VMWARE, INC. - Quarter Report: 2021 October (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2021
OR
☐ | 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) 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. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
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 | ☑ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 26, 2021, the number of shares of Class A common stock, par value $0.01 per share, of the registrant outstanding was 420,365,558.
TABLE OF CONTENTS
Page | ||||||||
VMware, Pivotal, vSphere, vRealize, Workspace ONE, Tanzu, Carbon Black, CloudHealth, VeloCloud, VMware vSAN, NSX, Horizon, Heptio, and Nyansa are registered trademarks or trademarks of VMware, Inc. or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective organizations.
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenue(1): | |||||||||||||||||||||||
License | $ | 710 | $ | 639 | $ | 2,093 | $ | 2,019 | |||||||||||||||
Subscription and SaaS | 820 | 676 | 2,336 | 1,880 | |||||||||||||||||||
Services | 1,658 | 1,549 | 4,891 | 4,574 | |||||||||||||||||||
Total revenue | 3,188 | 2,864 | 9,320 | 8,473 | |||||||||||||||||||
Operating expenses(2): | |||||||||||||||||||||||
Cost of license revenue | 37 | 44 | 111 | 119 | |||||||||||||||||||
Cost of subscription and SaaS revenue | 175 | 142 | 502 | 400 | |||||||||||||||||||
Cost of services revenue | 362 | 330 | 1,051 | 969 | |||||||||||||||||||
Research and development | 768 | 714 | 2,251 | 2,058 | |||||||||||||||||||
Sales and marketing | 1,011 | 912 | 2,993 | 2,727 | |||||||||||||||||||
General and administrative | 316 | 250 | 808 | 773 | |||||||||||||||||||
Realignment | — | 44 | 1 | 47 | |||||||||||||||||||
Operating income | 519 | 428 | 1,603 | 1,380 | |||||||||||||||||||
Investment income | — | 1 | 1 | 7 | |||||||||||||||||||
Interest expense | (74) | (52) | (173) | (156) | |||||||||||||||||||
Other income (expense), net | 12 | 177 | (7) | 186 | |||||||||||||||||||
Income before income tax | 457 | 554 | 1,424 | 1,417 | |||||||||||||||||||
Income tax provision | 59 | 120 | 190 | 150 | |||||||||||||||||||
Net income | $ | 398 | $ | 434 | $ | 1,234 | $ | 1,267 | |||||||||||||||
Net income per weighted-average share, basic for Classes A and B | $ | 0.95 | $ | 1.03 | $ | 2.94 | $ | 3.02 | |||||||||||||||
Net income per weighted-average share, diluted for Classes A and B | $ | 0.94 | $ | 1.02 | $ | 2.92 | $ | 3.00 | |||||||||||||||
Weighted-average shares, basic for Classes A and B | 419,456 | 420,857 | 419,309 | 419,758 | |||||||||||||||||||
Weighted-average shares, diluted for Classes A and B | 421,763 | 423,400 | 422,201 | 423,093 | |||||||||||||||||||
__________ | |||||||||||||||||||||||
(1) Includes related party revenue as follows (refer to Note C): | |||||||||||||||||||||||
License | $ | 335 | $ | 289 | $ | 996 | $ | 976 | |||||||||||||||
Subscription and SaaS | 221 | 136 | 589 | 373 | |||||||||||||||||||
Services | 644 | 518 | 1,838 | 1,439 | |||||||||||||||||||
(2) Includes stock-based compensation as follows: | |||||||||||||||||||||||
Cost of license revenue | $ | — | $ | — | $ | 1 | $ | 1 | |||||||||||||||
Cost of subscription and SaaS revenue | 5 | 4 | 16 | 13 | |||||||||||||||||||
Cost of services revenue | 21 | 25 | 70 | 74 | |||||||||||||||||||
Research and development | 125 | 140 | 402 | 397 | |||||||||||||||||||
Sales and marketing | 74 | 85 | 227 | 243 | |||||||||||||||||||
General and administrative | 33 | 50 | 97 | 141 | |||||||||||||||||||
3
VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net income | $ | 398 | $ | 434 | $ | 1,234 | $ | 1,267 | |||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Changes in fair value of effective foreign currency forward contracts: | |||||||||||||||||||||||
Unrealized gains (losses), net of tax provision (benefit) of $—, $—, $— and $— | 1 | 2 | 1 | (1) | |||||||||||||||||||
Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $—, $—, $— and $— | (1) | 2 | 1 | — | |||||||||||||||||||
Net change in fair value of effective foreign currency forward contracts | — | 4 | 2 | (1) | |||||||||||||||||||
Total other comprehensive income (loss) | — | 4 | 2 | (1) | |||||||||||||||||||
Comprehensive income, net of taxes | $ | 398 | $ | 438 | $ | 1,236 | $ | 1,266 | |||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
VMware, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
October 29, | January 29, | ||||||||||
2021 | 2021 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 12,500 | $ | 4,692 | |||||||
Short-term investments | 33 | 23 | |||||||||
Accounts receivable, net of allowance of $8 and $5 | 1,675 | 1,929 | |||||||||
Due from related parties, net | 660 | 1,438 | |||||||||
Other current assets | 577 | 530 | |||||||||
Total current assets | 15,445 | 8,612 | |||||||||
Property and equipment, net | 1,411 | 1,334 | |||||||||
Other assets | 2,645 | 2,697 | |||||||||
Deferred tax assets | 5,830 | 5,781 | |||||||||
Intangible assets, net | 781 | 993 | |||||||||
Goodwill | 9,598 | 9,599 | |||||||||
Total assets | $ | 35,710 | $ | 29,016 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 229 | $ | 131 | |||||||
Accrued expenses and other | 2,273 | 2,382 | |||||||||
Current portion of long-term debt | 1,498 | — | |||||||||
Unearned revenue | 5,808 | 5,873 | |||||||||
Total current liabilities | 9,808 | 8,386 | |||||||||
Note payable to Dell | — | 270 | |||||||||
Long-term debt | 9,170 | 4,717 | |||||||||
Unearned revenue | 4,425 | 4,441 | |||||||||
Income tax payable | 781 | 805 | |||||||||
Operating lease liabilities | 885 | 891 | |||||||||
Other liabilities | 416 | 455 | |||||||||
Total liabilities | 25,485 | 19,965 | |||||||||
Contingencies (refer to Note D) | |||||||||||
Stockholders’ equity: | |||||||||||
Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 112,441 and 112,082 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 | 1,923 | 1,985 | |||||||||
Accumulated other comprehensive loss | (3) | (5) | |||||||||
Retained earnings | 8,301 | 7,067 | |||||||||
Total stockholders’ equity | 10,225 | 9,051 | |||||||||
Total liabilities and stockholders’ equity | $ | 35,710 | $ | 29,016 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended | |||||||||||
October 29, | October 30, | ||||||||||
2021 | 2020 | ||||||||||
Operating activities: | |||||||||||
Net income | $ | 1,234 | $ | 1,267 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 825 | 757 | |||||||||
Stock-based compensation | 813 | 869 | |||||||||
Deferred income taxes, net | (92) | (177) | |||||||||
Unrealized (gain) loss on equity securities, net | 25 | (197) | |||||||||
(Gain) loss on disposition of assets, revaluation and impairment, net | 4 | 22 | |||||||||
Loss on extinguishment of debt | — | 8 | |||||||||
Other | 6 | — | |||||||||
Changes in assets and liabilities, net of acquisitions: | |||||||||||
Accounts receivable | 247 | 102 | |||||||||
Other current assets and other assets | (467) | (622) | |||||||||
Due to/from related parties, net | 777 | 785 | |||||||||
