future ~~sales.~~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

Our cost of services revenue and operating expenses primarily reflected increasing cash-based employee-related expenses, driven by incremental growth in salaries and headcount, both organic and ~~increasing compensation~~through acquisitions, across most of our income statement expense categories ~~during~~for the three ~~and nine~~ months ended ~~November 3, 2017. We expect increases in cash-based employee-related expenses to continue.~~May 1, 2020.

Cost of License Revenue

Cost of license revenue primarily consists of the cost of fulfillment of our ~~software,~~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 ~~software~~ products.

Cost of license revenue during the periods presented was as follows (dollars in millions):


	Three Months Ended											Nine Months Ended											Three Months Ended
	November 3,			September 30,								November 3,			September 30,								May 1,			May 3,
	2017			2016			$ Change			% Change		2017			2016			$ Change			% Change		2020			2019			$ Change		% Change
Cost of license revenue	$	38		$	40		$	(2	)	(5	)%	$	115		$	119		$	(5	)	(4	)%	$	40		$	36		$	4	10	%
Stock-based compensation	—			—			—			(33	)	1			2			—			(11	)
Total expenses	$	38		$	40		$	(2	)	(6	)	$	116		$	121		$	(5	)	(4	)
% of License revenue	5		%	6		%						5		%	6		%						6		%	6		%

Cost of license revenue ~~remained relatively flat~~increased during the three ~~and nine~~ months ended ~~November 3, 2017~~May 1, 2020 compared to the three ~~and nine~~ months ended ~~September 30, 2016.~~ May 3, 2019 primarily due to increased costs of fulfillment of our SD-WAN offerings of $11 million, partially offset by decreased amortization of intangible assets.

Cost of Subscription and SaaS Revenue

Cost of subscription and SaaS revenue primarily includes personnel costs and related overhead associated with delivery of our products and all hosted services supporting our SaaS offerings. Additionally, cost of services revenue 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):



	Three Months Ended
	May 1,			May 3,
	2020			2019			$ Change		% Change
Cost of subscription and SaaS revenue	$	122		$	91		$	32	35	%
Stock-based compensation	4			3			1		22
Total expenses	$	126		$	94		$	33	35
% of Subscription and SaaS revenue	22		%	23		%

Cost of subscription and SaaS revenue increased during the three months ended May 1, 2020 compared to the three months ended May 3, 2019. The increase was primarily due to growth in costs associated with hosted services to support our SaaS offerings of $19 million, resulting from an increase in demand for technical support and services, as well as increased amortization of intangible assets of $16 million due to certain intangible assets becoming fully amortized.

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 and costs to ~~provide~~deliver professional services. Additionally, cost of services revenue includes depreciation onof equipment supporting our service offerings.

Cost of services revenue during the periods presented was as follows (dollars in millions):


	Three Months Ended										Nine Months Ended										Three Months Ended
	November 3,			September 30,							November 3,			September 30,							May 1,			May 3,
	2017			2016			$ Change		% Change		2017			2016			$ Change		% Change		2020			2019			$ Change		% Change
Cost of services revenue	$	227		$	213		$	14	7	%	$	683		$	620		$	63	10	%	$	296		$	281		$	15	5	%
Stock-based compensation	13			13			—		(1	)	38			38			—		1		22			18			4		20
Total expenses	$	240		$	226		$	14	6		$	721		$	658		$	63	10		$	318		$	299		$	19	6
% of Services revenue	20		%	21		%					21		%	21		%					21		%	21		%

Cost of services revenue increased during the three ~~and nine~~ months ended ~~November 3, 2017~~May 1, 2020 compared to the three ~~and nine~~ months ended ~~September 30, 2016.~~May 3, 2019. The increase was primarily due to growth in cash-based employee-related expenses of ~~$15~~$25 million, ~~and $60 million during the three and nine months ended November 3, 2017, respectively,~~ driven by incremental growth in headcount and salaries, ~~as well as increased IT development~~partially offset by decreased travel-related costs ~~of $17 million during~~resulting from travel restrictions imposed in response to the nine months ended November 3, 2017. These increased costs were offset in part by a decrease in equipment, depreciation and facilities-related costs of $27 million during the nine months ended November 3, 2017.COVID-19 pandemic.

Research and Development Expenses

Research and development expenses include the personnel and related overhead associated with the development of our product software and service offerings. We continue to invest in our key growth areas, including VMware NSX 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.

Research and development expenses during the periods presented were as follows (dollars in millions):


	Three Months Ended										Nine Months Ended										Three Months Ended
	November 3,			September 30,							November 3,			September 30,							May 1,			May 3,
	2017			2016			$ Change		% Change		2017			2016			$ Change		% Change		2020			2019			$ Change		% Change
Research and development	$	353		$	309		$	45	15	%	$	1,032		$	885		$	148	17	%	$	540		$	488		$	52	11	%
Stock-based compensation	96			80			15		19		266			224			42		19		125			102			23		23
Total expenses	$	449		$	389		$	60	15		$	1,298		$	1,109		$	190	17		$	665		$	590		$	75	13
% of Total revenue	23		%	22		%					23		%	22		%					24		%	24		%

Research and development expenses increased during the three ~~and nine~~ months ended ~~November 3, 2017~~May 1, 2020 compared to the three ~~and nine~~ months ended ~~September 30, 2016.~~May 3, 2019. The increase was primarily due to growth in cash-based employee-related expenses of ~~$36~~$57 million, ~~and $150 million during the three and nine months ended November 3, 2017, respectively,~~ driven by incremental growth in salaries and headcount, both organic and ~~salaries. In addition,~~through acquisitions. The increase was also driven by an increase of stock-based compensation ~~increased by $15~~of $23 million, ~~and $42 million, respectively,~~ primarily driven by an increase in restricted stock unit awards ~~granted after the third quarter of 2016. Research and development expenses also increased due~~related to higher equipment, depreciation and facilities-related costs of $11 million and $19 million during the three and nine months ended November 3, 2017, respectively. These increases were offset in part by an increase in capitalized internal-use software development costs of $14 million and $48 million during the three and nine months ended November 3, 2017, respectively.recent acquisitions.

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. ~~Sales commissions for~~A significant portion of our ~~license offerings are generally earned and expensed when a firm order is received from the customer. In the event of an EA with multi-year support and maintenance or our SaaS offerings,~~ sales commissions are ~~generally expensed~~deferred and recognized over the ~~term~~expected period of ~~the arrangement.~~benefit.

Sales and marketing expenses during the periods presented were as follows (dollars in millions):


	Three Months Ended										Nine Months Ended										Three Months Ended
	November 3,			September 30,							November 3,			September 30,							May 1,			May 3,
	2017			2016			$ Change		% Change		2017			2016			$ Change		% Change		2020			2019			$ Change		% Change
Sales and marketing	$	555		$	513		$	42	8	%	$	1,712		$	1,562		$	151	10	%	$	845		$	805		$	39	5	%
Stock-based compensation	52			51			1		2		150			146			3		2		72			63			10		16
Total expenses	$	607		$	564		$	43	8		$	1,862		$	1,708		$	154	9		$	917		$	868		$	49	6
% of Total revenue	31		%	32		%					33		%	34		%					34		%	35		%

Sales and marketing expenses increased during the three ~~and nine~~ months ended ~~November 3, 2017~~May 1, 2020 compared to the three ~~and nine~~ months ended ~~September 30, 2016.~~May 3, 2019. The increase was primarily due to growth in cash-based employee-related expenses of ~~$32~~$45 million, ~~and $154 million during the three and nine months ended November 3, 2017, respectively,~~ driven by incremental growth in salaries and headcount, both organic and ~~salaries.~~through acquisitions. The increase ~~in cash-based employee-related expenses~~ was also driven by ~~higher commission costs~~an increase in stock-based compensation of $10 million during the ~~nine~~three months ended ~~November 3, 2017,~~May 1, 2020, primarily driven by an increase in restricted stock unit awards related to recent acquisitions. The increase was partially offset by decreased travel-related costs of $24 million resulting from ~~increased sales volume.~~travel restrictions imposed during the three months ended May 1, 2020 in response to the COVID-19 pandemic.

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.

General and administrative expenses during the periods presented were as follows (dollars in millions):


	Three Months Ended											Nine Months Ended											Three Months Ended
	November 3,			September 30,								November 3,			September 30,								May 1,			May 3,
	2017			2016			$ Change			% Change		2017			2016			$ Change			% Change		2020			2019			$ Change		% Change
General and administrative	$	154		$	152		$	2		1	%	$	428		$	454		$	(27	)	(6	)%	$	197		$	179		$	18	10	%
Stock-based compensation	21			26			(5		)	(19	)	58			62			(3		)	(6	)	49			30			19		65
Total expenses	$	175		$	178		$	(3	)	(2	)	$	486		$	516		$	(31	)	(6	)	$	246		$	209		$	37	18
% of Total revenue	9		%	10		%						9		%	10		%						9		%	9		%

General and administrative expenses ~~were relatively flat~~increased during the three months ended ~~November 3, 2017~~May 1, 2020 compared to the three months ended ~~September 30, 2016. During the nine months ended November~~May 3, ~~2017, general and administrative expenses decreased compared to the nine months ended September 30, 2016.~~2019. The ~~decrease~~increase was primarily ~~driven by a decrease in: IT development costs of $27 million; equipment, depreciation and facilities-related costs of $20 million; contractor spending~~

~~of $11 million; and telecom costs of $10 million. These decreases were offset in part by decreased capitalization of internal-use software development~~due to increased acquisition-related costs of $26 million, ~~as well as~~primarily relating to the fiscal 2020 acquisitions. The increase was also driven by increased ~~cash-based employee-related expenses~~stock-based compensation expense of ~~$23~~$19 million, ~~resulting~~ primarily ~~from incremental growth~~driven by an increase in ~~headcount~~stock options and ~~salaries during the nine months ended November 3, 2017.~~

~~Realignment and Loss on Disposition~~

~~Realignment expenses and loss on disposition during the periods presented were as follows (dollars in millions):~~

Three Months Ended Nine Months Ended
November 3, September 30, November 3, September 30,
2017 2016 $ Change 2017 2016 $ Change
Realignment and loss on disposition $ 2
$ —
$ 2
$ 88
$ 52
$ 36
% of Total revenue — % — % 2 % 1 %

~~During the second quarter of fiscal 2018, we completed the sale of vCloud Air~~restricted stock unit awards related to OVH. Losses recognized in connection with this transaction were $2 million and $88 million during the three and nine months ended November 3, 2017, respectively. Losses recognized on the disposition of vCloud Air include the impairment of fixed assets identified as part of the sale, as well as the costs associated with certain transition services, which primarily include employee-related expenses and costs associated with data-center colocation services. Transition services are to be provided over a period of 18 months, starting from the date of the sale.

On January 22, 2016, we approved a plan to streamline our operations, with plans to reinvest the associated savings in field, technical and support resources associated with growth products. As a result of these actions, approximately 800 positions were eliminated during the nine months ended September 30, 2016. We recognized $49 million of severance-related realignment expenses during the nine months ended September 30, 2016 on the condensed consolidated statements of income. Additionally, we consolidated certain facilities as part of this plan, which resulted in the recognition of $3 million of related expenses during the nine months ended September 30, 2016. Actions associated with this plan were substantially completed by December 31, 2016.recent acquisitions.

