VMware Reports Third Quarter 2008 Results

Quarterly Revenue Grew 32% to $472 Million; GAAP Operating Margin of 21%; Non-GAAP Operating Margin of 24%; Annual Revenue to Date of $1.4 Billion Exceeds Total for 2007

Supplemental Financial Tables

PALO ALTO, Calif., October 21, 2008 — VMware, Inc. (NYSE: VMW), the global leader in virtualization solutions from the desktop to the datacenter, today reported financial results for the third quarter of 2008:

  • Revenues for the third quarter were $472 million, an increase of 32% from the third quarter of 2007.
  • GAAP operating income for the third quarter was $101 million, an increase of 54% from the third quarter of 2007.
  • Non-GAAP operating income for the third quarter was $115 million, an increase of 26% from the third quarter of 2007.
  • GAAP net income for the third quarter was $83 million, or $0.21 per diluted share, compared to $65 million, or $0.18 per diluted share, for the third quarter of 2007.  
  • Non-GAAP net income for the quarter was $93 million, or $0.24 per diluted share, compared to $85 million, or $0.23 per diluted share, for the third quarter of 2007. 
  • Cash was nearly $1.7 billion and deferred revenue was $780 million as of September 30, 2008.

Third quarter U.S. revenues grew 24% to $249 million from the third quarter of 2007.  International revenues grew 42% to $224 million from the third quarter of 2007 driven by strength in Europe.

“VMware had another solid quarter, despite the challenging economic environment,” said Paul Maritz, president and chief executive officer of VMware. “This is a testament to the value our virtualization solutions provide to our customers. As commercial and government organizations are increasingly forced to do more with less, they’re moving VMware to the top of their short list of strategic priorities. Reducing hardware and operational costs, becoming more efficient, flexible and effective – these are the proven benefits we bring to our customer base of over 120,000.”

“At VMworld 2008 in September,” continued Maritz, “we laid out three key initiatives to build on our basic proposition of enabling our customers to do more with less. We plan to expand our current VMware Infrastructure offerings into a comprehensive virtual datacenter operating system for an enterprise cloud that is highly elastic, self-managing and self-healing.  This will enable customers to treat their IT infrastructure as a single giant computer with which they can more efficiently and flexibly provision and manage heterogeneous application loads. This approach, coupled with the work being done under our vCloud initiative, will also open the way to allowing application loads to be seamlessly off-loaded as needed to external Clouds. Complementary to these approaches, our vClient initiative lays out a roadmap to bring the management of thin and thick clients into a single framework, and give users the best of both. Execution against these initiatives starts with a major release this quarter of our client virtualization management, VMware View™ 3.0, and significant deliveries are expected through 2009.”

Third Quarter Highlights & Strategic Announcements

  • VMworld 2008 had a record of 13,800 attendees from 156 countries, a 30% increase over last year’s attendance.  215 sponsors and exhibitors supported the conference, including Platinum Sponsors Cisco, Dell, EMC, HP, IBM, Intel, NEC, NetApp and Symantec who delivered keynotes.
  • Virtual Datacenter Operating System (VDC-OS) -- groundbreaking new products and technologies are planned to expand VMware Infrastructure offerings into a comprehensive virtual datacenter operating system that can pool IT resources - servers, storage and network – into a single enterprise cloud.  By pooling IT infrastructure, customers can more efficiently and flexibly provision and manage heterogeneous application loads.  The new VDC- OS capabilities announced by VMware are expected to be delivered in 2009.
  • vCloud Initiative -- with support from 100+ partners, including BT, Rackspace, SAVVIS, SunGard, T-Systems, and Verizon Business, our vCloud Initiative is aimed at helping companies both large and small safely tap compute capacity inside and outside their firewalls – how they want, when they want, and as much as they want – to ensure quality of service for any application they want to run, internally or as a service. 
  • vClient Initiative – will enable the delivery of universal clients – desktops that follow users to any end point while providing a rich personalized experience that is secure, cost effective and easy for IT to manage.  The first step of the initiative is the roll out of VMware View™  – a set of products that extend VMware’s Virtual Desktop Infrastructure (VDI) solutions to include both server hosted virtual desktops and client virtual desktops that can run on any laptop or desktop computer. The vClient Initiative includes several new desktop virtualization technologies which VMware plans to introduce in 2009. These new technologies are planned to include client virtualization, image management (available as VMware View Composer) and offline desktop.
  • General availability of the new VMware Studio, an authoring and configuration tool to construct Virtual Appliances and vApps; also announced general availability of VMware Lab Manager 3, VMware Fusion™ 2.0 and VMware Workstation 6.5. 
  • VMware and Cisco plan to deliver joint datacenter solutions designed to improve the scalability and operational control of virtual environments. The Cisco Nexus® 1000V distributed virtual software switch is expected to be an integrated option in VMware Infrastructure.  Cisco and VMware also intend to combine their expertise in networking and virtualization to introduce a new set of multidisciplinary professional services and reseller certification training in support of customers’ data center virtualization strategies.  In parallel, Cisco and VMware are collaborating on integrating VMware Virtual Desktop Infrastructure (VDI) solutions with Cisco® Application Delivery Networking solutions to improve the performance of virtual desktops delivered across wide-area networks (WANs). 