Accounts payable | 87 | (4) | |||||||||
Accrued expenses and other liabilities | (181) | 393 | |||||||||
Income taxes payable | 24 | (53) | |||||||||
Unearned revenue | (82) | (65) | |||||||||
Net cash provided by operating activities | 3,220 | 3,085 | |||||||||
Investing activities: | |||||||||||
Additions to property and equipment | (263) | (247) | |||||||||
Sales of investments in equity securities | 68 | — | |||||||||
Purchases of strategic investments | (7) | (16) | |||||||||
Proceeds from disposition of assets | 5 | 21 | |||||||||
Business combinations, net of cash acquired, and purchases of intangible assets | (15) | (390) | |||||||||
Net cash used in investing activities | (212) | (632) | |||||||||
Financing activities: | |||||||||||
Proceeds from issuance of common stock | 267 | 264 | |||||||||
Net proceeds from issuance of long-term debt | 5,944 | 1,979 | |||||||||
Repayment of term loan | — | (1,500) | |||||||||
Repayment of current portion of long-term debt | — | (1,257) | |||||||||
Repayment of note payable to Dell | (270) | — | |||||||||
Repurchase of common stock | (872) | (566) | |||||||||
Shares repurchased for tax withholdings on vesting of restricted stock | (291) | (319) | |||||||||
Payment to acquire non-controlling interests | — | (91) | |||||||||
Principal payments on finance lease obligations | (3) | (3) | |||||||||
Net cash provided by (used in) financing activities | 4,775 | (1,493) | |||||||||
Net increase in cash, cash equivalents and restricted cash | 7,783 | 960 | |||||||||
Cash, cash equivalents and restricted cash at beginning of the period | 4,770 | 3,031 | |||||||||
Cash, cash equivalents and restricted cash at end of the period | $ | 12,553 | $ | 3,991 | |||||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid for interest | $ | 146 | $ | 142 | |||||||
Cash paid for taxes, net | 276 | 393 | |||||||||
Non-cash items: | |||||||||||
Changes in capital additions, accrued but not paid | $ | 9 | $ | (18) | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
Three Months Ended October 29, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Convertible Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||||||
Balance, July 30, 2021 | 112 | $ | 1 | 307 | $ | 3 | $ | 1,716 | $ | 7,903 | $ | (3) | $ | 9,620 | |||||||||||||||||||||||||||||||||
Proceeds from issuance of common stock | 1 | — | — | — | 128 | — | — | 128 | |||||||||||||||||||||||||||||||||||||||
Repurchase and retirement of common stock | (1) | — | — | — | (143) | — | — | (143) | |||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Shares withheld for tax withholdings on vesting of restricted stock | (1) | — | — | — | (42) | — | — | (42) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 264 | — | — | 264 | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 398 | — | 398 | |||||||||||||||||||||||||||||||||||||||
Balance, October 29, 2021 | 112 | $ | 1 | 307 | $ | 3 | $ | 1,923 | $ | 8,301 | $ | (3) | $ | 10,225 | |||||||||||||||||||||||||||||||||
Nine Months Ended October 29, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Convertible Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||||||
Balance, January 29, 2021 | 112 | $ | 1 | 307 | $ | 3 | $ | 1,985 | $ | 7,067 | $ | (5) | $ | 9,051 | |||||||||||||||||||||||||||||||||
Proceeds from issuance of common stock | 3 | — | — | — | 267 | — | — | 267 | |||||||||||||||||||||||||||||||||||||||
Repurchase and retirement of common stock | (6) | — | — | — | (872) | — | — | (872) | |||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 5 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Shares withheld for tax withholdings on vesting of restricted stock | (2) | — | — | — | (284) | — | — | (284) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 827 | — | — | 827 | |||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | — | — | — | — | — | — | 2 | 2 | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 1,234 | — | 1,234 | |||||||||||||||||||||||||||||||||||||||
Balance, October 29, 2021 | 112 | $ | 1 | 307 | $ | 3 | $ | 1,923 | $ | 8,301 | $ | (3) | $ | 10,225 | |||||||||||||||||||||||||||||||||
Three Months Ended October 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Convertible Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||||||
Balance, July 31, 2020 | 113 | $ | 1 | 307 | $ | 3 | $ | 2,070 | $ | 5,842 | $ | (9) | $ | 7,907 | |||||||||||||||||||||||||||||||||
Proceeds from issuance of common stock | 1 | — | — | — | 122 | — | — | 122 | |||||||||||||||||||||||||||||||||||||||
Repurchase and retirement of common stock | (2) | — | — | — | (255) | — | — | (255) | |||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Shares withheld for tax withholdings on vesting of restricted stock | — | — | — | — | (39) | — | — | (39) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 303 | — | — | 303 | |||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | — | — | — | — | — | — | 4 | 4 | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 434 | — | 434 | |||||||||||||||||||||||||||||||||||||||
Balance, October 30, 2020 | 113 | $ | 1 | 307 | $ | 3 | $ | 2,201 | $ | 6,276 | $ | (5) | $ | 8,476 | |||||||||||||||||||||||||||||||||
Nine Months Ended October 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Convertible Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||||||
Balance, January 31, 2020 | 110 | $ | 1 | 307 | $ | 3 | $ | 2,000 | $ | 5,009 | $ | (4) | $ | 7,009 | |||||||||||||||||||||||||||||||||
Proceeds from issuance of common stock | 3 | — | — | — | 264 | — | — | 264 | |||||||||||||||||||||||||||||||||||||||
Repurchase and retirement of common stock | (4) | — | — | — | (566) | — | — | (566) | |||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 6 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Shares withheld for tax withholdings on vesting of restricted stock | (2) | — | — | — | (315) | — | — | (315) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 863 | — | — | 863 | |||||||||||||||||||||||||||||||||||||||
Amount due from tax sharing arrangement | — | — | — | — | (45) | — | — | (45) | |||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | — | — | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 1,267 | — | 1,267 | |||||||||||||||||||||||||||||||||||||||
Balance, October 30, 2020 | 113 | $ | 1 | 307 | $ | 3 | $ | 2,201 | $ | 6,276 | $ | (5) | $ | 8,476 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
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 working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses through a digital transformation. To take on these challenges, VMware is working with customers in the areas of hybrid and multi-cloud, virtual cloud networking, digital workspaces, modern applications and intrinsic security. VMware’s software provides a flexible digital foundation to enable customers in their digital transformation.
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
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 2022. 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 March 26, 2021.