Interest ~~expense~~Expense

Interest expense during the periods presented was as follows (dollars in millions):


	Three Months Ended									Nine Months Ended									Three Months Ended
	November 3,			September 30,						November 3,			September 30,						May 1,			May 3,
	2017			2016			$ Change			2017			2016			$ Change			2020			2019			$ Change		% Change
Interest expense	$	(28	)	$	(7	)	$	(21	)	$	(41	)	$	(20	)	$	(21	)	$	49		$	34		$	15	43	%
% of Total revenue	(1		)%	—		%				(1		)%	—		%				2		%	1		%

~~On August 21, 2017, we issued~~Interest expense increased during the three months ended May 1, 2020 compared to the three months ended May 3, 2019, primarily driven by the senior unsecured term loan facility entered into during the third quarter of fiscal 2020 (the “Term Loan”), and the three series of unsecured senior notes ~~(“Senior Notes”) pursuant to a public debt offering~~issued during the first quarter of fiscal 2021 in the aggregate amount of $4,000 million. Upon closing, a portion of 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 $21 million during the three and nine months ended November 3, 2017 compared to the three and nine months ended September 30, 2016, due to the issuance of the Senior Notes, offset in part by a reduction in interest expense with Dell. We expect interest expense for the fiscal year 2018 to be approximately $75 million.$2.0 billion.

Other Income (Expense), net

Other income (expense), net during the periods presented was as follows (dollars in millions):


	Three Months Ended								Nine Months Ended								Three Months Ended
	November 3,			September 30,					November 3,			September 30,					May 1,			May 3,
	2017			2016			$ Change		2017			2016			$ Change		2020			2019			$ Change			% Change
Other income (expense), net	$	(2	)	$	(8	)	$	6	$	51		$	(8	)	$	59	$	(6	)	$	17		$	(23	)	(137	)%
% of Total revenue	—		%	(1		)%			1		%	—		%			—		%	1		%

During the third quarter of fiscal 2018, we 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 three and nine months ended November 3, 2017, we recognized a gain on extinguishment of debt of $6 million, which was recorded in other income (expense), net.

During the second quarter of fiscal 2018, we acquired all of the outstanding shares of Wavefront, Inc. (“Wavefront”). Prior to the closing of the acquisition, we held an ownership interest in Wavefront. Upon completion of the step acquisition, we recognized a gain of $34 millionThe change in other income (expense), net ~~for the remeasurement of our ownership interest to fair value.~~

~~Transition Period~~

In conjunction with our change in fiscal year end, we 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, shares in thousands):~~

~~During the Transition Period, total revenue increased and license sales declined when~~three months ended May 1, 2020 compared to the ~~one-month period~~three months ended ~~January 31, 2016. Operating loss during~~May 3, 2019 was primarily driven by unrealized losses on deferred compensation balances, resulting from stock market volatility caused by the ~~Transition Period reflected costs~~COVID-19 pandemic, partially offset by an unrealized gain related to our ~~global sales event, as well as increases~~strategic investment 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 included in the Transition Period.

~~The income tax benefit~~privately held companies recognized during the Transition Period was driven 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 the yearthree months ended ~~December 31, 2016, which was calculated on a standalone basis. We were required to file two U.S. tax returns covering the period prior to the Dell Acquisition from January~~May 1, 2016 to September 7, 2016 and the period following the Dell Acquisition through Dell’s fiscal year ended 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.2020.

Income Tax ~~Provision~~Benefit

The following table summarizes our income tax benefit during the periods presented (dollars in millions):



	Three Months Ended
	May 1,			May 3,
	2020			2019
Income tax benefit	$	(18	)	$	(14	)
Effective income tax rate	N/M			N/M
N/M - Effective tax rate is not considered meaningful.

Our quarterly effective income tax rate is based on our estimated annual income tax rate forecast and discrete tax items recognized in the period. ~~Our effective income tax rate was 5.4% and 10.9% during the three and nine months ended November 3, 2017, respectively. For the three and nine months ended September 30, 2016,~~The change in our effective tax rate was 17.6% and 19.4%, respectively. Our estimated annual effective income tax rate for fiscal 2018 increased slightly when compared to the annual effective tax rate for the year ended December 31, 2016.

~~Our~~ effective income tax rate for the three ~~and nine~~ months ended ~~November~~May 1, 2020 compared to the

three months ended May 3, ~~2017 declined~~2019 was primarily driven by a lower estimated annual income tax rate for fiscal 2021 due to an increase in certain U.S. tax credits during the ~~recognition~~three months ended May 1, 2020. The change was also driven by 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 the three months ended May 1, 2020, which was offset by the impact of excess tax benefits related to share based compensation. Excess tax benefits of ~~$32~~$13 million and $76 million for the three and nine months ended November 3, 2017, respectively, in connection with our adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718), during the first quarter of fiscal 2018. Prior to adopting the updated standard, such amounts were recognized ~~in additional paid-in capital on the consolidated balance sheets. In addition,~~ during the three ~~and nine~~ months ended ~~November 3, 2017, we reduced our unrecognized~~May 1, 2020 as compared to excess tax benefits ~~by $22~~of $82 million ~~due to the expiration of statutes of limitations~~recognized during the ~~third quarter of fiscal 2018. Our effective income tax rate for the nine~~three months ended ~~November~~May 3, 2017 also benefited from certain discrete tax items, including $25 million related to a non-taxable gain recognized on the step acquisition of one of our strategic investments and deductible losses from the disposition of vCloud Air during the second quarter of fiscal 2018.

Our rate of taxation in non-U.S. jurisdictions is lower than our U.S. tax rate. Our non-U.S. earnings are primarily earned by our subsidiaries organized in Ireland, 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.2019.

We ~~have historically been~~are included in ~~EMC’s~~Dell’s consolidated tax group for U.S. federal income tax purposes and ~~with the closing of the Dell Acquisition, we are now included in Dell’s consolidated tax group. We~~ will continue to be included in Dell’s consolidated tax 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 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. Each 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 would be reported separately from that of the Dell consolidated tax group.

Although our results are included in the Dell consolidated return for U.S. federal income tax purposes, our income tax provision or benefit is calculated primarily as though we were a separate taxpayer. However, under certain circumstances, transactions ~~that we~~between us and Dell ~~are parties to~~ are assessed using consolidated tax return rules.

During the fourth quarter of fiscal 2020, we completed the acquisition of Pivotal. Pivotal continues to file its separate tax return for U.S. federal income tax purposes as it has since left the Dell consolidated tax group at the time of Pivotal’s initial public offering (“IPO”) in April 2018.

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 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. Our future effective tax rate is impacted by changes in international tax laws and may also be significantly affected by such factors as changes in ~~tax laws, changes in~~ our business or statutory rates, ~~changing~~changes in interpretation of existing laws or regulations, the ~~impact of accounting for stock-based compensation and the~~ recognition of excess tax benefits ~~and tax~~or deficiencies ~~within the income tax provision in the period in which they occur,~~related to stock-based compensation, the impact of accounting for business combinations, ~~shifts~~changes in the ~~amount~~composition of earnings and overall level of income before tax in the ~~United States~~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. U.S. tax reform legislation, if enacted on terms similar to current proposals, would significantly change the U.S. taxation of multinational businesses and could have a material impact on our result of operations, effective tax rate, financial position and timing and amount of tax payments.

Our Relationship with Dell

As of November 3, 2017, Dell controlled 31 million shares of Class A common stock and all 300 million shares of Class B common stock, representing 81.9% of our total outstanding shares of common stock and 97.6% of the combined voting power of our outstanding common stock. For a description of related risks, refer to “Risks Related to Our Relationship with Dell” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Transactions with Dell

We engaged with Dell in the following ongoing ~~intercompany~~related party transactions, which resulted in revenue and receipts, and unearned revenue for us:

Pursuant to OEM and reseller arrangements, ~~with~~ Dell ~~Dell~~integrates or bundles our products and services with Dell’s products and sells them to end users. Dell also ~~resells~~acts as a distributor, purchasing our standalone products and services for resale to ~~end users and other~~end-user customers through VMware-authorized resellers. ~~Reseller revenue~~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.

~~We provide professional~~From time to time, we and Dell enter into agreements to collaborate on technology projects, and Dell pays us for services ~~to end users based upon contractual agreements with Dell.~~

~~Pursuant to an ongoing distribution agreement, we act as the selling agent~~or reimburses us 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 us and remitted to Pivotal, net of the contractual agency fee.

~~We provide various services to Pivotal. Support~~ costs incurred by us, ~~are reimbursed to us and are recorded as a reduction to the costs incurred by us.~~in connection with such projects.

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				Unearned Revenue
	Three Months Ended				As of
	May 1,		May 3,		May 1,		January 31,
	2020		2019		2020		2020
Reseller revenue	$	864	$	665	$	3,975	$	3,787
Internal-use revenue	18		12		46		57
Collaborative technology project receipts	3		2		n/a		n/a

Sales through Dell as a distributor, which is included in reseller revenue, continues to grow rapidly.

Customer deposits resulting from transactions with Dell were $184 million and $194 million as of May 1, 2020 and January 31, 2020, respectively.

We engaged with Dell in the following ongoing ~~intercompany~~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 condensed consolidated statements of income and primarily include salaries, benefits, travel and occupancy expenses. Dell also incurs certain administrative costs on our behalf in the ~~United States~~U.S. that are recorded as expenses on our condensed consolidated statements of income.

In certain geographic regions, Dell files a consolidated indirect tax return, which includes value added taxes and other indirect taxes collected by us from our customers. We remit the indirect taxes to Dell, and Dell remits 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 ~~costs from~~payments for such arrangements during the periods presented consisted of the following (table in millions):


									Transition Period		Three Months Ended
	Three Months Ended				Nine Months Ended				January 1 to		May 1,		May 3,
	November 3,		September 30,		November 3,		September 30,		February 3,		2020		2019
	2017		2016		2017		2016		2017
Purchases and leases of products and purchases of services	$	34	$	24	$	103	$	58	$	14
Purchases and leases of products and purchases of services⁽¹⁾											$	44	$	80
Dell subsidiary support and administrative costs	30		30		92		74		13		27		37

⁽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.

~~During the second quarter of fiscal 2018,~~From time to time, we ~~acquired Wavefront. Upon closing of the acquisition,~~and Dell ~~was paid $20 million in cash~~also enter into joint marketing, sales, branding and product development arrangements, for ~~its ownership interest in Wavefront.~~which both parties may incur costs.

Dell Financial Services ~~(“DFS”)~~

DFS provided financing to certain of our end ~~customers based on the customer’s~~users at our end users’ discretion. Upon acceptance of the financing arrangement by both our end ~~customer~~users and DFS, amounts classified as trade accounts receivable are reclassified to due from related parties, net on the condensed consolidated balance sheets. Revenue recognized on transactions financed through DFS was

recorded net of financing fees. Financing fees ~~which~~on arrangements accepted by both parties were $6$13 million and ~~$15~~$12 million during the three ~~and nine months~~

~~ended November 3, 2017, respectively. Financing fees during the three and nine~~ months ended ~~September 30, 2016~~May 1, 2020 and ~~the Transition Period were not significant.~~May 3, 2019, respectively.

Tax Sharing Agreement with Dell

~~We have~~Payments made ~~payments~~ to Dell pursuant to athe tax sharing ~~agreement. The following table summarizes the payments made~~agreement were $25 million and $37 million during the ~~periods presented (table in millions):~~three months ended May 1, 2020 and May 3, 2019, respectively.

