VMware Reports Third-Quarter Results

Delivers Strong Revenue and Earnings Growth During Initial Quarter as a Public Company

PALO ALTO, Calif., October 24, 2007 — VMware, Inc., the virtualization software leader, today announced financial results for the third quarter of 2007:

  • Total consolidated revenues were $358 million, an increase of 90% compared to the year-ago quarter. 
  • GAAP net income was $65 million or $0.18 per diluted share compared to $19 million or $0.06 per diluted share in the year-ago quarter.  GAAP operating income was $66 million compared to $28 million in the third quarter of 2006.
  • Non-GAAP net income was $85 million or $0.23 per diluted share.  Non-GAAP operating income was $91 million, which represents 25% of third-quarter revenues and is an increase of 71% over the year-ago quarter. 

“VMware had a strong quarter by several measures,” said Diane Greene, president and chief executive officer of VMware.  “Increased customer-adoption of VMware Infrastructure was a significant driver in growing our revenues 90%.  We completed our IPO.  Our annual VMworld conference drew more than 10,800 attendees, including more than 1,800 people representing our partners. And we introduced four brand new products to the market, including our next-generation server-embedded hypervisor VMware ESX Server 3i.”

“We believe customer appreciation for the quality and functionality of our products is driving our business,” continued Greene.  “Companies large and small are moving to a VMware Infrastructure architecture for their data centers and, in many cases, for their desktops. During the quarter customers continued to standardize on our third-generation VMware Infrastructure suite of virtualization software. We also saw increased adoption of VMware Virtual Desktop Infrastructure (VDI), backed by the VMware Infrastructure architecture, to centrally manage and secure enterprise desktops.”

GAAP operating cash flows, on a trailing 12 month basis ending September 30, 2007, were $514 million compared to $230 million for the twelve months that ended September 30, 2006. 

“We had solid growth during our first quarter as a public company,” said Mark Peek, chief financial officer of VMware.  “In particular, we were pleased with our ability to grow operating income while continuing to invest in the business, increase our footprint in the market, develop new products, and meet the high expectations of our customers and partners.”

VMware plans to host a conference call today to review its third-quarter financial results.  The call is scheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed via the Web at http://ir.vmware.com. The Internet broadcast will be available live, and a replay will be available following completion of the live broadcast for approximately one year.

About VMware

VMware (NYSE:VMW) is the global leader in virtual infrastructure software for industry-standard systems.  Organizations of all sizes use VMware solutions to simplify their IT, fully leverage their existing computing investments and respond faster to changing business demands.  VMware is based in Palo Alto, California and majority-owned by EMC Corporation (NYSE:EMC).  For more information, visit www.vmware.com.

VMware is a registered trademark of VMware, Inc. in the United States and/or other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.

Forward-Looking Statements

This release contains “forward-looking statements” as defined under the Federal Securities Laws. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) adverse changes in general economic or market conditions; (ii) delays or reductions in consumer or information technology spending; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, and new product introductions; (iv) the ability to develop, and to transition to, new products, the uncertainty of customer acceptance of emerging technology, and rapid technological and market change; (v) VMware’s relationship with EMC Corporation, and EMC’s ability to control matters requiring stockholder approval, including the election of VMware’s board members; (vi) the ability to protect our proprietary technology; (vii) earthquakes, war or acts of terrorism; (viii) the failure to attract and retain highly qualified employees; (ix) fluctuating currency exchange rates; and (x) other one-time events and other important factors disclosed previously and from time to time in VMware’s filings with the U.S. Securities and Exchange Commission (the “SEC”).  VMware disclaims any obligation to update any such forward-looking statements after the date of this release.

Use of Non-GAAP Financial Measures

VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure.  These non-GAAP financial measures, which are used as measures of VMware’s performance, should be considered in addition to, not as a substitute for or in isolation from, measures of VMware’s financial performance prepared in accordance with GAAP.  These measures differ from GAAP in that they exclude stock-based compensation, amortization of intangible assets, the write-off of in-process research and development, and the net effect of the amortization and capitalization of software under Statement of Financial Accounting Standards No. 86 (“FAS86”). VMware’s bases for these adjustments are described below.

VMware’s management uses the non-GAAP financial measures referenced in this release and shown in the accompanying schedules to gain an understanding of VMware’s comparative operating results (when comparing such results with previous periods or forecasts) and its future prospects and excludes the above-listed items (stock-based compensation, amortization of intangible assets, write-off of in-process research and development, and the net effect of the amortization and capitalization of software under FAS86) from its internal operating plans and measurement of financial performance, including budgeting, calculating bonus payments, and forecasting future periods.  These non-GAAP financial measures are used by VMware’s management in their financial and operating decision-making because management believes they reflect VMware’s ongoing business in a manner that allows meaningful period-to-period comparisons.  As the non-GAAP financial measures exclude non-cash expenses that VMware believes are not reflective of ongoing operating results, management believes the non-GAAP financial measures enable management to better analyze trends in its business.  VMware’s management also believes that these non-GAAP financial measures provide useful information to investors and others (a) in understanding and evaluating VMware’s current operating results and future prospects in the same manner as management does, if they so choose, and (b) in comparing in a consistent manner VMware’s current financial results with VMware’s past financial results. 

In addition to the foregoing, management believes that these non-GAAP measures are useful to investors and others in assessing VMware’s operating performance due to the following factors:

  • Although stock-based compensation is an important aspect of the compensation of VMware’s employees and executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards.  VMware does not believe these non-cash expenses are reflective of ongoing operating results. 
  • VMware’s amortization of intangible assets includes the effects of EMC’s acquisition of VMware in January 2004. Also, VMware does not acquire businesses on a predictable cycle.   VMware therefore believes that the presentation of non-GAAP measures that adjust for the amortization of intangible assets and the write-off of in-process research and development, provide investors and others with a consistent basis for comparison across accounting periods and, therefore, are useful to investors and others in helping them to better understand VMware’s operating results and underlying operational trends.
  • The amortization and capitalization of software under FAS86 can vary significantly depending upon the timing of products reaching technological feasibility.  VMware does not believe that the variance in operating results caused by the net effect of applying FAS86 properly reflects underlying operational trends.

VMware’s non-GAAP financial measures may be defined differently than similar terms used by other companies and, accordingly, may not be comparable to similarly-titled non-GAAP financial measures used by other companies.   There are significant limitations associated with the use of non-GAAP financial measures.  Specifically, the non-GAAP financial measures that exclude stock-based compensation, intangible amortization, in-process research and development, and the net effect of the amortization and capitalization of software under FAS86, do not include all items of income and expense that affect VMware’s operations.  More specifically, in the case of stock-based compensation, if VMware did not pay out a portion of its compensation in the form of stock-based compensation, the cash salary expense included in costs of revenues and operating expenses would be higher. In the case of intangible amortization, while not directly affecting VMware’s cash position, it represents the loss of value of intangible assets
over time.  As a result, non-GAAP net income and non-GAAP net income per share, which exclude this expense, do not reflect the full economic loss in value of those intangible assets.  Management compensates for these limitations by reconciling the non-GAAP financial measures to VMware’s financial results as determined in accordance with GAAP, which reconciliations are set forth in the accompanying schedules to this release, in the current report on Form 8-K furnished to the SEC on the date hereof and on http://ir.vmware.com.