Effective September 7, 2016, Dell Technologies Inc. (“Dell”) (formerly Denali Holding Inc.) acquired EMC Corporation (“EMC”), VMware’s then-parent company, including EMC’s majority control of VMware. As of October 29, 2021 (the “Record Date”), Dell controlled 80.5% of VMware’s outstanding common stock and 97.4% of the combined voting power of VMware’s outstanding common stock, including 31 million shares of VMware’s Class A common stock (“Class A Stock”) and all of VMware’s Class B convertible common stock (“Class B Stock”). On November 1, 2021, VMware’s spin-off from Dell (the “Spin-Off”) was completed, and VMware paid an $11.5 billion special dividend, pro rata, to each of the holders of Class A and Class B Stock (including Dell) as of the Record Date.
As VMware was a majority-owned and controlled subsidiary of Dell through October 29, 2021, its results of operations and financial position were consolidated with Dell’s financial statements.
Refer to Note O for more information regarding the Spin-Off.
Management believes the assumptions underlying the condensed consolidated financial statements are reasonable. However, the amounts recorded for VMware’s related party transactions with Dell and its consolidated subsidiaries may not be considered arm’s length with an unrelated third party. Therefore, the 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.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of VMware and subsidiaries in which VMware has a controlling financial interest. 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.
8
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, trade receivable valuation, marketing development funds, expected period of benefit for deferred commissions, useful lives assigned to fixed assets and intangible assets, valuation of goodwill and definite-lived intangibles, income taxes, stock-based compensation and contingencies. Actual results could differ from those estimates. To the extent the Company’s actual results differ materially from those estimates and assumptions, VMware’s future financial statements could be affected.
Recently Adopted Accounting Standards
Effective January 30, 2021, VMware adopted, on a modified retrospective basis, Accounting Standards Update (“ASU”) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This update simplifies the accounting for convertible instruments and contracts in an entity’s own equity and amends the diluted earnings per share guidance for greater consistency within the standard. The standard did not have an impact on the Company’s condensed consolidated financial statements except for the calculation of the year-to-date weighted-average diluted share count, which did not have a material impact on the Company’s diluted net income per share for the nine months ended October 29, 2021.
Effective January 30, 2021, VMware adopted ASU No. 2019-12, Income Taxes (Topic 740), simplifying the accounting for income taxes. The standard did not have a material impact on the Company’s condensed consolidated financial statements.
New Accounting Pronouncement
In October 2021, the Financial Accounting Standard Board issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This update requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by an acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. The new standard is effective for interim and annual periods beginning after December 15, 2022, but may be early adopted. The adoption of the ASU will be applied prospectively to business combinations occurring on or after the effective date of the ASU. If the new standard is early adopted in an interim period, it should be applied retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. VMware plans to early adopt this standard during the fourth quarter of fiscal 2022. The standard did not have an impact on business combinations occurring during the nine months ended October 29, 2021.
B. Revenue, Unearned Revenue and Remaining Performance Obligations
Revenue
Contract Assets
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets include fixed fee professional services where transfer of services has occurred in advance of the Company’s right to invoice. Contract assets are classified as accounts receivables upon invoicing. Contract assets are included in other current assets on the condensed consolidated balance sheets. Contract assets were $50 million and $43 million as of October 29, 2021 and January 29, 2021, respectively. Contract asset balances will fluctuate based upon the timing of the transfer of services, billings and customers’ acceptance of contractual milestones.
Contract Liabilities
Contract liabilities consist of unearned revenue, which is generally recorded when VMware has the right to invoice or payments have been received for undelivered products or services.
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 October 29, 2021, customer deposits related to customer prepayments and cloud credits of $322 million were included in accrued expenses and other, and $151 million were included in other liabilities on the condensed consolidated
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
balance sheets. As of January 29, 2021, customer deposits related to customer prepayments and cloud credits of $294 million were included in accrued expenses and other, and $163 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 October 29, 2021 and January 29, 2021 were $12 million and $31 million, respectively. Deferred commissions included in other assets were $1.2 billion and $1.1 billion as of October 29, 2021 and January 29, 2021, respectively.
Amortization expense for deferred commissions was included in sales and marketing on the condensed consolidated statements of income and was $130 million and $383 million during the three and nine months ended October 29, 2021, respectively, and $113 million and $319 million during the three and nine months ended October 30, 2020, respectively.
Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
October 29, | January 29, | ||||||||||
2021 | 2021 | ||||||||||
Unearned license revenue | $ | 17 | $ | 15 | |||||||
Unearned subscription and SaaS revenue | 2,238 | 1,998 | |||||||||
Unearned software maintenance revenue | 6,773 | 7,092 | |||||||||
Unearned professional services revenue | 1,205 | 1,209 | |||||||||
Total unearned revenue | $ | 10,233 | $ | 10,314 |
Unearned subscription and SaaS revenue is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized ratably over the contract duration. The weighted-average remaining contractual term as of October 29, 2021 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 months ended October 29, 2021 were $2.0 billion and $2.1 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses. Total billings and revenue recognized during the nine months ended October 29, 2021 were $6.0 billion and $6.1 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 and nine months ended October 30, 2020 was $1.9 billion and $5.5 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premises licenses.
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted non-cancellable customer contracts at the end of any given period.
As of October 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.1 billion, of which approximately 56% is expected to be recognized as revenue over the next twelve months and the remainder thereafter. As of January 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.3 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2022, and the remainder thereafter.
C. Related Parties
The information provided below includes a summary of transactions with Dell and Dell’s consolidated subsidiaries (collectively, “Dell”).
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Transactions with Dell
VMware and Dell engaged in the following ongoing related party transactions, which resulted in revenue and receipts, and unearned revenue for VMware:
•Pursuant to original equipment manufacturer (“OEM”) and reseller arrangements, Dell integrates or bundles VMware’s products and services with Dell’s products and sells them to end users. Dell also acts as a distributor, purchasing VMware’s standalone products and services for resale to end-user customers through VMware-authorized resellers. Revenue under these arrangements is presented net of related marketing development funds and rebates paid to Dell. In addition, VMware provides professional services to end users based upon contractual agreements with Dell.
•Dell purchases products and services from VMware for its internal use.
•From time to time, VMware and Dell enter into agreements to collaborate on technology projects, and Dell pays VMware for services or reimburses VMware for costs incurred by VMware, in connection with such projects.
During the three and nine months ended October 29, 2021, revenue from Dell accounted for 38% and 37% of VMware’s consolidated revenue, respectively. During each of the three and nine months ended October 29, 2021, revenue recognized on transactions where Dell acted as an OEM accounted for 13% of total revenue from Dell, or 5% of VMware’s consolidated revenue.
During each of the three and nine months ended October 30, 2020, revenue from Dell accounted for 33% of VMware’s consolidated revenue. During the three and nine months ended October 30, 2020, revenue recognized on transactions where Dell acted as an OEM accounted for 13% and 12%, respectively, of total revenue from Dell, or 4% of VMware’s consolidated revenue.
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 | Nine Months Ended | As of | |||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | October 29, | January 29, | ||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2021 | ||||||||||||||||||||||||||||||
Reseller revenue | $ | 1,183 | $ | 927 | $ | 3,380 | $ | 2,738 | $ | 5,008 | $ | 4,952 | |||||||||||||||||||||||
Internal-use revenue | 17 | 16 | 43 | 50 | 25 | 45 | |||||||||||||||||||||||||||||
Receipts from Dell for collaborative technology projects were not material during the three and nine months ended October 29, 2021 and October 30, 2020.
