Overview and Basis of Presentation | 12 Months Ended |
Dec. 31, 2013 |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | ' |
Overview And Basis Of Presentation | ' |
Overview and Basis of Presentation |
Company and Background |
VMware, Inc. (“VMware” or the “Company”) is the leader in virtualization infrastructure solutions utilized by organizations to help them transform the way they build, deliver and consume information technology (“IT”) resources. VMware’s virtualization infrastructure solutions, which include a suite of products designed to deliver a software-defined data center, run on industry-standard desktop computers and servers and support a wide range of operating system and application environments, as well as networking and storage infrastructures. |
Basis of Presentation |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for annual financial reporting. |
VMware was incorporated as a Delaware corporation in 1998, was acquired by EMC Corporation (“EMC”) in 2004 and conducted its initial public offering of VMware’s Class A common stock in August 2007. As of December 31, 2013, EMC held approximately 79.7% of VMware’s outstanding common stock and 97.2% of the combined voting power of VMware’s outstanding common stock, including 43 million shares of VMware’s Class A common stock and all of VMware’s Class B common stock. VMware is a majority-owned and controlled subsidiary of EMC, and its results of operations and financial position are consolidated with EMC’s financial statements. |
Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the amounts recorded for VMware’s intercompany transactions with EMC and Pivotal Software, Inc. (“Pivotal”, previously known as “GoPivotal, Inc.”) may not be considered arm’s length with an unrelated third party. Therefore, the financial statements included herein may not necessarily reflect the financial position, results of operations 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 financial position, results of operations and cash flows will be in the future if and when VMware contracts at arm’s length with unrelated third parties for the services the Company receives from and provides to EMC and Pivotal. |
Principles of Consolidation |
The consolidated financial statements include the accounts of VMware and its subsidiaries after elimination of intercompany transactions and account balances between VMware and its subsidiaries. All intercompany transactions with EMC and Pivotal in the consolidated statements of cash flows will be settled in cash, and changes in the current intercompany balances are presented as a component of cash flows from operating activities. |
Reclassification |
Certain prior period financial statements have been reclassified to conform to current period presentation. Deferred rent of $30 million was reclassified from accrued expenses and other to other liabilities in the consolidated balance sheet as of December 31, 2012 to conform to current-year presentation. |
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 revenues 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 rebates, 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. |
Revenue Recognition |
VMware derives revenues primarily from licensing software under perpetual license, related software maintenance and from training, technical support and consulting services. VMware recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable. |
License Revenues |
VMware licenses most of its software through its channel of distributors, resellers, system vendors, systems integrators and through its direct sales force. VMware recognizes revenues from the sale of its software licenses upon shipment provided all other revenue recognition criteria have been met. When perpetual software license arrangement is offered with new products that become available on a when and if available basis, revenue associated with these arrangements are recognized ratably over the subscription period. |
For software sold by system vendors that is bundled with their hardware, unless the Company has a separate license agreement which governs the transaction, revenue is recognized in arrears upon the receipt of royalty reports. |
VMware’s return policy only allows product returns for a refund in very limited circumstances. VMware estimates future product returns at the time of sale based on historical return rates. Returns have not been material to date. |
Rebates |
Rebates are offered to certain channel partners. When rebates are based on a set percentage of actual sales, rebates are recognized as a reduction of revenues as the underlying revenue is recognized. When rebates are earned upon achievement of a cumulative level of sales, rebates are recognized as a reduction of revenues proportionally for each sale that is required to achieve the target. |
Marketing development funds are also offered to certain channel partners. The obligation for marketing development funds is based upon the maximum potential liability and is also recognized as a reduction of revenues concurrent with the recognition of the underlying revenue. The difference between the maximum potential liability recognized and the actual amount paid out has not been material to date. |
Services Revenues |
Services revenues generally consist of software maintenance, training, technical support, and consulting services. Software maintenance and technical support offerings entitle customers to receive major and minor product upgrades on a when and if available basis and technical support. Revenues relating to software maintenance and technical support offerings are generally recognized ratably over the contract period, which typically ranges from one to five years. |
Professional services include design, implementation and training. Professional services are not considered essential to the functionality of VMware’s products as these services do not alter the product capabilities and may be performed by customers or other vendors. Revenues for professional services engagements performed for a fixed fee, for which VMware is able to make reasonably dependable estimates of progress toward completion, are recognized on a proportional performance basis. Revenue for professional services engagements billed on a time and materials basis are recognized as the hours are incurred. Revenues on all other professional services engagements are recognized upon completion. |
Multiple-Element Arrangements |