Transition Period
Three Months Ended Nine Months Ended January 1 to
November 3, September 30, November 3, September 30, February 3,
2017 2016 2017 2016 2017
Payments from us to Dell $ —
$ 54
$ 12
$ 148
$ —

~~The timing of the tax payments due to and from related parties is governed by a tax sharing agreement.~~ Payments from us to Dell under the tax sharing agreement relate to our portion of federal income taxes on Dell’s consolidated 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. Our portion of the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (the “Transition Tax”) is governed by a letter agreement between Dell, EMC Corporation and us executed during the first quarter of fiscal 2020 (the “Letter Agreement”). In December 2019, we amended the tax sharing agreement with Dell in connection with, and effective as of, the Pivotal acquisition. The tax sharing agreement with Dell, as amended and subject to certain exceptions, generally limits our maximum annual tax liability to Dell to the amount we would owe on a separate tax return basis. Subject to this cap for periods following the Pivotal acquisition, the amounts that we pay to Dell for ~~our~~its portion of federal income taxes on Dell’s consolidated tax return differ from the amounts we would owe on a separate tax return basis and the difference is ~~presented~~recognized as a component of ~~stockholders’ equity. The difference between~~additional paid-in capital, generally in the ~~amount~~period in which the consolidated tax return is filed.

As a result of ~~tax calculated on a separate return basis and~~ the ~~amount of tax calculated pursuant to~~activity under the tax sharing agreement ~~was estimated at up~~with Dell, amounts due to ~~$14~~Dell were $515 million and ~~$16~~$529 million ~~during~~as of May 1, 2020 and January 31, 2020, respectively, primarily related to our estimated tax obligation resulting from the ~~three and nine months ended November 3, 2017, respectively, subject~~Transition Tax. We expect to ~~final verification, and was $13 million during~~pay the ~~nine months ended September 30, 2016. The difference between~~remainder of our Transition Tax over a period of six years.

Pivotal Tax Sharing Agreement with Dell

Pivotal continues to file 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 IPO in April 2018. This has reduced the amount of ~~tax calculated on a separate return basis and~~benefit or expense received by Pivotal since the IPO to the amount of benefit or expense Dell realizes from Pivotal’s inclusion on unitary state tax ~~calculated pursuant~~returns. Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for the tax benefits derived from the inclusion of its losses in certain Dell U.S. federal and state group returns. Payments received from Dell were recognized as a component of additional paid-in capital.

In April 2019, Pivotal and Dell amended their tax sharing agreement with regard to the treatment of certain U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”) implications not explicitly covered by the original terms of the tax sharing ~~agreement was not significant~~agreement. The amendment resulted in $27 million recognized as a component of additional paid-in capital during the three months ended ~~September 30, 2016 and the Transition Period.~~May 3, 2019.

Due To/From Related Parties, Net

Amounts due to and from related parties, net as of the periods presented consisted of the following (table in millions):



	May 1,		January 31,
	2020		2020
Due from related parties, current	$	899	$	1,618
Due to related parties, current⁽¹⁾	132		161
Due from related parties, net, current	$	767	$	1,457

⁽¹⁾ Includes an immaterial amount related to our current operating lease liabilities due to related parties.

We also recognized an immaterial amount related to non-current operating lease liabilities due to related parties. This amount has been included in operating lease liabilities on the condensed consolidated balance sheets as of May 1, 2020 and January 31, 2020.

~~Stock Purchase Arrangements with Dell~~

On March 29, 2017, we entered into a stock purchase agreement with Dell (the “2017 Purchase Agreement”) pursuant to which we and Dell may commit to purchases by us of our Class A common stock from Dell.

On August 23, 2017, we entered into a stock purchase commitment pursuant to the 2017 Purchase Agreement to purchase $300 million of our Class A common stock from Dell. During the third quarter of fiscal 2018, we paid Dell $300 million in exchange for 2.7 million shares. The aggregate number of shares purchased was determined based upon a volume-weighted average price during a defined period, less an agreed upon discount. On November 3, 2017, the stock purchase with Dell was completed.

On March 29, 2017, we entered into a stock purchase commitment pursuant to the 2017 Purchase Agreement to purchase $300 million of our Class A common stock from Dell. During the first quarter of fiscal 2018, we paid Dell $300 million in exchange for an initial delivery of 2.7 million shares, or approximately 80% of the expected total shares to be received and retired under the arrangement. On May 10, 2017, the stock purchase with Dell was completed and we received an additional 0.7 million shares. The aggregate number of 3.4 million shares purchased was determined based upon the volume-weighted average price during a defined period, less an agreed upon discount.

On December 15, 2016, we entered into a stock purchase agreement to purchase $500 million of our Class A common stock from Dell. We purchased 4.8 million shares for $375 million through December 31, 2016. On February 15, 2017, the

stock purchase agreement with Dell was completed. A total of $500 million was paid in exchange for 6.2 million shares. The aggregate number of shares purchased was determined based upon the volume-weighted average price during a defined period, less an agreed upon discount.

Notes Payable to Dell

~~On January 21, 2014, we entered into a note exchange agreement with Dell providing for the issuance~~As 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,~~January 31, 2020, we ~~repaid two of the notes~~had an outstanding promissory note 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 three and nine months ended November 3, 2017, we recognized a gain on extinguishment of debt of $6 million, which was recorded in other income (expense), net on the condensed consolidated statements of income (loss). The remaining note payable of $270 million due December 1, ~~2022~~2020. The note may be prepaid without penalty or premium.

Liquidity and Capital Resources

As of the periods presented, we held cash and cash equivalents ~~and short-term investments~~ as follows (table in millions):

Transition Period
November 3, December 31, February 3,
2017 2016 2017
Cash and cash equivalents $ 6,012
$ 2,790
$ 3,220
Short-term investments 5,600
5,195
5,173
Total cash, cash equivalents and short-term investments $ 11,612
$ 7,985
$ 8,393



	May 1,		January 31,
	2020		2020
Cash and cash equivalents	$	5,946	$	2,915

~~We hold a diversified portfolio~~Cash equivalents primarily consisted of amounts invested in money market funds and fixed income securities. Our fixed income securities are denominated in U.S. dollars and primarily consist 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.funds. We limit the amount of our investments with any single issuer and monitor the diversity of the portfolio and the amount of investments held at any single financial institution, thereby diversifying our credit risk.

As of November 3, 2017, our cash, cash equivalents and short-term investments held outside the United States were $8,232 million. If these overseas funds were needed for our operations in the U.S., we would be requiredWe continue to accrue and pay U.S. taxes on substantially all of the undistributed earnings to repatriate these funds. However, our intent is to indefinitely reinvest our non-U.S. earnings in our foreign operations and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

During the nine months ended November 3, 2017, our cash, cash equivalents, and short-term investments increased primarily driven by the issuance of long-term debt and cash generated from operations, offset in part by the repayment of two of the notes payable to Dell and repurchases of our Class A common stock. We 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 our borrowing capacity, together with any cash generated from operations, will be sufficient to fund our operations for at least the next twelve months. 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 ~~investments~~ and stock repurchases, among other things. We remain committed to a 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.

The 2017 Tax Act imposed a Transition Tax and eliminated U.S. Federal taxes on foreign subsidiary distributions. The Transition Tax was calculated on a separate tax return basis. Our unpaid liabilities related to the Transition Tax as of May 1, 2020 was $545 million, which we expect to pay over the next six years pursuant to the Letter Agreement. 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. The difference between our estimated liability and the amount paid to Dell is recognized as a component of additional paid-in capital, generally in the period in which the consolidated tax return is filed.

Our cash flows summarized for the periods presented were as follows (table in millions):


							Transition Period
	Nine Months Ended						January 1 to		Three Months Ended
	November 3,			September 30,			February 3,		May 1,			May 3,
	2017			2016			2017		2020			2019
Net cash provided by (used in):
Operating activities	$	2,364		$	1,917		$	361	$	1,374		$	1,395
Investing activities	(861		)	(752		)	7		(126		)	(100		)
Financing activities	1,289			(1,004		)	62		1,793			(661		)
Net increase in cash and cash equivalents	$	2,792		$	161		$	430
Effect of exchange rate changes on cash, cash equivalents, and restricted cash									(1		)	—
Net increase in cash, cash equivalents and restricted cash									$	3,040		$	634

Operating Activities

Cash provided by operating activities ~~increased $447~~decreased by $21 million during the ~~nine~~three months ended ~~November 3, 2017~~May 1, 2020 compared to the ~~nine~~three months ended ~~September 30, 2016. Cash provided~~May 3, 2019, primarily driven by ~~operating activities benefited from a net increase in cash collections due to~~ increased sales, decrease in tax payments related to the tax sharing agreement with Dell, and the absence of severance payments related to the January 2016 realignment plan. These positive impacts were partially offset by an increase in cash payments for employee-related expenses, including salaries, bonuses and commissions, resulting primarily from growth in ~~headcount.~~

~~Cash provided by~~headcount, as well as increased cash payments for operating ~~activities of $361 million during the Transition Period primarily reflected~~expenses. These cash ~~provided by cash collections,~~payments were partially offset by an increase in cash ~~payments for employee-related expenses.~~collections due to increased sales.

Investing Activities

Cash used in investing activities ~~is generally attributable to the purchase of available-for-sale securities, business acquisitions and capital expenditures. Cash provided~~increased by ~~investing activities is affected by the sales and maturities of our available-for-sale securities.~~

~~Cash used in investing activities increased $109~~$26 million during the ~~nine~~three months ended ~~November 3, 2017~~May 1, 2020 compared to the ~~nine~~three months ended ~~September 30, 2016,~~May 3, 2019, primarily driven ~~primarily~~ by a decrease in proceeds from the ~~increase~~disposition of assets, including our strategic investments, and increased capital expenditures, partially offset by a decrease in ~~net~~ cash used in business ~~combinations, capital additions and the disposition of vCloud Air, offset in part by the increase in net cash provided by our available-for-sale securities.~~combinations.

Financing Activities

Cash provided by financing activities increased ~~$2,293 million~~by $2.5 billion during the ~~nine~~three months ended ~~November 3, 2017~~May 1, 2020 compared to the ~~nine~~three months ended ~~September 30, 2016,~~May 3, 2019. The increase was driven primarily by the net cash proceeds received from the issuance of long-term debt of ~~$3,961~~$2.0 billion, as well a decrease of $410 million ~~partially offset by the repayment~~in repurchases of ~~two~~shares of our ~~outstanding notes payable to Dell~~Class A common stock and a decrease of ~~$1,225 million.~~

~~Cash provided by financing activities~~$89 million in repurchases of ~~$62 million~~shares for tax withholdings on vesting of restricted stock during the ~~Transition Period was driven by cash proceeds from~~three months ended May 1, 2020.