Customer deposits resulting from transactions with Dell were $225 million and $214 million as of October 29, 2021 and January 29, 2021, respectively.
VMware and Dell engaged in the following ongoing related party transactions, which resulted in costs to VMware:
•VMware purchases and leases products and purchases services from Dell.
•From time to time, VMware and Dell enter into agreements to collaborate on technology projects, and VMware pays Dell for services provided to VMware by Dell related to such projects.
•In certain geographic regions where VMware does not have an established legal entity, VMware contracts with Dell subsidiaries for support services and support from Dell personnel who are managed by VMware. The costs incurred by Dell on VMware’s behalf related to these employees are charged to VMware with a mark-up intended to approximate costs that would have been incurred had VMware contracted for such services with an unrelated third party. These costs are included as expenses on VMware’s condensed consolidated statements of income and primarily include salaries, benefits, travel and occupancy expenses. Dell also incurs certain administrative costs on VMware’s behalf in the U.S. that are recorded as expenses on VMware’s 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 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
•From time to time, VMware invoices end users on behalf of Dell for certain services rendered by Dell. Cash related to these services is collected from the end user by VMware and remitted to Dell.
•From time to time, VMware enters into agency arrangements with Dell that enable VMware to sell its subscriptions and services, leveraging the Dell enterprise relationships and end customer contracts.
Information about VMware’s payments for such arrangements during the periods presented consisted of the following (table in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Purchases and leases of products and purchases of services(1) | $ | 57 | $ | 49 | $ | 164 | $ | 138 | |||||||||||||||
Dell subsidiary support and administrative costs | 8 | 12 | 32 | 54 |
(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.
From time to time, VMware and Dell also enter into joint marketing, sales, branding and product development arrangements, for which both parties may incur costs.
On November 1, 2021, in connection with the Spin-Off from Dell, VMware and Dell entered into a commercial framework agreement that is intended to preserve and enhance the Company’s strategic partnership with Dell to deliver joint customer value and a transition services agreement to facilitate the transactions and the operation of the Company and Dell following the Spin-Off. The commercial framework agreement has an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and conditions. Refer to Note O for more information regarding the Spin-Off.
Dell Financial Services (“DFS”)
DFS provides financing to certain of VMware’s end users at the end users’ discretion. Upon acceptance of the financing arrangement by both VMware’s end 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 on arrangements accepted by both parties were not significant during the three months ended October 29, 2021 and were $20 million during the nine months ended October 29, 2021. Financing fees on arrangements accepted by both parties were $12 million and $43 million during the three and nine months ended October 30, 2020, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Tax Agreements with Dell
Concurrently with the execution of the Separation and Distribution Agreement (the “Separation Agreement”), effective as of April 14, 2021, VMware and Dell entered into a Tax Matters Agreement (the “Tax Matters Agreement”) and agreed to terminate the tax sharing agreement as amended on December 30, 2019 (together with the Tax Matters Agreement and the Letter Agreement (as defined below), the “Tax Agreements”). The Tax Matters Agreement governs the Company’s and Dell’s respective rights and obligations, both for pre-Spin-Off periods and post-Spin-Off periods, regarding income and other taxes, and related matters, including tax liabilities and benefits, attributes and returns.
Payments made to Dell pursuant to the Tax Agreements were $10 million and $96 million during the three and nine months ended October 29, 2021, respectively, and were $54 million and $221 million during the three and nine months ended October 30, 2020, respectively. Refunds received from Dell pursuant to the Tax Agreements were $45 million during the nine months ended October 29, 2021.
Payments from VMware to Dell under the Tax Agreements 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 Dell is governed by the Tax Agreements. 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 on April 1, 2019 (the “Letter Agreement”). VMware’s 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 VMware’s payments to Dell generally are capped at the amount that VMware would have paid on a separate tax return basis. The difference between the amount of tax calculated on a separate tax return basis and the amount of tax calculated pursuant to the Tax Agreements that was recorded in additional paid-in capital was $45 million during the nine months ended October 30, 2020 and was not significant during the three and nine months ended October 29, 2021 and three months ended October 30, 2020.
As a result of the activity under the Tax Agreements with Dell, amounts due to Dell were $443 million and $451 million as of October 29, 2021 and January 29, 2021, respectively, primarily related to VMware’s estimated tax obligation resulting from the Transition Tax. The U.S. Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Tax Act”) included a deferral election for an eight-year installment payment method on the Transition Tax. The Company expects to pay the remainder of its Transition Tax over a period of four years.
Pivotal Tax Sharing Agreement with Dell
During the fourth quarter of fiscal 2020, VMware completed the acquisition of Pivotal. Prior to the Spin-Off, Pivotal filed a separate tax return for U.S. federal income tax purposes as it left the Dell consolidated tax group at the time of Pivotal’s IPO in April 2018. Pivotal continued to be included on Dell’s unitary state tax returns until the Spin-Off. Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for tax benefits that Dell realized due to Pivotal’s inclusion on such returns. There were no payments received from Dell during the three and nine months ended October 29, 2021 and October 30, 2020.
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):
October 29, | January 29, | ||||||||||
2021 | 2021 | ||||||||||
Due from related parties, current | $ | 748 | $ | 1,558 | |||||||
Due to related parties, current(1) | 88 | 120 | |||||||||
Due from related parties, net, current | $ | 660 | $ | 1,438 | |||||||
(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 October 29, 2021 and January 29, 2021.
Amounts included in due from related parties, net, current, with the exception of DFS and tax obligations, are generally settled in cash within 60 days of each quarter-end.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Notes Payable to Dell
As of January 29, 2021, VMware had an outstanding promissory note payable to Dell in the principal amount of $270 million due December 1, 2022. VMware repaid the outstanding balance of $270 million during the three months ended October 29, 2021. During the three and nine months ended October 29, 2021 and October 30, 2020, interest expense on the notes payable to Dell was not significant.
D. Commitments and Contingencies
Litigation
On March 5, 2020, two purported Pivotal stockholders filed a petition for appraisal in the Delaware Court of Chancery (the “Court”) seeking a judicial determination of the fair value of an aggregate total of 10,000,100 Pivotal shares (the “Appraisal Action”). Separately, on June 4, 2020, purported Pivotal stockholder Kenia Lopez filed a lawsuit in the Court against Dell, VMware, Michael Dell, Robert Mee, and Cynthia Gaylor (the “Lopez Action”), which alleges breach of fiduciary duty and aiding and abetting, all tied to VMware’s acquisition of Pivotal. On July 16, 2020, purported Pivotal stockholder Stephanie Howarth filed a similar lawsuit against the same defendants asserting similar claims (the “Howarth Action”). On August 14, 2020, the Court entered an order consolidating the Appraisal Action, the Lopez Action, and the Howarth Action into a single action (the “Consolidated Action”) for all purposes including pretrial discovery and trial. On June 23, 2020, the Company made a payment of $91 million to the petitioners in the Appraisal Action, which reduces the Company’s exposure to accumulating interest. The parties are now in the discovery stage of the lawsuit. The trial is currently scheduled to begin on July 6, 2022. The Company is unable at this time to assess whether or to what extent it may be found liable and, if found liable, what the damages may be, and believes a loss is not probable and reasonably estimable. The Company intends to vigorously defend itself in connection with this matter.