VMware enters into software-related multiple element revenue arrangements in which a customer may purchase a combination of software, maintenance and technical support, training, and consulting services. If a product or service included in a software-related multiple element arrangements has not been delivered, and is not considered essential to the functionality of the delivered products or services, fair value of each undelivered product and/or service using vendor-specific objective evidence (“VSOE”) must be determined. VSOE is used to allocate a portion of the price to the undelivered products and/or services and the residual method is used to allocate the remaining portion to the delivered products and services. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered products or services, or until all elements of the arrangement have been delivered. However, if the only undelivered element is software maintenance and technical support, the entire arrangement fee is recognized ratably over the performance period. Changes in assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of revenue that VMware reports in a particular period. |
VSOE of fair value for an undelivered element is based on historical stand-alone sales to third parties. In determining VSOE of fair value, VMware requires that the selling prices for a product or service fall within a reasonable pricing range. VMware established VSOE for its software maintenance and technical support services, consulting services and training. |
In the event VMware publicly announce specific features or functionalities, entitlements or the release number of an upgrade that has not been made available, and customers will receive that upgrade as part of a current software maintenance contract, a specified upgrade is deemed created. As a result of the specified upgrade, revenues are deferred on purchases made after the announcement date until delivery of the upgrade for those purchases that include the current version of the product subject to the announcement. |
Multiple element arrangements may be bundled with a commitment to deliver a product that has not yet been made available. Revenue specific to these arrangements is deferred until all product obligations have been fulfilled. In addition, revenue specific to arrangements that include subscription software products and professional services are deferred until the professional service obligations have been fulfilled. |
For multiple-element arrangements that contain software and non-software elements such as VMware's software as a service subscription offerings, VMware allocates revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. The relative selling price for each deliverable is determined using VSOE of selling price, if it exists, or third-party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, VMware's best estimate of selling price (“BESP”) is used for that deliverable. Once value is allocated to software or software-related elements as a group, revenue is then recognized when the relevant revenue recognition criteria are met. |
The objective of BESP is to determine the price at which VMware would transact a sale if the product or service were sold on a stand-alone basis. VMware determines BESP by considering its overall pricing objectives and market conditions. At this time, VMware uses BESP to determine the relative selling price of its license elements and software as a service elements based upon rates charged in both multi-element and stand-alone arrangements. |
Unearned revenues substantially consist of payments received in advance of revenue recognition for products and services described above. See Note J for further information. |
Foreign Currency Translation |
The U.S. Dollar is the functional currency of VMware’s foreign subsidiaries. Gains and losses from foreign currency transactions are included in other income (expense), net and were not material on a net basis in any period presented. |
Cash and Cash Equivalents, Short-Term Investments, and Restricted Cash |
VMware invests primarily in money market funds, highly liquid debt instruments of the U.S. government and its agencies, U.S. municipal obligations, and U.S. and foreign corporate debt securities. All highly liquid investments with maturities of 90 days or less from date of purchase are classified as cash equivalents and all highly liquid investments with maturities of greater than 90 days from date of purchase as short-term investments. Short-term investments are classified as available-for-sale. VMware may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions and strategic investments. Consequently, VMware may or may not hold securities with stated maturities greater than twelve months until maturity. |
VMware carries its fixed income investments, as well as its equity investments in public companies that have readily determinable fair values, at fair value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive income, a component of stockholders’ equity. Realized gains or losses are included in the consolidated statements of income. Gains and losses on the sale of fixed income securities issued by the same issuer and of the same type are determined using the first-in first-out (“FIFO”) method. When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included in the consolidated statements of income. |
Cash balances that are restricted pursuant to the terms of various agreements are classified as restricted cash and included in other current and other long-term assets in the accompanying consolidated balance sheets. The amount of restricted cash was not material in any period presented. |
As of December 31, 2013, VMware's total cash, cash equivalents and short-term investments were $6,175 million, of which $4,146 million was held outside the U.S. |
Allowance for Doubtful Accounts |
VMware maintains an allowance for doubtful accounts for estimated losses on uncollectible accounts receivable. The allowance for doubtful accounts considers such factors as creditworthiness of VMware’s customers, historical experience, the age of the receivable and current market and economic conditions. |
Property and Equipment, Net |
Property and equipment, net are recorded at cost. Depreciation commences upon placing the asset in service and is recognized on a straight-line basis over the estimated useful lives of the assets, as follows: |
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Buildings | | Term of underlying land lease |
Land improvements | | 15 years |
Furniture and fixtures | | 5 years |
Equipment and software | | 2 years up to 5 years |
Leasehold improvements | | Lease term, not to exceed 20 years |
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized in the consolidated statements of income. Repair and maintenance costs that do not extend the economic life of the underlying assets are expensed as incurred. |
Internal-Use Software Development Costs |