Unsecured Senior Notes

The following table summarizes the ~~issuance~~principal on our three series of ~~common stock of $61 million, resulting primarily from our employee stock purchase plan.~~

~~Long-term Debt~~

Onunsecured senior notes issued August 21, 2017 weand our three series of unsecured senior notes issued April 7, 2020 (collectively, the “Senior Notes”) as of May 1, 2020 (amounts in millions):



Senior Notes issued August 21, 2017:
2.30% Senior Note Due August 21, 2020	$	1,250
2.95% Senior Note Due August 21, 2022	1,500
3.90% Senior Note Due August 21, 2027	1,250
Senior Notes issued April 7, 2020:
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
Total principal amount	$	6,000

Interest on the Senior Notes ~~pursuant to a public debt offering~~issued on April 7, 2020 is payable semiannually in ~~the aggregate amount~~arrears, on May 15 and November 15 of ~~$4,000 million, which consisted of outstanding principal due~~each year, beginning November 15, 2020. Interest on the ~~following dates: $1,250 million due~~Senior Notes issued on August 21, ~~2020, $1,500 million due August 21, 2022 and $1,250 million due August 21, 2027. The notes bear interest,~~2017 is payable ~~semi-annually~~semiannually in arrears, on February 21 and August 21 of each ~~year, at annual rates~~year. The interest rate on each note issued on April 7, 2020 is subject to adjustment based on certain rating events. During each of ~~2.30%, 2.95% and 3.90%, respectively. In aggregate, the annual interest expense related to~~ the three ~~notes is expected to be approximately $130 million. We used a portion of the net proceeds from the offering to repay certain notes payable to Dell due May 1, 2018 and~~months ended May 1, 2020 and ~~intend~~May 3, 2019, $61 million was paid for interest related to ~~use~~ the remaining proceeds to fund additional purchases of up to $1,000 million of our Class A common stock through August 31, 2018, and for general corporate purposes, including mergers and acquisitions and repaying other indebtedness.Senior Notes.

The Senior Notes also include 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.

On May 11, 2020, subsequent to the first quarter of fiscal 2021, we exercised a make-whole call and redeemed the $1.3 billion unsecured senior note due August 21, 2020 at a premium. We intend to use the remaining net proceeds of the Senior Notes for general corporate purposes, including mergers and acquisitions, repayment of other indebtedness or stock repurchases.

Revolving Credit ~~Facility~~Facilities

On September 12, 2017, we entered into an unsecured credit agreement establishing a revolving credit facility ~~(“Credit Facility”),~~ with a syndicate of lenders that provides ~~the company~~us with a borrowing capacity of up to ~~$1,000 million, which may be used~~$1.0 billion, for general corporate purposes. The credit agreement contains certain representations, warranties and covenants. Commitments under the ~~Credit Facility~~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. As of ~~November 3, 2017,~~May 1, 2020 and January 31, 2020, there ~~were~~was no outstanding ~~borrowings~~borrowing under the ~~Credit Facility.~~revolving credit facility.

Senior Unsecured Term Loan Facility

On September 26, 2019, we entered into the Term Loan with a syndicate of lenders that provided us with a borrowing capacity of up to $2.0 billion through February 7, 2020, for general corporate purposes. The Term Loan matures on the 364^th day following the initial funding under the Term Loan. The Term Loan bears interest at the London interbank offered rate plus 0.75% to 1.25%, or an alternate base rate plus 0.00% to 0.25%, depending on our external credit ~~agreement~~ratings. As of May 1, 2020, the weighted-average interest rate on the outstanding Term Loan was 1.36%.

~~Notes~~Note Payable to Dell

~~On January 21, 2014,~~Refer to “Our Relationship with Dell” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 for disclosure regarding our note payable to Dell.

Contractual Commitments

From time to time, we ~~entered~~enter into ~~a note exchange agreement~~arrangements with ~~Dell providing for the issuance of three promissory notes~~minimum purchase commitments in the ~~aggregate principal amount~~ordinary course of ~~$1,500~~business. New material purchase commitments in fiscal 2021 have totaled $1.2 billion. Minimum payments under these new

commitments as of June 8, 2020 are $250 million ~~which consisted~~for fiscal 2022, $250 million for fiscal 2023 and $700 million prior to the end 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 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.

Interest is payable quarterly in arrears, at the annual rate of 1.75%. During the nine months ended November 3, 2017 and September 30, 2016, $18 million and $20 million, respectively, was paid for interest related to these notes.

~~Disposition of our vCloud Air Business~~

As a part of the sale of vCloud Air, we agreed to provide certain transition services to OVH. Transition services consist primarily of payroll-related support services covering the migration of our vCloud Air customers to OVH. We will continue to make payments related to these transition services through the next 18 months from the date of the sale. In addition, we will make payments associated with the settlement of certain leases related to vCloud Air. Costs associated with transition services were included in the losses recognized in connection with the sale of vCloud Air recorded in realignment and loss on disposition on the condensed consolidated statements of income (loss) during the three and nine months ended November 3, 2017.fiscal 2024.

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 ~~can~~may 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 January 2017, our board of directors authorized the repurchase of up to $1,200 million of our Class A common stock through the end of fiscal 2018. During August 2017, our board of directors authorized the repurchase of up to an additional $1,000 million of Class A common stock through August 31, 2018. The authorization is in addition to our $1,200 million stock repurchase program authorized in January 2017, of which $1,045 million remained available for repurchase as of November 3, 2017. Refer to Note L to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for ~~further discussion.~~stock repurchase authorizations approved by our board of directors for the periods presented.

Critical Accounting Policies and Estimates

In preparing our condensed 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 ~~as new events occur~~in future periods and ~~additional information is obtained, and are~~will be recognized in the condensed consolidated financial statements as ~~soon as they become~~new events occur and additional information becomes 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 within Part II, Item 7, “Critical Accounting Policies and Estimates” of our Annual Report on Form 10-K filed on ~~February 24, 2017~~March 26, 2020 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.

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 condensed 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.

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 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’s expectations regarding the timing of tax payments and the impacts of changes in VMware’s 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 ~~transaction,~~transactions, acquisitions, stock repurchases and investment activities; the outcome or impact of pending litigation, claims or disputes; the impact of the COVID-19 pandemic on the global economy as well as our business operations, financial performance, results of operations and stock price; 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.

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~~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~~Annual Report on Form 10-K, ~~quarterly reports~~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.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes to our market risk exposures during the ~~nine~~three months ended ~~November 3, 2017 or the Transition Period.~~May 1, 2020. See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K filed on ~~February 24, 2017~~March 26, 2020 for a detailed discussion of our market risk exposures.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by the Securities Exchange Act of 1934, as 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.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended ~~November 3, 2017~~May 1, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In response to the COVID-19 pandemic, we are encouraging all of our employees to work remotely. Our internal controls over financial reporting have not been affected as a result of this change as of May 1, 2020. We will continue to monitor for and assess any effects that the COVID-19 pandemic may have on the design or operating effectiveness of 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.

PART II

OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

Refer to Note ~~J of~~D to the ~~“Notes to Condensed Consolidated Financial Statements”~~condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q 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 II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of potential risks to our results of operations and financial condition that may arise from legal proceedings.


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 ~~facing us.~~we face. 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 Technologies Inc. (“Dell”) ~~following Dell’s acquisition of our former majority stockholder EMC Corporation (“EMC”) on September 7, 2016 (the “Dell Acquisition”), including, among other things,~~ 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.” These risk factors also describe specific risks related to the global COVID-19 pandemic. The impact of COVID-19 may exacerbate other risks discussed in this section which could in turn have a material adverse effect on our business operations, financial performance, results of operations and stock price. For additional information regarding the impact of COVID-19 on our business, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

Risks Related to Our Business

We remain unable to predict the extent to which the global COVID-19 pandemic may adversely impact our business operations, financial performance, results of operations and stock price.

The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide and caused economic downturns in the regions in which we sell our products and services and conduct our business operations. The magnitude and duration of the pandemic and the resulting decline in business activity cannot currently be estimated with any degree of certainty and threatens to (1) negatively impact the demand for our products and services, (2) restrict our sales operations and marketing efforts, (3) disrupt the supply chain of hardware needed to operate our software-as-a-service (“SaaS”) offerings, offer hardware appliances that integrated with our software products or run our business, (4) adversely impact the operations of our business partners who support our technology and sales ecosystems, and (5) disrupt our ability to conduct product development and other important business activities.

In response to the COVID-19 pandemic,

Certain industry events that we sponsor or at which we present and certain customer events have been canceled, postponed or moved to virtual-only experiences, including our annual United States (“U.S.”) and regional VMworld trade shows, which have historically been our most significant marketing and customer outreach events where we annually make important new product announcements, and which have been changed to virtual-only events, and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future; and

In addition, substantially all of our employees worldwide have worked remotely for an extended period of time, and while we expect to gradually re-open facilities with appropriate social distancing and health practices when and as permitted by local governmental authorities, we are allowing most employees to work from home for the foreseeable future until they feel it is safe to return to their workplaces.

While the COVID-19 pandemic has not had a material adverse financial impact on our operations to date, we expect the COVID-19 pandemic to have a negative impact on our sales and our results of operations in future periods, the size and duration of which we remain unable to predict. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which has and may continue to adversely impact our stock price and 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.

Our success depends increasingly on customer acceptance of our ~~emerging~~newer products and services.

Our products and services are primarily based on server virtualization and related compute technologies used for virtualizing on-premises data center servers, which form the foundation for private cloud computing. As the market for server virtualization continues to mature, the rate of growth in license sales of ~~our~~VMware vSphere ~~hypervisor product~~(“vSphere”) has declined. We are increasingly directing our product development and marketing efforts toward products and services that enable businesses to utilize virtualization as the foundation for private, public, hybrid and ~~hybrid cloud-based~~multi-cloud-based computing and mobile computing,

including our vSphere-based software-defined data center (“SDDC”) products such as ~~our~~ vRealize management, ~~and automation offerings,~~ VMware vSAN ~~(“vSAN”)~~ storage virtualization, ~~offerings, and network virtualization (“NSX”) offerings,~~NSX virtual networking, as well as our Horizon client virtualization, ~~offerings, VMware AirWatch (“AirWatch”)~~Unified Endpoint Management mobile device management, ~~offerings~~and our managed subscription services such as VMware Cloud on AWS, VMware Cloud on AWS Outposts and our VMware Cloud on ~~AWS offering,~~Dell EMC. In October 2019, we completed the acquisition of Carbon Black, Inc. (“Carbon Black”), which ~~became initially available in August 2017.~~will form the nucleus of VMware’s new set of enterprise security solutions focused on helping to provide advanced cybersecurity protection to customers. We have also been introducing ~~software-as-a-service (“SaaS”)~~SaaS versions of our on-premises products, including VMware ~~Horizon Suite and certain AirWatch~~Workspace ONE (“Workspace ONE”) offerings, and ~~are working to extend~~investing in a range of SaaS and cloud-native technologies and products, including those acquired through our ~~SDDC~~Heptio Inc., CloudHealth Technologies, Inc., and ~~NSX offerings~~VeloCloud Networks, Inc. and ~~management software into the public~~Pivotal Software, Inc. (“Pivotal”) acquisitions. These cloud and ~~to introduce cloud products and services by investing in cloud and~~ SaaS ~~initiatives and partnering with public cloud providers such as Amazon Web Services (“AWS”) and IBM. These~~ initiatives present new and difficult technological, operational and compliance challenges, and significant investments ~~will~~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 private, public, hybrid and ~~hybrid cloud~~multi-cloud solutions and our client virtualization and mobile device management solutions. As the market for our server virtualization products continues to mature, and the scale of our business ~~has increased,~~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 ~~emerging~~newer products and services are ~~adopted more slowly than~~not sufficient to offset declines in revenue growth infor our established server virtualization offerings, ~~declines,~~ our overall revenue growth rates may slow materially or our revenue may decline ~~substantially,~~substantially. Additionally, we may fail to realize returns on our investments in new initiatives and our operating results could be materially adversely affected.

A significant decrease in demand for our server 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 server virtualization products. As more ~~and more~~ businesses achieve high levels of virtualization in their data centers, the market for our ~~VMware~~ 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 ~~may also shift~~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 ~~VMware~~ vSphere. Although sales of ~~VMware~~ vSphere have declined as a portion of our overall business, and we expect this trend to continue, ~~VMware~~ vSphere remains key to our future growth as it serves as the foundation for our newer SDDC, network virtualization and our ~~planned new cloud~~newer subscription and SaaS offerings. Although we have launched, and are ~~developing~~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.