On April 25, 2019, Cirba Inc. and Cirba IP, Inc. (collectively, “Cirba”) sued VMware in the United States District Court for the District of Delaware (the “Delaware Court”) for allegedly infringing two patents and three trademarks (“First Action”). After an August 6, 2019 hearing, the Delaware Court denied Cirba’s preliminary injunction motion. On August 20, 2019, VMware filed counterclaims against Cirba for infringing four VMware patents. The Delaware Court severed VMware’s patent infringement counterclaims from Cirba’s claims. On January 24, 2020, a jury returned a verdict that VMware had willfully infringed Cirba’s two patents and awarded approximately $237 million in damages. As to Cirba’s trademark-related claims, the jury found that VMware was not liable. A total of $237 million was accrued for the First Action as of January 31, 2020, which reflected the estimated losses that were considered both probable and reasonably estimable at that time. The amount accrued for this matter was included in accrued expenses and other on the consolidated balance sheet as of January 31, 2020 and the charge was included in general and administrative expense on the consolidated statement of income for the year ended January 31, 2020. On March 9, 2020, the parties filed post-trial motions in the First Action. On December 21, 2020, the Delaware Court granted VMware’s request for a new trial based, in part, on Cirba Inc.’s lack of standing, set aside the verdict and damages award, and denied Cirba’s post-trial motions (the “Post-Trial Order”). On October 22, 2019, VMware filed a separate lawsuit against Cirba Inc. in the United States District Court for the Eastern District of Virginia for infringing four additional VMware patents (“Second Action”). The Second Action was transferred to the Delaware Court on February 25, 2020. On March 23, 2020, Cirba filed a counterclaim against VMware in the Second Action alleging infringement of an additional Cirba patent. The Delaware Court consolidated the First and Second Actions and ordered a consolidated trial on all of the parties’ patent infringement claims and counterclaims. On January 20, 2021, Cirba moved to certify the Post-Trial Order to enable an interlocutory appeal to the United States Court of Appeals for the Federal Circuit, and on May 3, 2021 the Court denied Cirba’s motion. Also, on May 3, 2021, the Court granted Cirba’s motion for leave to assert an additional patent against VMware. Separately, VMware has filed challenges with the U.S. Patent and Trademark Office against each of the four patents that are the subject of Cirba’s allegations. To date, of the four challenges, two ex parte reexams have been granted and one Inter Partes Review has been instituted. As of January 29, 2021, the Company reassessed its estimated loss accrual for the First Action based on the Post-Trial Order and determined that a loss was no longer probable and reasonably estimable with respect to the consolidated First and Second Actions. Accordingly, the estimated loss accrual of $237 million recorded on the consolidated balance sheet was derecognized, with the credit included in general and administrative expense on the consolidated income statement for the year ended January 29, 2021. The Company is unable at this time to assess whether, or to what extent, it may be found liable and, if found liable, what the damages may be. The Company intends to vigorously defend against this matter.
In December 2019, the staff of the Enforcement Division of the SEC requested documents and information related to VMware’s backlog and associated accounting and disclosures. VMware is fully cooperating with the SEC’s investigation and is unable to predict the outcome of this matter at this time.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
While VMware believes that it has valid defenses against each of the above legal matters, given the unpredictable nature of legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a material adverse effect on VMware’s consolidated financial statements.
VMware accrues for a liability when a determination has been made that a loss is both probable and the amount of the loss can be reasonably estimated. If only a range can be estimated and no amount within the range is a better estimate than any other amount, an accrual is recorded for the minimum amount in the range. Significant judgment is required in both the determination that the occurrence of a loss is probable and is reasonably estimable. In making such judgments, VMware considers the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs are generally recognized as expense when incurred.
VMware is also subject to other legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business or in connection with business mergers and acquisitions, including claims with respect to commercial, contracting and sales practices, product liability, intellectual property, employment, corporate and securities law, class action, whistleblower and other matters. From time to time, VMware also receives inquiries from and has discussions with government entities and stockholders on various matters. As of October 29, 2021, amounts accrued relating to these other matters arising as part of the ordinary course of business were considered not material. VMware does not believe that any liability from any reasonably possible disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on its consolidated financial statements.
E. Definite-Lived Intangible Assets, Net
As of the periods presented, definite-lived intangible assets consisted of the following (amounts in tables in millions):
October 29, 2021 | |||||||||||||||||||||||
Weighted-Average Useful Lives (in years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||
Purchased technology | 5.3 | $ | 940 | $ | (568) | $ | 372 | ||||||||||||||||
Customer relationships and customer lists | 11.5 | 721 | (351) | 370 | |||||||||||||||||||
Trademarks and tradenames | 7.7 | 131 | (92) | 39 | |||||||||||||||||||
Total definite-lived intangible assets | $ | 1,792 | $ | (1,011) | $ | 781 |
January 29, 2021 | |||||||||||||||||||||||
Weighted-Average Useful Lives (in years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||
Purchased technology | 5.3 | $ | 948 | $ | (462) | $ | 486 | ||||||||||||||||
Customer relationships and customer lists | 11.4 | 727 | (281) | 446 | |||||||||||||||||||
Trademarks and tradenames | 7.6 | 132 | (78) | 54 | |||||||||||||||||||
Other | 2.0 | 21 | (14) | 7 | |||||||||||||||||||
Total definite-lived intangible assets | $ | 1,828 | $ | (835) | $ | 993 |
Amortization expense on definite-lived intangible assets was $75 million and $228 million during the three and nine months ended October 29, 2021, respectively, and $83 million and $244 million during the three and nine months ended October 30, 2020, respectively.
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VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Based on intangible assets recorded as of October 29, 2021 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 2022 | $ | 74 | |||
2023 | 252 | ||||
2024 | 200 | ||||
2025 | 107 | ||||
2026 | 67 | ||||
Thereafter | 81 | ||||
Total | $ | 781 |
F. Realignment
During the third quarter of fiscal 2021, VMware approved a plan to streamline its operations and align resources with its business priorities. As a result of this action, approximately 330 positions were eliminated during the third quarter of fiscal 2021. VMware recognized $44 million and $47 million of severance-related realignment expenses during the three and nine months ended October 30, 2020, respectively, on the condensed consolidated statements of income. Severance payments made under this plan during the three and nine months ended October 30, 2020 were $24 million. Actions associated with this plan were substantially complete by the end of fiscal 2021.