Costs associated with internal-use software systems during the application development stage are capitalized. Capitalization of costs begins when the preliminary project stage is completed, management has committed to funding the project, and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization ceases at the point in which the project is substantially complete and is ready for its intended purpose. The capitalized amounts are included in property and equipment, net on the consolidated balance sheets. |
Research and Development and Capitalized Software Development Costs |
Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when the product has established technological feasibility has been established and ending when the product is available for general release. |
Following the release of vSphere 5 and the comprehensive suite of cloud infrastructure technologies during the third quarter of 2011, management determined that VMware’s go-to-market strategy had changed from single solutions to product suite solutions. As a result of this change in strategy, the related increased importance of interoperability between VMware’s products, the length of time between achieving technological feasibility and general release to customers significantly decreased. During the years ended December 31, 2013 and 2012, software development costs incurred for products during the time period between reaching technological feasibility and general release were not material. Accordingly, software development costs incurred during the years ended December 31, 2013 and 2012 were expensed as incurred. |
As of December 31, 2013, all previously capitalized software development costs had been fully amortized. Unamortized software development costs as of December 31, 2012 were $34 million and were included in other assets, net on the consolidated balance sheets. |
For the year ended December 31, 2011, VMware capitalized $86 million (including $12 million of stock-based compensation) of costs incurred for the development of software products. Amortization expense from capitalized amounts was $34 million, $71 million and $85 million for the years ended December 31, 2013, 2012 and 2011, respectively. Amortization expense is included in cost of license revenues on the consolidated statements of income. |
Business Combinations |
For business combinations, VMware recognizes the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in an acquiree, which are measured based on the acquisition date fair value. Goodwill is measured as the excess of consideration transferred over the net amounts of the identifiable tangible and intangible assets acquired and the liabilities assumed at the acquisition date. |
VMware uses significant estimates and assumptions, including fair value estimates, to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the business combination date. When those estimates are provisional, VMware refines them as necessary during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which VMware may gather new information about facts and circumstances that existed as of the acquisition date to adjust the provisional amounts recognized. Measurement period adjustments are applied retrospectively, if material. All other adjustments are recorded to the consolidated statements of income. |
Businesses acquired from EMC are accounted for as a business combination between entities under common control. VMware includes the results of operations of the acquired businesses under common control, if material, in the period of acquisition as if it had occurred at the beginning of the period and also retrospectively adjusts the financial statement information presented for prior years to reflect the business as if it had been acquired at the beginning of the financial period presented. VMware recognizes the net assets under common control at EMC's carrying values as of the date of the transfer and records the difference between the carrying value and the cash consideration as an equity transaction. |
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income as the expenses are incurred. |
Purchased Intangible Assets and Goodwill |
Goodwill is evaluated for impairment during the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. VMware elected to perform a quantitative assessment of goodwill with respect to its one reporting unit. In doing so, VMware compared the enterprise fair value to the carrying amount of the reporting unit, including goodwill. VMware concluded that to date there have been no impairments of goodwill. |
Purchased intangible assets with finite lives are amortized over their estimated useful lives. During the years ended December 31, 2013, 2012 and 2011, amortization expense was $103 million, $92 million and $65 million, respectively. VMware reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. |
Derivative Instruments |
Derivative instruments and hedging activities are measured at fair value and reported as current assets and current liabilities on the consolidated balance sheets, as applicable. |
In order to manage VMware’s exposure to foreign currency fluctuations, VMware enters into foreign currency contracts to hedge a portion of VMware’s net outstanding monetary asset and liability positions. These foreign currency forward contracts are generally traded on a monthly basis, with a typical contractual term of 1 month. These forward contracts are not designated as hedging instruments under applicable accounting guidance and therefore are adjusted to fair value through other income (expense), net in the consolidated statements of income. |
Starting in the fourth quarter of 2011, VMware entered into forward contracts which it designated as cash flow hedges to manage the volatility of cash flows that relate to operating expenses denominated in certain foreign currencies. The cash flow hedges are generally traded semi-annually, have maturities of 6 months or less and are adjusted to fair value through accumulated other comprehensive income, net of tax, on the consolidated balance sheets. When the underlying expense transaction occurs, the gains or losses on the forward contract are subsequently reclassified from accumulated other comprehensive income to the related operating expense line item in the consolidated statements of income. |
The Company does not enter into speculative foreign exchange contracts for trading purposes. See Note G to the consolidated financial statements for further information. |
Advertising |
Advertising costs are expensed as incurred. Advertising expense was $27 million, $37 million and $20 million in the years ended December 31, 2013, 2012 and 2011, respectively. |
Income Taxes |