We face intense competition that could adversely affect our operating results.

The virtualization, container, cloud computing, end-user computing, security 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. 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 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. 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 offerings. If ~~we fail to develop~~our private, hybrid and multi-cloud products and services ~~that~~fail to address evolving customer requirements, ~~for hybrid cloud computing,~~ the demand for VMware’s virtualization products and services may decline, and we could experience lower growth. Additionally, VMware Cloud Provider Program (“VCPP”) offerings from our partners may compete directly with ~~infrastructure-as-a service~~infrastructure-as-a-service (“IaaS”) offerings from various public cloud providers such as ~~AWS~~Amazon Web Services (“AWS”) and Microsoft. Many of these cloud providers are partnering with on-premises hardware vendors to deliver their cloud platform as an on-premises solution, including AWS Outposts and Azure Stack. In ~~October 2016,~~fiscal 2018, we ~~announced~~entered into a strategic alliance with AWS to deliver a vSphere-based cloud service, ~~running on AWS. Although we expect our strategic alliance to provide significant advantages to customers when it is generally available, our strategic alliance with Amazon and our~~ VMware Cloud ~~Provider Program offerings from~~on AWS, running in AWS data centers available in certain geographies. 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 ~~other partners~~VCPP that enable customers to run native VMware-based workloads on Azure, Google Cloud, and Oracle Cloud. Our partnerships with these public cloud providers may ~~not prevent or completely offset a decline in demand for our virtualization products and services. Our strategic alliance with Amazon may also~~ be seen as competitive with each other, with other VCPP partners and with AWS, while some partners may elect to include solutions such as VMware Cloud ~~Provider Program~~on AWS as part of their managed services provider offerings. In addition, in November 2018, when AWS announced AWS Outposts, we extended our collaboration with AWS by previewing offerings that will run on AWS Outposts, currently available to try as part of the VMware Cloud on AWS Outposts Beta program. To the extent customers choose to operate native AWS environments (or similar non-VMware

environments, such as Azure Stack) 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 enterprise security offerings. With the close of VMware’s acquisition of Carbon Black in October 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 the frequent introductions of new solutions. Competitors in the end point security space include legacy antivirus solution providers such as McAfee and NortonLifeLock established software and infrastructure providers such as Blackberry Limited (after purchasing Cylance, Inc.) and Microsoft as well as next-generation endpoint security providers such as CrowdStrike. In addition, new startup companies and established companies have entered or are currently attempting to enter the next-generation endpoint security market. 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. If our efforts to enter the enterprise security market segment are unsuccessful, our operating results could be materially adversely ~~affect our relationship with VMware Cloud Provider Program partners.~~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 August 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, ~~and~~ Microsoft offers its own server, network, and storage virtualization software packaged with its Windows Server product ~~and offers~~as well as built-in virtualization in the client version of ~~Windows.~~Windows and Cisco includes network virtualization technology in many of their 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, ~~Rocket,~~rkt, OpenShift, Mesos, Kubernetes and OpenStack, ~~appear to provide~~and other open source software-based products, solutions and services developed by enterprise IT vendors that target data center virtualization and private cloud, such as Red Hat (now a part of IBM) and Nutanix, may reduce the demand for our solutions, put pricing ~~competition~~pressure on our offerings and enable competing vendors to leverage ~~these~~ open source technologies to compete directly with ~~our SDDC initiative. Enterprises~~us. In addition, one of the characteristics of open source software is that, subject to specified restrictions, anyone may modify and ~~service providers have shown interest~~redistribute existing open source software and use it to compete in ~~building their own clouds~~the marketplace. Such competition can develop with a smaller degree of overhead and lead time than traditional proprietary software companies require. New platform technologies and standards based on open source ~~projects such as OpenStack,~~software are consistently being developed and ~~other companies have indicated their intention~~can gain popularity quickly. Improvements in open source software could cause customers to expand offerings of virtual management and cloud computing solutions as well. Additionally, a number of enterprise IT hardware vendors have released solutions based on OpenStack, including IBM and Cisco.replace software purchased from us with open-source software. VMware is delivering container technologies ~~such as Photon OS™~~ and ~~vSphere Integrated Containers~~Cloud Native Application technologies portfolio with VMware Tanzu. We have also increased our level of commitment to open source projects and communities like the Cloud Native Computing Foundation that are designed to ~~help~~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 like Red Hat and the large providers of public cloud infrastructure. Such competitive pressure or the availability of new open source software may result in reduced sales, increasing pricing pressure, increased sales and marketing expenses and lower operating margins, any one of which may adversely affect our operating results.

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. These alliances may result in more compelling product and service offerings than 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 July 2019, one of our important partners and customers, IBM, closed its acquisition of Red Hat, one of our competitors in the cloud native applications space. Consequently, we may find it more difficult to continue to work together productively on other projects, and the advantages we derive from our ecosystem could diminish.

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.

~~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.

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~~cloud-based 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, changes in tariffs and trade agreements or the imposition of fines or government sanctions, could adversely impact our business, financial condition and operating results in a number of ways, including by lengthening sales cycles, affecting the size of enterprise agreements (“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, 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. Additionally, a recurrence of the sovereign debt crisis in Europe and repercussions from the ~~vote by the~~ United ~~Kingdom to~~Kingdom’s (“U.K.”) exit from the European Union ~~or that region’s failure to recover from recession~~(“EU”) (“Brexit”) 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 COVID-19, Brexit and trade tensions between the U.S. and its trading partners have 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~~may need to make significant changes in their spending ~~cutbacks~~priorities, 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 ~~historically~~relatively low levels for several years. Additionally, the business downturn caused by the COVID-19 pandemic is likely to adversely impact the businesses and financial health of many of our customers and hurt their creditworthiness. 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. Even if customers are willing to purchase our products and services, if they do not meet our credit requirements, we may not be able to record accounts receivable or unearned revenue or recognize revenue from these customers until we receive payment, which could adversely affect the amount of revenue we are able to recognize and our cash flows in a particular period. 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 ~~existing notes payable to Dell,~~outstanding indebtedness, fund future product development and acquisitions or conduct stock buybacks.

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 ~~virtualization, cloud computing, end-user~~software-defined data center, hybrid and multi-cloud computing and ~~SDDC~~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 Internet of Things 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, ~~introduce them into product suites~~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 ~~product suite components~~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 ~~virtualization, cloud computing, end-user~~software-defined data center, hybrid and multi-cloud computing and ~~SDDC~~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 ~~VMware~~ vSphere product line, manage the transition to hybrid ~~cloud~~and multi-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 ~~VMware~~ vSphere may decline. Additionally, if we fail to realize returns on investments in our newer NSX virtual networking, hyperconverged infrastructure, subscription and SaaS, and ~~cloud~~edge computing initiatives as well as our recently launched enterprise security and modern applications platform solutions, 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 systems of 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. Consequently, cyber risks represent a large and growing risk to our business. We are increasingly developing and maintaining large data sets and relying on machine learning, artificial intelligence and analytics to provide services to our customers and 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. The COVID-19 pandemic has forced most or all of our employees to shift to work-from-home arrangements, which further increases our vulnerability to email phishing, social engineering and similar cyber-attacks aimed at employees and contractors working remotely. These ~~cyberattacks~~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, with our recent acquisition of endpoint security provider Carbon Black and the launch of our new set of enterprise security solutions, our products may be targeted by computer hackers seeking to compromise product security.

We are increasingly being targeted for financial gain and fraud by criminal entities. Utilizing techniques such as email, telephone and postal mail solicitation, criminals seek to extort or steal funds from companies and employees. 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~~subscription 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 ~~(which have been increasing in length)~~ 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;

changes in customers’ budgets for information technology purchases and in the timing of their purchasing decisions;

the timing of recognizing revenue in any given quarter, which can be affected by a number of factors, including product announcements, beta programs and product promotions that can cause revenue recognition of certain orders to be deferred until future products to which customers are entitled become available;

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 ofassociated with our distributors, who account for a significant portion of our product revenue and accounts ~~receivable;~~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;

~~the impact of new accounting pronouncements, for example, the adoption of Accounting Standards Update (“ASU”) 2016-09, which will likely result in~~ increased volatility in the provision for income taxes ~~because excess tax benefits and tax deficiencies are now recognized within the income tax provision~~in periods in which transfers of intellectual property between our legal entities occur;

fluctuations in the ~~period in~~severity and duration of the COVID-19 pandemic and resulting restrictions on business activity which ~~they occur;~~may vary significantly by region; 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;~~offerings.

Acquisitions and divestitures could harm our business and operating results.

We have acquired in the past, and plan to acquire in the ~~extent~~future, other businesses, products or technologies. In October 2019, we completed our acquisition of Carbon Black, and, in December 2019, we completed our acquisition of Pivotal. We also from time to time sell or divest businesses, products and technologies. Acquisitions and divestitures involve significant risks and uncertainties, which include:

disrupting our ongoing operations and diverting management from day-to-day responsibilities;

increasing our expenses, and adversely impacting our business, financial condition and operating results, including, for example, the dilutive impact on our operating margin and earnings per share that we ~~buy back shares~~expect from our acquisitions of Carbon Black and Pivotal;

the costs of integrating business operations and on-boarding personnel, particularly for larger acquisitions such as Carbon Black and Pivotal;

failure of an acquired business to further our ~~common~~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 ~~private transactions~~potentially dilutive issuances of equity securities or the incurrence of additional 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 ~~Dell or other third parties through arrangements~~a disposition that ~~are accounted for as derivative instruments, fluctuations in our stock price during the pricing reference periods of such arrangements~~ may result in ~~gains~~the diversion of resources and focus;

difficulty achieving expected business results due to a lack of experience in new markets, products or ~~losses~~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 ~~quarterly earnings.~~own customers as a result of any integration of operations or the divestiture of a business upon which our customers rely;

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;

the accounting consequences of certain acquisitions, which may vary by deal structure, including, for instance, the need to account for our acquisition of Pivotal as a transaction between entities under common control, which requires prior period financial statements of VMware to be recast as if we had owned Pivotal and operated as one consolidated entity for all periods presented; and

the need to later divest acquired assets at a loss if an acquisition does not meet our expectations.

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, while the impact of the COVID-19 pandemic may introduce further volatility as the ability to control the pandemic and implement sustained economic recoveries may vary significantly from country to country. During the ~~nine~~three months ended ~~November 3, 2017,~~May 1, 2020, 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~~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, we experienced a measurable negative impact~~The financial uncertainty introduced by 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 ~~revenue in 2015 due to exchange rate fluctuations.~~foreign currency hedging strategy and our operating results. Any ~~further~~future weakening of foreign currency exchange rates against the U.S. dollar would likely result in additional adverse impact on our revenue.

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.

AnFor example, we currently comply with a number of EU regulations that govern our sales, facilities and employees located in the U.K. There continues to be 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. ~~A new~~In that respect, a Cyber Security Law ~~was enacted in November 2016 and~~ came into effect on June 1, ~~2017, which~~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~~

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” that might affect national security undergo a formal security ~~assessment in order to evaluate their “security” and “controllability.” The specific technical requirements of the~~assessment. Implementing measures governing this security assessment ~~have~~were issued in April 2020 and came into effect on June 1, 2020. Draft regulations contemplate more far-reaching data localization measures, which would require a security assessment be conducted for any business in China and not ~~yet been clarified. In December 2015, China enacted~~merely operators of critical information infrastructure to share personal information or a vaguely-defined scope of “important information” with overseas parties.