G. 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 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. 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. Since both classes share the same rights in dividends, 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 | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net income | $ | 398 | $ | 434 | $ | 1,234 | $ | 1,267 | |||||||||||||||
Weighted-average shares, basic for Classes A and B | 419,456 | 420,857 | 419,309 | 419,758 | |||||||||||||||||||
Effect of other dilutive securities | 2,307 | 2,543 | 2,892 | 3,335 | |||||||||||||||||||
Weighted-average shares, diluted for Classes A and B | 421,763 | 423,400 | 422,201 | 423,093 | |||||||||||||||||||
Net income per weighted-average share, basic for Classes A and B | $ | 0.95 | $ | 1.03 | $ | 2.94 | $ | 3.02 | |||||||||||||||
Net income per weighted-average share, diluted for Classes A and B | $ | 0.94 | $ | 1.02 | $ | 2.92 | $ | 3.00 |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table sets forth the weighted-average common share equivalents of Class A 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 | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Anti-dilutive securities: | |||||||||||||||||||||||
Employee stock options | 9 | 140 | 17 | 202 | |||||||||||||||||||
Restricted stock units | 181 | 2,968 | 311 | 4,696 | |||||||||||||||||||
Total | 190 | 3,108 | 328 | 4,898 |
H. Cash, Cash Equivalents, Restricted Cash and Short-Term Investments
Cash and Cash Equivalents
Cash and cash equivalents totaled $12.5 billion and $4.7 billion as of October 29, 2021 and January 29, 2021, respectively. Cash equivalents were $11.8 billion as of October 29, 2021 and consisted of money-market funds of $11.7 billion and time deposits of $63 million. Cash equivalents were $3.8 billion as of January 29, 2021 and consisted of money-market funds of $3.7 billion and time deposits of $102 million. Subsequent to the third quarter of fiscal 2022, VMware’s cash and cash equivalents balance as of October 29, 2021 was used to fund a portion of the special dividend in connection with the Spin-Off from Dell. Refer to Note O for more information regarding the Spin-Off.
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 the periods presented (table in millions):
October 29, | January 29, | ||||||||||
2021 | 2021 | ||||||||||
Cash and cash equivalents | $ | 12,500 | $ | 4,692 | |||||||
Restricted cash within other current assets | 47 | 56 | |||||||||
Restricted cash within other assets | 6 | 22 | |||||||||
Total cash, cash equivalents and restricted cash | $ | 12,553 | $ | 4,770 |
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.
Short-Term Investments
Short-term investments totaled $33 million and $23 million as of October 29, 2021 and January 29, 2021, respectively, and consisted of marketable equity securities. Short-term investments as of October 29, 2021 consisted of marketable equity securities that were previously subject to a certain sale restriction and therefore were classified as other assets on the condensed consolidated balance sheet as of January 29, 2021. Refer to Note J for more information regarding the Company’s marketable equity securities.
I. Debt
Unsecured Senior Notes
On August 2, 2021, VMware issued five series of unsecured senior notes pursuant to a public debt offering (the “2021 Senior Notes”). The proceeds from the 2021 Senior Notes were $5.9 billion, net of debt discount of $11 million and debt issuance costs of $47 million. The proceeds from the 2021 Senior Notes were used to fund a portion of the special dividend in connection with the Spin-Off. Refer to Note O for more information regarding the Spin-Off.
VMware also has unsecured senior notes issued on April 7, 2020 (the “2020 Senior Notes”) and on August 21, 2017 (the “2017 Senior Notes", collectively with the 2020 Senior Notes and 2021 Senior Notes, the “Senior Notes”).
17
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The carrying value of the Senior Notes as of the periods presented was as follows (amounts in millions):
October 29, | January 29, | Effective Interest Rate | |||||||||||||||
2021 | 2021 | ||||||||||||||||
2017 Senior Notes: | |||||||||||||||||
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% | ||||||||||||||
2020 Senior Notes: | |||||||||||||||||
4.50% Senior Note Due May 15, 2025 | 750 | 750 | 4.70% | ||||||||||||||
4.65% Senior Note Due May 15, 2027 | 500 | 500 | 4.80% | ||||||||||||||
4.70% Senior Note Due May 15, 2030 | 750 | 750 | 4.86% | ||||||||||||||
2021 Senior Notes: | |||||||||||||||||
0.60% Senior Note Due August 15, 2023 | 1,000 | — | 0.95% | ||||||||||||||
1.00% Senior Note Due August 15, 2024 | 1,250 | — | 1.23% | ||||||||||||||
1.40% Senior Note Due August 15, 2026 | 1,500 | — | 1.61% | ||||||||||||||
1.80% Senior Note Due August 15, 2028 | 750 | — | 2.01% | ||||||||||||||
2.20% Senior Note Due August 15, 2031 | 1,500 | — | 2.32% | ||||||||||||||
Total principal amount | 10,750 | 4,750 | |||||||||||||||
Less: unamortized discount | (16) | (7) | |||||||||||||||
Less: unamortized debt issuance costs | (66) | (26) | |||||||||||||||
Net carrying amount included in long-term debt | 10,668 | 4,717 | |||||||||||||||
Current portion of long-term debt | 1,498 | — | |||||||||||||||
Long-term debt | $ | 9,170 | $ | 4,717 |
Interest on the 2021 Senior Notes is payable semiannually in arrears, on February 15 and August 15 of each year, commencing on February 15, 2022. Interest on the 2020 Senior Notes is payable semiannually in arrears, on May 15 and November 15 of each year, beginning November 15, 2020. The interest rate on the 2020 Senior Notes is subject to adjustment based on certain rating events. Interest on the 2017 Senior Notes is payable semiannually in arrears, on February 21 and August 21 of each year. Interest expense was $72 million and $169 million during the three and nine months ended October 29, 2021, respectively, and $48 million and $135 million during the three and nine months ended October 30, 2020, 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 and may be subject to a make-whole premium. In addition, upon the occurrence of certain change-of-control triggering events and certain downgrades of the ratings on the Senior Notes, VMware may be required to repurchase the notes at a repurchase price equal to 101% of the aggregate principal plus any accrued and unpaid interest on the date of repurchase. The Senior Notes rank equally in right of payment with VMware’s other unsecured and unsubordinated indebtedness and contain restrictive covenants that, in certain circumstances, limit VMware’s ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate, merge, sell or otherwise dispose of all or substantially all of VMware’s assets.
18
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The future principal payments for the Senior Notes as of October 29, 2021 were as follows (amounts in millions):
Remainder of 2022 | $ | — | |||
2023 | 1,500 | ||||
2024 | 1,000 | ||||
2025 | 1,250 | ||||
2026 | 750 | ||||
Thereafter | 6,250 | ||||
Total | $ | 10,750 | |||
Revolving Credit Facility
On September 2, 2021, 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 $1.5 billion for general corporate purposes (the “2021 Revolving Credit Facility”). The 2021 Revolving Credit Facility replaced the Company’s existing $1.0 billion revolving credit facility that was undrawn. Commitments under the 2021 Revolving Credit Facility are available for a period of five years, which may be extended, subject to the satisfaction of certain conditions, by up to two one-year periods. As of October 29, 2021, there was no outstanding borrowing under the 2021 Revolving Credit Facility. The credit agreement contains certain representations, warranties and covenants. Commitment fees, interest rates and other terms of borrowing under the 2021 Revolving Credit Facility may vary based on VMware’s external credit ratings. The amount incurred in connection with the ongoing commitment fee, which is payable quarterly in arrears, was not significant during the three months ended October 29, 2021.