 

Financial Outlook

The following forward-looking statements are based on current expectations and are subject to uncertainties and risks discussed below and in documents filed by VMware with the United States Securities and Exchange Commission.  Actual results may differ materially.

Current uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters and makes it more likely that VMware’s actual results could differ materially from expectations

  • VMware is maintaining its 2008 revenue guidance for annual growth of 42% to 45% over 2007.  VMware cautions of an increased likelihood that 2008 revenue will be at the lower end of the guidance range.
  • GAAP operating margin for the fourth quarter of 2008 is targeted to be between 16% and 18%.  This guidance includes stock-based compensation, employer payroll tax on employee stock transactions, and amortization of intangible assets and capitalized software development costs which are targeted at 6% of projected revenue.
  • The 2008 GAAP tax rate is expected to be between 13 and 15 percent and reflects the reinstatement of the U.S. Federal research tax credit.  This guidance includes stock-based compensation, amortization of intangibles, and FAS86 capitalization, representing approximately 3 - 4 percentage points.

About VMware 
VMware (NYSE: VMW) is the global leader in virtualization solutions from the desktop to the datacenter.  Customers of all sizes rely on VMware to reduce capital and operating expenses, ensure business continuity, strengthen security and go green. With 2007 revenues of $1.3 billion, more than 120,000 customers and more than 20,000 partners. VMware is one of the fastest growing public software companies. Headquartered in Palo Alto, California, VMware is 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.

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, employer payroll tax on employee stock transactions, 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, employer payroll tax on employee stock transactions, 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 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. 
  • The amount of employer payroll taxes on stock-based compensation is dependent on VMware’s stock price and the timing and size of exercise by employees of their stock options and of vesting in restricted stock, over which management has limited to no control, and as such does not correlate to VMware’s operation of the business.
  • 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 reflect 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 and related employer payroll taxes, the cash salary expense included in costs of revenues and operating expenses would be higher. Payment of employer payroll taxes on stock-based compensation is also a cash expense for VMware and impacts the Company’s cash position.  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.

Forward-Looking Statements

Statements made in this press release which are not statements of historical fact are forward-looking statements and are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate, but are not limited, to our financial outlook for revenue growth during the 2008, continuing customer adoption and deployment of our products and architecture, levels of demand for our products including priorities in customer spending and the prospects for our new strategic initiatives, ongoing development, and projections for the release and delivery of our software products.  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, entry of new competitors into the virtualization market, and new product and marketing initiatives by our competitors; (iv) factors that affect timing of license revenue recognition such as product announcements and beta programs; (v) our customers’ ability to develop, and to transition to, new products, (vi) the uncertainty of customer acceptance of emerging technology; (viii) rapid technological and market changes in virtualization software; (ix) changes to product development timelines; (x) VMware’s relationship with EMC Corporation, and EMC’s ability to control matters requiring stockholder approval, including the election of VMware’s board members; (xi) our ability to protect our proprietary technology; (xii) our ability  to attract and retain highly qualified employees; and (xiii) fluctuating currency exchange rates. 

Current uncertainty in global economic conditions pose a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news, which could negatively affect product demand and other related matters. Consequently, customer spending on VMware products could be different from VMware’s expectations due to factors including changes in business and economic conditions, including conditions in the credit market that could affect consumer confidence; customer acceptance of VMware’s and competitors’ products; changes in customer order and payment patterns; and changes in the willingness of customers to enter into longer term licensing and support arrangements.

These forward looking statements are based on current expectations and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission, including the report on Form 10-Q for the quarter ended June 30, 2008, which could cause actual results to vary from expectations. VMware disclaims any obligation to update any such forward-looking statements after the date of this release.