Also, on January 1, 2016, an Anti-Terrorism Law came into effect in China 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~~are 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, sanctions and tariffs. The current U.S. presidential administration is pursuing substantial changes to U.S. foreign trade policy with respect to China, the EU, Mexico and other countries, including the possibility of imposing greater restrictions on international trade, restrictions on sales and technology transfers, including those countries and companies determined to be involved in activities contrary to the national security or foreign or economic policy interests of the U.S., and significant increases of tariffs on goods imported into the U.S. Given the relatively fluid regulatory environment in both China and the U.S. and uncertainty regarding how the U.S. and foreign governments will act with respect to tariffs, international trade agreements and policies and national security interests, a trade war, further governmental action related to tariffs or international trade policies, or additional tax or other regulatory changes or enforcement practices could occur in the future 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.

~~On August 21, 2017, we issued $4,000 million~~We have $4.8 billion in unsecured notes ~~through a debt offering and repaid $1,230 million of the notes payable to Dell, utilizing a portion of the proceeds from the offering. An~~outstanding as well as an additional unsecured promissory note with an outstanding principal amount of $270 million owed to ~~Dell remains outstanding. On September 12, 2017, we entered into~~Dell. We also have a ~~$1,000 million~~$1.0 billion unsecured ~~credit agreement establishing a~~ revolving credit facility, ~~(“Credit Facility”) that~~which is currently ~~undrawn.~~undrawn, and a $2.0 billion senior unsecured 364-day term loan facility, which, as of May 1, 2020, had an outstanding balance of $1.5 billion (collectively, the “Credit Facilities”). 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~~Facilities 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~~Facilities 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 I, Item 2 of this Quarterly Report on Form 10-Q 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 ~~VMware~~ NSX virtual networking, ~~vSAN virtual storage, cloud~~hyperconverged infrastructure, subscription and SaaS, security and modern applications platform 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 ~~23%~~24% of our total revenue during the ~~nine~~three months ended ~~November 3, 2017.~~May 1, 2020. 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, mergers and acquisitions 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 JD to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q 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 ~~United States.~~U.S. In addition, we rely on confidentiality orand 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.

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~~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.

~~In March 2015, a software developer who alleges that software code he wrote is used in a component~~We have faced and successfully defended against allegations of ~~our vSphere product filed a lawsuit against us in Germany alleging~~ copyright infringement ~~for~~and failing to comply with the terms of the open source General Public License v.2, ~~(“GPL v.2”) and seeking an order requiring us~~but we can provide no assurances that we will not face similar lawsuits with respect to ~~comply with~~our use of open source software in the ~~GPL v.2 or cease distribution~~future, nor what the outcome of any affected code within Germany. On July 8, 2016, the German court issued a written decision dismissing the lawsuit. On August 9, 2016, a Notice of Appeal was filed. We have filed our responsive appellate brief. An adverse outcome to this claim on appeal or to other claims could have a material adverse impact on our intellectual property rights, our operating results and financial condition.such lawsuits may be.

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, ~~VMware Cloud Provider Program-integrated~~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. ~~Additionally, the duration of sales cycles for our offerings has increased as our customers’ purchasing decisions become more complex and require additional levels of approval.~~ 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. From time to time, we may choose to reorganize our go-to-market teams in an effort to better leverage investments in our sales efforts by increasing efficiencies and improving customer coverage. These reorganizations can cause short-term disruptions that may negatively impact sales over one or more fiscal periods. For example, during the first quarter of fiscal 2020, our sales in the Americas grew more slowly than in other geographies, which may have been due in part to a reorganization of our go-to-market resources in that region. There is no assurance that this reorganization or similar reorganizations will not negatively impact sales in future quarters. 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 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 plans to launch managed subscription services such as VMware Cloud on AWS and VMware Cloud on Dell EMC will require us to implement new methods to deliver and monitor end user services and adjust our model for releasing product upgrades.

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 ~~new~~ product initiatives, such as our ~~VMware Cloud Provider Program~~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~~subscription and SaaS products and services, our revenue and license 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 ~~arrangements~~contracts through which we typically sell our established offerings. 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. Prior period amounts have been reclassified to conform with current period presentation. As a result, the rate of growth in our license revenue, which has been viewed as a leading indicator of our business performance may appear to be negatively impacted while the 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. 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. ~~We may~~VMware products and services are also ~~inherit~~subject to known and unknown security vulnerabilities ~~when we integrate the~~resulting from integration with products or services of other companies ~~into VMware products~~(such as applications, operating systems or ~~services.~~semiconductors). 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.

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 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 subscription and 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 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. The economic downturn caused by the COVID-19 pandemic could threaten the financial health of some of our third-party providers and adversely impact their ability to maintain agreed-upon service levels. 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 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.

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 ~~intend~~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, ~~which completed its acquisition of EMC in September 2016,~~ 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, including our various routes to market through Dell, 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.

~~Three~~ Additionally, the economic downturn caused by the COVID-19 pandemic could threaten the financial health of some of our channel partners and adversely impact their ability to conduct sales activities and provide support for our customers.

One of our distributors ~~each~~ accounted for 10% or more of our consolidated revenue during the ~~nine~~three months ended ~~November 3, 2017.~~May 1, 2020. 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 rely~~Additionally, sales via our various route-to-market relationships with Dell accounted for 32% of our consolidated revenue during the three months ended May 1, 2020. Such routes to market include Dell selling joint solutions as an original equipment manufacturer (“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. 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 ~~third-party providers for data center space and colocation services.~~

~~Our SaaS offerings rely upon third-party providers~~our operating results until such time as we arrange to ~~supply data center space, equipment maintenance and other colocation services. Although we have entered into various agreements for~~replace these distribution services with the ~~lease~~services 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 lossesexisting 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.new distributors.

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.

~~SaaS offerings, which involve various risks, constitute an important part of our business.~~

~~As we continue to develop~~Non-compliance or perceived non-compliance with existing 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~~evolving international 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~~domestic 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~~protection laws, regulations and adapting our go-to-market efforts. The expansion of our SaaS and related cloud offerings will also require 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.

~~Improper disclosure and use of personal data~~standards could result in liability and adversely impact our business.

Our business is subject to ~~a wide variety of laws~~regulation by various federal, state and ~~regulations regarding~~international governmental agencies responsible for monitoring and enforcing privacy and data protection ~~of personal data. Federal, state~~laws. The regulatory framework for privacy issues worldwide is rapidly evolving, as many new laws, regulations and ~~foreign governments and agencies have adopted or are considering adopting laws and regulations~~standards regarding the collection, ~~storage,~~location, use and disclosure of ~~this information. We collect contact~~personal information are being adopted, and ~~other~~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 ~~or identifying information from our customers, and our customers increasingly use our services to store and process~~data; the California Consumer Privacy Act, which came 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 ~~regulated data, including protected health information subject~~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 ~~stringent data privacy laws. In the course of providing~~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 ~~compensation and benefits, we also maintain~~ personal data, as U.S. and international regulatory frameworks evolve. Ongoing compliance efforts may increase the cost and complexity of our ~~employees~~business relationships and ~~share that information with third party payroll~~the delivery of our products and ~~benefits providers. Our hybrid cloud computing service offerings, pursuant to which we offer hybrid cloud~~ services and ~~enable third-party service providers~~may negatively impact our business, our ability to ~~offer hybrid cloud services built on~~run promotions and effectively market our ~~technology, expose us to particularly significant risks. We rely on~~offerings, and the ~~contractual representations of these third parties that they do not violate any applicable privacy laws~~demand for our products and ~~regulations or their own privacy policies.~~services.

Any failure or perceived failure by us or our business partners to comply with ~~posted privacy policies, other~~such federal, state or international ~~privacy-related~~privacy or data protection laws and regulations, or the privacy commitments contained in our contracts ~~could result in proceedings against us by governmental entities~~ or ~~others and significant fines, which could~~the privacy policies we have ~~a material adverse effect~~posted on our business and operating results and harm our reputation. Further, any systems failure, unauthorized access or other compromise of our security that results in the release of our customers’ or employees’ datawebsite could ~~(i)~~ subject us to ~~substantial damage claims, (ii) expose us~~investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal liability, penalties or injunctions. For example, failure to costly regulatory remediation, (iii) harm our reputation and brand, and (iv) disrupt our business activities. The application of U.S. and international data privacy laws and regulations to cloud computing vendors is evolving and uncertain, and our existing contractual provisions may prove to be inadequate to protect us from claims for data loss or regulatory noncompliance made against cloud computing providerscomply with ~~whom we may partner. Additionally, privacy laws and regulations could negatively affect demand for our services, thereby reducing our revenue.~~

~~The European Union data protection law,~~ the ~~General Data Protection Regulation (“GDPR”), which will become effective in May 2018, is wide-ranging in scope. In order to adapt to these new~~EU’s GDPR requirements we are investing resources necessary to enhance our policies and controls across our business units and services relating to how we collect and use personal data relating to customers, employees and vendors. Additionally, we expect that the international transfer of personal data will present ongoing compliance challenges and complicate our business transactions as we negotiate and implement suitable arrangements with international customers and international and domestic vendors. Failure to comply may lead to fines of up to

~~€20~~ €20 million or ~~up to~~ 4% of the annual global revenues of the infringer, whichever is greater. EUAdditionally, as a technology provider, our customers expect that we can demonstrate compliance with current data privacy and data protection laws and ~~their interpretations continue~~regulations, and our inability or perceived inability to ~~develop,~~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 inconsistent from jurisdiction to jurisdiction, which may further impact our information processing activities. Further, laws such as the EU’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes,harmed, we could incur significant costs, and ~~the tracking of individuals’ online activities. In addition, countries outside the EU are considering or have passed legislation that requires local storage~~financial and ~~processing of data, which~~operating results could increase the cost and complexity of delivering our services. Our current arrangements for the transfer of personal data will need to continue to adapt to future judicial decisions and regulatory activity as laws on privacy and the protection of personal data continue to evolve in the countries in which we do business.be materially adversely affected.

If we fail to comply with our customer contracts or government contracting regulations, our business could be adversely affected.

Contracts, including contracts entered into by companies we acquire, 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 US LLC. 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;~~

~~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;

~~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, ~~of other companies,~~ which could result in an impairment of goodwill or intangibles. As of ~~November 3, 2017,~~May 1, 2020, goodwill and amortizable intangible assets were ~~$4,271 million~~$9.4 billion and ~~$443 million,~~$1.1 billion, 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 February 2017~~during the first quarter of fiscal 2020 we implemented a ~~change~~new lease accounting software in ~~our fiscal calendar, which required us~~order to ~~make adjustments~~facilitate the preparation of financial information related to ~~our critical business processes and data systems. In addition, in connection with our~~the adoption of ~~ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), we plan to implement new revenue~~ accounting software, utilizing internal and third party resources. Delays in adapting our information systems to address new business models could limit the success or result in the failure of such initiatives and impair the effectiveness of our internal controls. Even if we do not encounter these adverse effects, the implementation of these enhancements may be much more costly than we anticipated. If we are unable to successfully implement the information systems enhancements as planned, our operating results could be negatively impacted.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 ~~(the “IRS”~~(“IRS”)~~. All U.S. federal income tax matters have been concluded~~ has started its examination of fiscal years 2015 through 2019 for ~~years through 2011, except for any matters under appeal.~~the Dell consolidated group, which VMware was part of beginning in Dell’s fiscal year 2017. 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 may assess us with additional taxes. In addition, regulatory guidance is still forthcoming with respect to the 2017 Tax Cuts and Jobs Act (“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.