Senior Unsecured Term Loan Facility
On September 2, 2021, VMware received commitments from financial institutions for a three-year senior unsecured term loan facility and a five-year senior unsecured term loan facility that would provide the Company with an aggregate borrowing capacity of up to $4.0 billion. The Company may borrow once up to the aggregate borrowing capacity of $4.0 billion. The term loan facilities contain certain representations, warranties and covenants.
On November 1, 2021, the Company drew down an aggregate of $4.0 billion with a weighted average interest rate of 0.90%. The drawdown was used to fund a portion of the special dividend in connection with the Spin-Off from Dell. Refer to Note O for more information regarding the Spin-Off.
Refer to Note C for disclosure regarding the note payable to Dell.
J. 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.
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.
19
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables set forth the fair value hierarchy of VMware’s cash equivalents and short-term investments that were required to be measured at fair value as of the periods presented (tables in millions):
October 29, 2021 | |||||||||||||||||
Level 1 | Level 2 | Total | |||||||||||||||
Cash equivalents: | |||||||||||||||||
Money-market funds | $ | 11,748 | $ | — | $ | 11,748 | |||||||||||
Time deposits(1) | — | 63 | 63 | ||||||||||||||
Total cash equivalents | $ | 11,748 | $ | 63 | $ | 11,811 | |||||||||||
Short-term investments: | |||||||||||||||||
Marketable equity securities | $ | 33 | $ | — | $ | 33 | |||||||||||
Total short-term investments | $ | 33 | $ | — | $ | 33 |
January 29, 2021 | |||||||||||||||||
Level 1 | Level 2 | Total | |||||||||||||||
Cash equivalents: | |||||||||||||||||
Money-market funds | $ | 3,738 | $ | — | $ | 3,738 | |||||||||||
Time deposits(1) | — | 102 | 102 | ||||||||||||||
Total cash equivalents | $ | 3,738 | $ | 102 | $ | 3,840 | |||||||||||
Short-term investments: | |||||||||||||||||
Marketable equity securities | $ | 23 | $ | — | $ | 23 | |||||||||||
Total short-term investments | $ | 23 | $ | — | $ | 23 |
(1) Time deposits were valued at amortized cost, which approximated fair value.
The note payable to Dell and the Senior Notes were not recorded at fair value. The fair value of the note payable to Dell was $276 million as of January 29, 2021. VMware repaid the outstanding balance of $270 million on the note payable to Dell during the three months ended October 29, 2021. The fair value of the Senior Notes was approximately $11.1 billion and $5.3 billion as of October 29, 2021 and January 29, 2021, respectively. Refer to Note I for more information regarding the Company’s recent offering of the 2021 Senior Notes. Fair value for the note payable to Dell and the Senior Notes was estimated primarily based on observable market interest rates (Level 2 inputs).
VMware offers a deferred compensation plan for eligible employees, which allows participants to defer payment for part or all of their compensation. 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 $176 million and $140 million as of October 29, 2021 and January 29, 2021, respectively, and were included in other assets on the condensed consolidated balance sheets. Liabilities associated with this plan were included in accrued expenses and other of $17 million and in other liabilities of $159 million on the condensed consolidated balance sheet as of October 29, 2021. Liabilities associated with this plan of $140 million were included in other liabilities on the condensed consolidated balance sheet as of January 29, 2021.
Equity Securities With a Readily Determinable Fair Value
VMware’s equity securities include an investment in a company that completed its initial public offering during the third quarter of fiscal 2021. The fair value of the investment is based on quoted prices for identical assets in an active market (Level 1). As of January 29, 2021, this investment had a fair value of $162 million, of which $139 million was included in other assets on the condensed consolidated balance sheet due to a certain sale restriction and $23 million was included in short-term investments as they were unrestricted and available for sale. The sale restriction lapsed for the remaining shares during the three months ended April 30, 2021. As of October 29, 2021, the fair value of the investment was $33 million and was included in short-term investments on the condensed consolidated balance sheet.
The carrying value at the time of sale for the investments sold during the three and nine months ended October 29, 2021 was $38 million and $75 million, respectively. Unrealized losses recognized on the investment still held as of October 29, 2021 were $11 million and $30 million during the three and nine months ended October 29, 2021, respectively. An unrealized gain of
20
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
$189 million was recognized during each of the three and nine months ended October 30, 2020 to adjust the investment to its fair value. A discrete tax expense of $62 million related to the book and tax basis difference on the investment was also recognized during each of the three and nine months ended October 30, 2020. All gains and losses, whether realized or unrealized, are recognized in other income (expense), net on the condensed consolidated statements of income.
Equity Securities Without a Readily Determinable Fair Value
VMware’s equity securities also include investments in privately held companies, which do not have a readily determinable fair value. As of October 29, 2021 and January 29, 2021, investments in privately held companies, which consisted primarily of equity securities, had a carrying value of $165 million and $129 million, respectively, and were included in other assets on the condensed consolidated balance sheets. Unrealized gains recognized on securities still held as of October 29, 2021 were $21 million and $32 million during the three and nine months ended October 29, 2021, respectively. Unrealized losses recognized during each of the three and nine months ended October 30, 2020 were $15 million. 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.
K. 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
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 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 and nine months ended October 29, 2021 and October 30, 2020, 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 October 29, 2021 and January 29, 2021, outstanding forward contracts had a total notional value of $132 million and $486 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. The fair value of these forward contracts was not significant as of October 29, 2021 and January 29, 2021.
During the three and nine months ended October 29, 2021 and October 30, 2020, all cash flow hedges were considered effective.
Forward Contracts Not Designated as Hedges
VMware has established a program that utilizes forward contracts to offset the foreign currency risk associated with net outstanding monetary asset and liability positions. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are reported in other income (expense), net on the condensed consolidated statements of income.
These forward contracts generally have a contractual maturity of one month, and as of October 29, 2021 and January 29, 2021, outstanding forward contracts had a total notional value of $687 million and $1.2 billion, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. The fair value of these forward contracts was not significant as of October 29, 2021 and January 29, 2021.
Gains related to the settlement of forward contracts were $11 million and $27 million during the three and nine months ended October 29, 2021, respectively. Losses related to the settlement of forward contracts were not significant and $34 million during the three and nine months ended October 30, 2020, respectively. Gains and losses are recorded in other income (expense), net on the condensed consolidated statements of income.
21
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 and nine months ended October 29, 2021. 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 October 30, 2020 and resulted in net gains of $14 million during the nine months ended October 30, 2020. Net gains and losses are recorded in other income (expense), net on the condensed consolidated statements of income.
L. Leases
VMware has operating and finance leases primarily related to office facilities and equipment, which have remaining lease terms of one month to 25 years.
The components of lease expense during the periods presented were as follows (table in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Operating lease expense | $ | 48 | $ | 47 | $ | 144 | $ | 137 | |||||||||||||||
Finance lease expense: | |||||||||||||||||||||||
Amortization of right-of-use (“ROU”) assets | 2 | 2 | 5 | 5 | |||||||||||||||||||
Interest on lease liabilities | — | — | 1 | 1 | |||||||||||||||||||
Total finance lease expense | 2 | 2 | 6 | 6 | |||||||||||||||||||
Short-term lease expense | — | 1 | 1 | 2 | |||||||||||||||||||
Variable lease expense | 8 | 7 | 23 | 22 | |||||||||||||||||||
Total lease expense | $ | 58 | $ | 57 | $ | 174 | $ | 167 |
From time to time, VMware enters into lease arrangements with Dell. Lease expense incurred for arrangements with Dell was not significant during the periods presented.