Income taxes as presented herein are calculated on a separate tax return basis, although VMware is included in the consolidated tax return of EMC. However, certain transactions that VMware and EMC are parties to, are assessed using consolidated tax return rules. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax credits are generally recognized as reductions of income tax provisions in the year in which the credits arise. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. |
VMware does not provide for a U.S. income tax liability on undistributed earnings of VMware’s foreign subsidiaries. The earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are currently indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax. If these overseas funds are needed for its operations in the U.S., VMware would be required to accrue and pay U.S. taxes on related undistributed earnings to repatriate these funds. However, VMware’s intent is to indefinitely reinvest its non-U.S. earnings in its foreign operations and VMware’s current plans do not demonstrate a need to repatriate them to fund its U.S. operations. At this time, it is not practicable to estimate the amount of tax that may be payable were VMware to repatriate these funds. |
The difference between the income taxes payable or receivable that is calculated on a separate return basis and the amount actually paid to or received from EMC pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital. See Note L to the consolidated financial statements for further information. |
Earnings Per Share |
Basic net income per share is calculated using the weighted-average number of shares of VMware’s common stock outstanding during the period. Diluted earnings per share are calculated using the weighted-average number of common shares, including the dilutive effect of equity awards as determined under the treasury stock method. VMware has two classes of common stock, Class A and Class B common stock. For purposes of calculating earnings per share, VMware uses the two-class method. As both classes share the same rights in dividends, basic and diluted earnings per share are the same for both classes. |
Concentrations of Risks |
Financial instruments, which potentially subject VMware to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash on deposit with banks may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand. VMware places cash, cash equivalents and short-term investments primarily in money market funds and fixed income securities and limits the amount of investment with any single issuer and any single financial institution. VMware holds a diversified portfolio of money market funds and fixed income securities, which primarily consist of various highly liquid debt instruments of the U.S. government and its agencies, U.S. municipal obligations, and U.S. and foreign corporate debt securities. VMware’s fixed income investment portfolio is denominated in U.S. dollars and consists of securities with various maturities. |
VMware monitors the counterparty risk for adequate diversification amongst the financial institutions holding the funds. VMware also monitors counterparty risk to financial institutions with which VMware enters into derivatives to ensure that these financial institutions are of high credit quality. |
VMware held $37 million of foreign government and agencies securities, of which $8 million was deemed sovereign debt, at December 31, 2013. These sovereign debt securities had an average credit rating of AAA and were predominantly from Canada. |
VMware provides credit to its customers, including distributors, OEMs, resellers, and end-user customers, in the normal course of business. To reduce credit risk, the Company performs periodic credit evaluations, which consider the customer’s prior payment history and demonstrated financial stability. Additionally, VMware does not recognize revenues or unearned revenues to the extent a customer’s outstanding balance exceeds its credit limit. |
As of December 31, 2013, three distributors accounted for 18%, 15% and 11% of VMware’s accounts receivable balance. As of December 31, 2012, three distributors accounted for 19%, 16% and 11% of VMware’s accounts receivable balance. |
One distributor accounted for 15% of revenues in each of the years ended December 31, 2013, 2012 and 2011, respectively, and another distributor accounted for 12%, 12% and 11% of revenues in the years ended December 31, 2013, 2012 and 2011, respectively. A third distributor accounted for 11% and 10% of revenues in the years ended December 31, 2013 and 2011, respectively. |
Accounting for Stock-Based Compensation |
The Black-Scholes option-pricing model is used to determine the fair value of VMware’s stock option awards and ESPP shares. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected term and risk-free interest rates. These assumptions reflect the Company’s best estimates, but these items involve uncertainties based on market and other conditions outside of the Company’s control. VMware restricted stock unit awards, including performance stock unit (“PSU”) awards, are valued based on the Company’s stock price on the date of grant. For those awards expected to vest, which only contain a service vesting feature, compensation cost is recognized on a straight-line basis over the awards’ requisite service periods. Liability-classified awards are recorded at fair value and are included in accrued expenses and other on the consolidated balance sheets with changes in fair value relating to the vested portion of the award recognized as stock-based compensation on the consolidated statements of income. |
PSU awards will vest if certain employee-specific or VMware-designated performance targets are achieved. If minimum performance thresholds are achieved, each PSU award will convert into VMware's Class A common stock at a defined ratio depending on the degree of achievement of the performance target designated by each individual award. If minimum performance thresholds are not achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is recognized on a straight-line basis over the PSUs' requisite service periods. The expected levels of achievement are reassessed over the requisite service periods and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted in the period of change and recorded in the statement of income and the remaining unrecognized stock-based compensation is recorded over the remaining requisite service period. |
New Accounting Pronouncement |
In February 2013, the Financial Accounting Standards Board (“FASB”) amended the accounting standards requiring companies to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. VMware adopted this accounting standard update on January 1, 2013 and presents reclassification adjustments from accumulated other comprehensive income in accordance with the requirements of the amended accounting standard in this Annual Report on Form 10-K. |