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~~or tax deficiencies within the income tax provision or benefit in the period in which they occur, the impact of accounting for business combinations, our acquisition of Pivotal, which was accounted for as a common control transaction, shifts in the amount of earnings in the ~~United States~~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 or benefits and accruals.

Our effective tax rate in the future will depend upon the proportion of ~~taxation~~our income before provision for income taxes earned in ~~foreign~~the U.S. and in jurisdictions iswith a tax rate lower than ~~our~~the U.S. ~~tax~~statutory rate. Our ~~international income is~~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 ~~impacted~~significantly affected by the composition of our earnings in the U.S. and ~~foreign~~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. ~~Prior to this date,~~In addition, we will be impacted by changes in tax laws in Bermuda and may be impacted by changes in other jurisdictions in 2019 and through 2021. 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~~multinational companies. However, due to the acquisition of EMC Corporation (“EMC”), VMware’s parent company, by Dell ~~Acquisition,~~effective September 7, 2016 (the “Dell Acquisition”), we could be subject to higher tax obligations in the event we executed similar structural changes.

The U.S. House of Representatives (the “House”) and the U.S. Senate (the “Senate”) have each passed versions of legislation that would significantly change the U.S. taxation of multinational businesses, such as VMware. Although the House and Senate versions differ in certain respects, each includes provisions that would, if enacted, reduce U.S. corporate tax rates, change how U.S. multinational corporations are taxed on international earnings, immediately impose tax on our current foreign cash holdings, limit certain deductions for executive compensation and place certain limitations on interest deductions andAny other ~~tax benefits. Any~~ significant ~~change~~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. The Organisation for Economic Cooperation and Development issued guidelines and proposals during October 2015 that may change how our tax obligations are determined in many of the countries in which we do business. These changes could adversely affect our effective tax rate or result in higher cash tax liabilities.

~~Catastrophic~~Natural disasters, catastrophic events or geo-political conditions could disrupt our business.

Our worldwide operations are dependent on our network infrastructure, internal technology systems and website. Significant portions of our intellectual property and personnel, including our corporate headquarters, are located in the San Francisco Bay Area, a region known for seismic activity. We also have operations in various domestic and international locations that expose us to additional diverse risks. A significant natural disaster, such as an earthquake, fire, flood or other act of God, or pandemics, such as the recent outbreak of COVID-19, 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, or pandemics, such as the recent outbreak of COVID-19, or other unanticipated catastrophes, 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 condensed consolidated financial statements in accordance with accounting principles generally accepted in the ~~United States.~~U.S. These principles are subject to interpretation by the ~~SEC~~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 May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). We plan to adopt Topic 606 using the full retrospective transition method when it becomes effective for us in the first fiscal quarter of 2019, under the Company’s new fiscal calendar. Currently, we defer all license revenue related to the sale of perpetual licenses in the event certain revenue recognition criteria are not met. This would include transactions that offer undelivered future products including emerging products that are offered as part of product promotions where vendor-specific objective evidence of fair value has not been established. However, under Topic 606, we would generally expect that substantially all license revenue related to sale of perpetual licenses will be recognized upon delivery, including arrangements that also include offers of future products, such as emerging products that are offered as part of product promotions. Topic 606 is also expected to impact the timing and recognition of costs to obtain contracts with customers, such as commissions. Under the new standard, incremental costs to obtain contracts with customers are deferred and recognized over the expected period of benefit. As a result, we expect deferred commission costs to increase.

~~We are continuing to evaluate the effect that Topic 606 will have on our financial statements and related disclosures, and preliminary assessments are subject to change.~~

Additionally, during October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers or Assets Other Than Inventory (Topic 740), which changes the timing of recognition of the income tax consequences of intra-entity asset transfers. The updated standard is effective for annual and interim periods beginning after December 15, 2017 and could have a material impact on the consolidated financial statements due to the changed treatment of the income tax consequences of business combinations and asset transfers with our international entities.

Risks Related to Our Relationship with Dell

Our ~~stock price fluctuated significantly following the announcement of the Dell Acquisition, and our future~~ relationship with Dell may adversely impact our business and stock price.

As of May 1, 2020, Dell beneficially owned 30,678,605 shares of our Class A common stock and all 307,221,836 shares of our Class B common stock, representing 80.6% 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 ~~in the future.~~to fluctuate.

For example, during 2018, Dell ~~acquired EMC on September 7, 2016. In connection~~announced that it was reviewing its strategic opportunities, including a possible business combination with ~~the Dell Acquisition, Dell issued~~us, a ~~tracking stock~~review that led to ~~EMC shareholders,~~Dell’s exchange of its Class V common stock ~~that is intended~~designed to ~~reflect~~track our ~~economic~~financial performance ~~as partial consideration to the EMC shareholders. The~~for its Class VC common stock ~~tracks~~and our payment of a special cash dividend totaling $11.0 billion. Throughout that year, the ~~performance of an approximately 50% economic interest in our business.~~

~~Our~~ stock price ~~fluctuated significantly following~~of our Class A common stock experienced periods of significant volatility related to public speculation regarding the ~~announcement~~outcome of Dell’s strategic review and the likelihood of its success. Additionally, speculation regarding how our relationship with Dell ~~Acquisition.~~ might be affected by Dell’s status as a publicly traded company or additional strategic transactions involving Dell, such as our acquisition of Pivotal in December 2019, 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 ~~future~~ 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 ~~and the other matters over which EMC formerly had control,~~ 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 ~~the completion of the~~our relationship with Dell ~~Acquisition~~ could adversely affect our ~~relationship~~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. During the three months ended May 1, 2020, revenue from Dell, including purchases of products and services directly from us, as well as through our channel partners, accounted for 32% 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 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.

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.

~~We anticipate certain synergies~~Synergies and benefits that we expect from ~~the~~our relationship with Dell ~~Acquisition that~~ may not be realized.

~~The Class V common stock issued by~~ Dell on September 7, 2016, while not a VMware issued security, increases the supply of publicly traded securities that track VMware’s economic performance and may create the perception that the Class V common stock dilutes the holdings of our public stockholders, both of which may put downward pressure on our stock price. While the price of Class V common stock has initially been relatively stable, it may be volatile from time-to-time as a consistent trading market in Class V common stock is ~~established. Any volatility in the market for Class V common stock could contribute to volatility in the price of VMware Class A common stock.~~

~~With the closing of the Dell Acquisition, Dell has become more~~ highly leveraged and ~~may be required to commit~~commits a substantial portion of its cash flows to servicing its indebtedness. ~~While Dell has publicly stated that it plans to leave VMware free to use its cash to invest in the VMware business,~~ 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, ~~the trading price of the Class V common stock issued by Dell would be adversely affected, which could negatively impact the price of our Class A common stock, and~~ 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 ~~November 3, 2017,~~May 1, 2020, Dell controlled ~~30,679,000 shares of our Class A common stock and all 300,000,000 shares of our Class B common stock, representing 81.9%~~80.6% of the total outstanding shares of common stock, ~~or 97.6%~~including all of our outstanding Class B common stock, representing 97.4% of the voting power of our total outstanding common ~~stock held by EMC.~~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 ~~Internal Revenue Service.~~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. ~~Dell is entitled to exercise the voting control and contractual rights of EMC, and may do so in a manner that could vary significantly from EMC’s historic practice.~~ 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 ~~November 3, 2017,~~May 1, 2020, Dell controlled ~~81.9%~~80.6% 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 ~~is prohibited through September 7,~~on July 1, 2018, ~~under its charter from purchasing~~until the ten-year anniversary of the agreement, Dell may not purchase or otherwise ~~acquiring~~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,~~For example, in ~~2013~~December 2019, we ~~contributed technology~~acquired Pivotal, a then majority owned subsidiary of Dell and ~~transferred employees to Pivotal Software, Inc. (“Pivotal”). We continue to hold~~a company in which we held a significant ownership ~~interest~~interest. Additionally, in ~~Pivotal after contributing $20 million~~December 2019, personnel in ~~cash~~the Dell Technologies Consulting group who provide professional services for VMware product offerings to ~~Pivotal during 2016, in exchange for additional preferred equity interests in Pivotal.~~Dell customers transferred to VMware’s professional services group.

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, if Pivotal requires additional funding, we may be asked to contribute capital resources to Pivotal or accept dilution in our ownership interest, and we may be unable to realize any value from the technology and resources that we contributed to Pivotal.

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~~hyperconverged 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~~that may otherwise be available to us.

The realignment of our fiscal calendar to coincide with Dell’s and Dell’s reporting on our financial results may make it more difficult to compare our year-over-year performance and identify changes in business trends and conditions.

Dell provides segment reporting on VMware in its public reports on financial results. However, prior to February 2017, the fiscal calendars for Dell and VMware did not align. VMware reported on a calendar year basis through December 31, 2016, whereas Dell reports on a 52- or 53-week fiscal year basis ending on the Friday nearest to January 31 of each year. Effective January 1, 2017, our fiscal calendar changed to align with Dell’s.

The period beginning on January 1, 2017 and ending on February 3, 2017 is being reported as a transition period (the “Transition Period”). Accordingly, our first full fiscal year under our revised fiscal calendar began on February 4, 2017 and will end on February 2, 2018.

We are including certain unaudited condensed consolidated financial statements for the Transition Period in this Form 10-Q and will include audited financial statements for the Transition Period in the Form 10-K for the fiscal year ended February 2, 2018. Following the change in our fiscal calendar and for the first fiscal year, we will compare results from each fiscal period under our new fiscal calendar to the corresponding period under our prior calendar. For example, this Form 10-Q compares the results of the first, second and third quarter of our 2018 fiscal year running from February 4, 2017 through November 3, 2017 to the results of the first, second and third quarter of our 2016 fiscal year which ran from January 1, 2016 through September 30, 2016, and in accordance with generally accepted accounting practices, we will not denote any full fiscal quarters or a fiscal year as a “2017” fiscal period.

Our fiscal year transition may also distort the impact of seasonal factors that we have observed in our business, such as the end of fiscal period budget expenditures by our customers and the timing of holiday and vacation periods on our quarterly results. Consequently, it may be difficult to accurately determine the extent to which year-over-year changes in our financial results represent actual changes to business conditions and trends or are instead artifacts of our fiscal period transition.

Additionally, the financial results for Dell’s VMware business segment may differ from the financial results reported by us due to the impact of intercompany transactions, purchase accounting, and reporting practices. These differences in the reporting of VMware’s financial results by us and Dell could result in volatility and fluctuations in the price of our Class A common stock.

Further, the process of implementing a fiscal calendar transition required us to make adjustments to many of the critical business processes and data systems that our management and personnel rely upon to conduct our business operations and coordinate our worldwide activities. Although we believe that we have successfully managed the transition of our processes and systems to the new fiscal calendar, there can be no assurance that errors and failures will not occur that could impact comparisons of our year-over-year results.

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 ~~with the closing of~~since the Dell Acquisition, we ~~are now~~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 ~~standalone~~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. In April 2019, VMware, Dell and EMC entered into a letter agreement that governs our portion of the one-time transition tax imposed by the 2017 Tax Act on accumulated earnings of foreign subsidiaries.

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.

During the fourth quarter of fiscal 2020, we completed the acquisition of Pivotal. Pivotal will continue to file 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. Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for the tax benefits derived from the inclusion of its losses in certain Dell U.S. federal and state group returns. This has reduced the amount of benefit or expense received by Pivotal since the IPO to the amount of benefit or expenses Dell realizes from Pivotal’s inclusion on unitary state tax returns.

In December 2019, VMware amended the tax sharing agreement with Dell in connection with, and effective as of, the Pivotal acquisition. The tax sharing agreement with Dell, as amended and subject to certain exceptions, generally limits VMware’s maximum annual tax liability to Dell to the amount VMware would owe on a separate tax return basis.

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.

~~Our CEO, our CFO and some~~Some of our directors have potential conflicts of interest with Dell.

~~Our~~The Chairman of our Board of Directors, Michael Dell, is also Chairman and CEO ~~our CFO~~of Dell and ~~some~~is a significant stockholder of Dell, and one of our directors, ~~received~~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 ~~Class V~~ common ~~stock in partial consideration for their EMC common stock when the Dell Acquisition closed. In addition, some of our directors are executive officers or directors of Dell, and~~stock. Dell, through its ~~control of EMC, which is the sole holder of~~controlling voting interest in our ~~Class B~~outstanding common stock, is entitled to elect 8 of our 9 ~~directors.~~directors and possesses sufficient voting control to elect the remaining director. Ownership of Dell ~~Class V~~ 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 ~~or officers~~ 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 ~~officers or~~ 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, ~~persons who might otherwise accept our invitation~~it may become difficult for us to ~~join our board of directors may decline.~~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 condensed consolidated statements of income. Additionally, we engage with Dell in ~~intercompany~~related party 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 the three ~~and nine~~ months ended ~~November 3, 2017,~~May 1, 2020, we recognized revenue of ~~$337~~$882 million, ~~and $907 million, respectively,~~ and as of ~~November 3, 2017, $930 million~~May 1, 2020, $4.0 billion 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 I, Item 2 and Note BC to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly ~~report~~Report on Form 10-Q.

Risks Related to Owning Our Class A Common Stock

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 to the factors discussed in this Risk Factors section and elsewhere in this report. The trading market for Dell Class V common stock that was issued upon the closing of the Dell Acquisition that is expected to track the performance of VMware, as well as continuing volatility in technology company share prices, could also lead to volatility in our stock price.

Dell, which beneficially owned ~~81.9%~~80.6% of our outstanding stock as of ~~November 3, 2017,~~May 1, 2020, is not restricted from selling its shares and is entitled to certain registration rights. If a significant number of 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 general 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 volatility in our stock compared to that of other companies with a market capitalization similar to ours. It is also uncertain what impact the trading of Dell Class V common stock, which represents approximately 50% of the economic interest in us, will have on the volatility and the liquidity of our Class A common stock and how the Dell Class V common stock will trade in relation to our Class A common stock over time. In addition, 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 ~~or who cover the Dell Class V common stock~~ 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. 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;

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 provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock.


~~ITEM 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Public Offering of Common Stock

None.

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 may 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.

Purchases of ~~equity securities~~Class A common stock during the three months ended ~~November 3, 2017:~~May 1, 2020 were as follows:

Total Number of Shares Purchased⁽¹⁾

Average Price Paid Per Share⁽²⁾

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs ⁽³⁾
August 5 – September 1, 2017 623,700
104.55
623,700
1,834,792,596
September 2 – September 29, 2017 4,944,895
108.65
4,944,895
1,297,553,604
September 30 – November 3, 2017 2,202,741
114.54
2,202,741
1,045,244,983
7,771,336
$ 109.99
7,771,336
1,045,244,983



	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⁾
February 1 – February 28, 2020	—	$	—	—	$	1,000,397,897
February 29 – March 27, 2020	1,390,608	115.76		1,390,608	839,417,826
March 28 – May 1, 2020	149,624	133.65		149,624	819,420,325
	1,540,232	$	117.50	1,540,232	819,420,325

⁽¹⁾

During January 2017, VMware’s board of directors authorized the repurchase of up to $1,200 million of VMware’s Class A common stock through the end of fiscal 2018. During August 2017, VMware’s board of directors authorized the repurchase of up to an additional $1,000 million of Class A common stock through August 31, 2018. The authorization is in addition to VMware’s $1,200 million stock repurchase program authorized in January 2017. On August 23, 2017, VMware entered into a stock purchase commitment with Dell to purchase $300 million of VMware Class A common stock. During the third quarter of fiscal 2018, VMware paid Dell $300 million in exchange for 2.7 million shares. The aggregate number of shares purchased was determined based upon the volume-weighted average price during a defined period, less an agreed upon discount.


⁽²⁾	The average price paid per share excludes commissions.


⁽³⁾ ⁽²⁾ Represents the amounts remaining from VMware’s $1.5 billion stock repurchase authorization announced on May 29, 2019 that expires at the end of fiscal 2021. Amounts remaining exclude commissions.	~~Represents the amounts remaining in the VMware stock repurchase authorizations.~~


ITEM 6.	EXHIBITS

~~See~~The Company hereby files, furnishes or incorporates by reference the ~~Exhibit Index following the signature page of this Quarterly Report on Form 10-Q for a list of exhibits.~~exhibits listed below:



		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date

4.6	Fourth Supplemental Indenture, by and between VMware and The Bank of New York Mellon Trust Company, N.A., as trustee, dated April 7, 2020	8-K	001-33622	4.2	4/7/20
4.7	Fifth Supplemental Indenture, by and between VMware and The Bank of New York Mellon Trust Company, N.A., as trustee, dated April 7, 2020	8-K	001-33622	4.3	4/7/20
4.8	Sixth Supplemental Indenture, by and between VMware and The Bank of New York Mellon Trust Company, N.A., as trustee, dated April 7, 2020	8-K	001-33622	4.4	4/7/20
10.30*⁺	Letter Agreement between VMware, Inc. and Jean-Pierre Brulard effective as of February 1, 2020
31.1*	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1ǂ	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2ǂ	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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

SIGNATURE

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:	~~December 11, 2017~~June 8, 2020	By:	/s/ ~~Kevan Krysler~~J. Andrew Munk
			~~Kevan Krysler~~J. Andrew Munk ~~Senior Vice President,~~ Chief Accounting Officer (Principal Accounting Officer)

~~EXHIBIT INDEX~~

Incorporated by Reference
Exhibit
Number
Exhibit Description Form File No. Exhibit Filing Date

3.1

Amended and Restated Certificate of Incorporation
10-Q 001-33622 3.1 6/9/17
3.2

Amended and Restated Bylaws
8-K 001-33622 3.1 2/23/17
4.2

Indenture, by and between VMware and The Bank of New York Mellon Trust Company, N.A., as trustee, dated August 21, 2017
8-K 001-33622 4.1 8/21/17
4.3

First Supplemental Indenture, by and between VMware and The Bank of New York Mellon Trust Company, N.A., as trustee, dated August 21, 2017
8-K 001-33622 4.2 8/21/17
4.4

Second Supplemental Indenture, by and between VMware and The Bank of New York Mellon Trust Company, N.A., as trustee, dated August 21, 2017
8-K 001-33622 4.3 8/21/17
4.5

Third Supplemental Indenture, by and between VMware and The Bank of New York Mellon Trust Company, N.A., as trustee, dated August 21, 2017
8-K 001-33622 4.4 8/21/17
10.36

Purchase Commitment Supplement No. 2, dated as of August 23, 2017, by and among Dell Technologies Inc., EMC Equity Assets LLC and VMware, Inc.
8-K 001-33622 99.1 8/24/17
31.1*

Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1ǂ

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2ǂ

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

* Filed herewith

~~ǂ Furnished herewith~~



	November 3, 2017
	Weighted-Average Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	6.5	$	663	$	(438	)	$	225
Leasehold interest	34.9	149		(27		)	122
Customer relationships and customer lists	8.2	135		(75		)	60
Trademarks and tradenames	8.5	63		(29		)	34
Other	5.7	5		(3		)	2
Total definite-lived intangible assets		$	1,015	$	(572	)	$	443



	December 31, 2016
	Weighted-Average Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	6.6	$	641	$	(358	)	$	283
Leasehold interest	34.9	149		(24		)	125
Customer relationships and customer lists	8.3	132		(62		)	70
Trademarks and tradenames	8.7	61		(23		)	38
Other	5.7	4		(3		)	1
Total definite-lived intangible assets		$	987	$	(470	)	$	517



	Transition Period February 3, 2017
	Weighted-Average Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	6.5	$	641	$	(366	)	$	275
Leasehold interest	34.9	149		(24		)	125
Customer relationships and customer lists	8.3	132		(64		)	68
Trademarks and tradenames	8.7	61		(23		)	38
Other	5.7	4		(3		)	1
Total definite-lived intangible assets		$	987	$	(480	)	$	507



Remainder of 2018	$	34
2019	124
2020	100
2021	46
2022	31
Thereafter	108
Total	$	443



Balance, February 3, 2017	$	4,032
Increase in goodwill related to business combinations	239
Balance, November 3, 2017	$	4,271



	Nine Months Ended September 30, 2016
	Balance as of January 1, 2016		Realignment		Utilization			Balance as of September 30, 2016
Severance-related costs	$	3	$	49	$	(51	)	$	1
Costs to exit facilities	—		3		(1		)	2
Total	$	3	$	52	$	(52	)	$	3



	November 3, 2017
	Cost or Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Fair Value
Cash	$	415	$	—	$	—		$	415
Cash equivalents:
Money-market funds	$	5,503	$	—	$	—		$	5,503
U.S. Government and agency obligations	5		—		—			5
U.S. and foreign corporate debt securities	89		—		—			89
Total cash equivalents	$	5,597	$	—	$	—		$	5,597
Short-term investments:
U.S. Government and agency obligations	$	1,000	$	—	$	(4	)	$	996
U.S. and foreign corporate debt securities	4,347		5		(8		)	4,344
Foreign governments and multi-national agency obligations	95		—		—			95
Mortgage-backed securities	134		—		(1		)	133
Marketable available-for-sale equity securities	15		17		—			32
Total short-term investments	$	5,591	$	22	$	(13	)	$	5,600



	Amortized Cost Basis		Aggregate Fair Value
Due within one year	$	1,978	$	1,976
Due after 1 year through 5 years	3,406		3,400
Due after 5 years through 10 years	98		98
Due after 10 years	94		94
Total fixed income securities	$	5,576	$	5,568



	Number of Units		Weighted-Average Grant Date Fair Value (per unit)
Outstanding, January 1, 2017	20,866		$	67.54
Vested	(256	)	77.07
Forfeited	(159	)	68.11
Outstanding, February 3, 2017	20,451		67.41
Granted	7,000		90.45
Vested	(7,603	)	67.39
Forfeited	(1,471	)	71.80
Outstanding, November 3, 2017	18,377		75.93



	Transition Period			Comparable Period
	January 1 to			January 1 to
	February 3,			January 31,
	2017			2016
Total revenue	$	496		$	470
Operating income (loss)	(41		)	22
Income tax provision (benefit)	(26		)	4
Net income (loss)	(8		)	22

Net income (loss) per weighted-average share, basic for Classes A and B	$	(0.02	)	$	0.05
Net income (loss) per weighted-average share, diluted for Classes A and B	$	(0.02	)	$	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



	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share⁽²⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs ⁽³⁾
August 5 – September 1, 2017	623,700	104.55		623,700	1,834,792,596
September 2 – September 29, 2017	4,944,895	108.65		4,944,895	1,297,553,604
September 30 – November 3, 2017	2,202,741	114.54		2,202,741	1,045,244,983
	7,771,336	$	109.99	7,771,336	1,045,244,983