The Company subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income was not significant during each of the three months ended October 29, 2021 and October 30, 2020 and was $16 million and $15 million, respectively, during the nine months ended October 29, 2021 and October 30, 2020.
Supplemental cash flow information related to operating and finance leases during the periods presented was as follows (table in millions):
Nine Months Ended | |||||||||||
October 29, | October 30, | ||||||||||
2021 | 2020 | ||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows from operating leases | $ | 129 | $ | 124 | |||||||
Operating cash flows from finance leases | 1 | 1 | |||||||||
Financing cash flows from finance leases | 3 | 3 | |||||||||
ROU assets obtained in exchange for lease liabilities: | |||||||||||
Operating leases | $ | 124 | $ | 256 | |||||||
Finance leases | — | 1 |
22
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Supplemental balance sheet information related to operating and finance leases as of the periods presented was as follows (table in millions):
October 29, 2021 | |||||||||||
Operating Leases | Finance Leases | ||||||||||
ROU assets, non-current(1) | $ | 1,000 | $ | 48 | |||||||
Lease liabilities, current(2) | $ | 127 | $ | 5 | |||||||
Lease liabilities, non-current(3) | 885 | 45 | |||||||||
Total lease liabilities | $ | 1,012 | $ | 50 |
January 29, 2021 | |||||||||||
Operating Leases | Finance Leases | ||||||||||
ROU assets, non-current(1) | $ | 997 | $ | 53 | |||||||
Lease liabilities, current(2) | $ | 109 | $ | 5 | |||||||
Lease liabilities, non-current(3) | 891 | 50 | |||||||||
Total lease liabilities | $ | 1,000 | $ | 55 |
(1) ROU assets for operating leases are included in and ROU assets for finance leases are included in on the condensed consolidated balance sheets.
(2) Current lease liabilities are included primarily in on the condensed consolidated balance sheets. An insignificant amount is 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 on the condensed consolidated balance sheets.
Lease term and discount rate related to operating and finance leases as of the periods presented were as follows:
October 29, | January 29, | ||||||||||
2021 | 2021 | ||||||||||
Weighted-average remaining lease term (in years) | |||||||||||
Operating leases | 12.1 | 12.6 | |||||||||
Finance leases | 7.5 | 8.3 | |||||||||
Weighted-average discount rate | |||||||||||
Operating leases | 3.3 | % | 3.5 | % | |||||||
Finance leases | 2.9 | % | 2.9 | % |
23
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following represents VMware’s future minimum lease payments under non-cancellable operating and finance leases as of October 29, 2021 (table in millions):
Operating Leases | Finance Leases | ||||||||||
Remainder of 2022 | $ | 32 | $ | 2 | |||||||
2023 | 177 | 7 | |||||||||
2024 | 153 | 7 | |||||||||
2025 | 121 | 6 | |||||||||
2026 | 107 | 7 | |||||||||
Thereafter | 690 | 27 | |||||||||
Total future minimum lease payments | 1,280 | 56 | |||||||||
Less: Imputed interest | (268) | (6) | |||||||||
Total lease liabilities(1) | $ | 1,012 | $ | 50 | |||||||
(1) Total lease liabilities as of October 29, 2021 excluded legally binding lease payments for leases signed but not yet commenced of $62 million.
M. 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 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.
During May 2019, VMware’s board of directors authorized the repurchase of up to $1.5 billion of Class A Stock through January 29, 2021. During July 2020, VMware’s board of directors extended authorization of the existing stock repurchase program through January 28, 2022 and authorized the repurchase of up to an additional $1.0 billion of Class A Stock through January 28, 2022. On October 7, 2021, VMware authorized the termination of the existing stock repurchase program, under which $183 million remained authorized and unpurchased as of October 29, 2021 and authorized a new repurchase program of up to $2.0 billion of Class A Stock through the end of fiscal 2024, in each case, effective upon the consummation of the Spin-Off from Dell on November 1, 2021. Refer to Note O for more information regarding the Spin-Off.
The following table summarizes stock repurchase activity during the periods presented (aggregate purchase price in millions, shares in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Aggregate purchase price | $ | 143 | $ | 255 | $ | 872 | $ | 566 | |||||||||||||||
Class A Stock repurchased | 956 | 1,770 | 5,699 | 4,229 | |||||||||||||||||||
Weighted-average price per share | $ | 149.61 | $ | 144.28 | $ | 153.07 | $ | 133.83 |
VMware Restricted Stock
VMware’s restricted stock primarily consists of RSU awards 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 share of VMware’s Class A Stock.
VMware’s restricted stock also includes PSU awards granted to certain VMware executives and employees. PSU awards 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 Stock at various ratios ranging from 0.4 to 2.0 shares per PSU, depending upon the degree of
24
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
achievement of the performance or market-based target designated by each award. If minimum performance thresholds are not achieved, then no shares are issued.
The following table summarizes restricted stock activity since January 29, 2021 (units in thousands):
Number of Units | Weighted-Average Grant Date Fair Value (per unit) | ||||||||||
Outstanding, January 29, 2021 | 17,790 | $ | 147.46 | ||||||||
Granted | 8,733 | 149.10 | |||||||||
Vested | (5,258) | 139.67 | |||||||||
Forfeited | (2,796) | 149.00 | |||||||||
Outstanding, October 29, 2021 | 18,469 | 149.64 | |||||||||
The aggregate vesting date fair value of VMware’s restricted stock that vested during the nine months ended October 29, 2021 was $822 million. As of October 29, 2021, restricted stock representing 18.5 million shares of VMware’s Class A Stock were outstanding, with an aggregate intrinsic value of $2.8 billion based on VMware’s closing stock price as of October 29, 2021.
Net Excess Tax Benefits
Net excess tax benefits recognized in connection with stock-based awards are included in income tax provision on the condensed consolidated statements of income. Net excess tax benefits recognized during the three and nine months ended October 29, 2021 were not material and $19 million, respectively, and were not material and $32 million during the three and nine months ended October 30, 2020, respectively.
Accumulated Other Comprehensive Loss
The changes in components of accumulated other comprehensive loss during the periods presented were as follows (tables in millions):
Unrealized Gain (Loss) on Forward Contracts | Foreign Currency Translation Adjustments | Total | ||||||||||||||||||
Balance, January 29, 2021 | $ | (1) | $ | (4) | $ | (5) | ||||||||||||||
Unrealized gains (losses), net of tax provision (benefit) of $—, $—, and $— | 1 | — | 1 | |||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income, net of tax (provision) benefit of $—, $—, and $— | 1 | — | 1 | |||||||||||||||||
Other comprehensive income (loss), net | 2 | — | 2 | |||||||||||||||||
Balance, October 29, 2021 | $ | 1 | $ | (4) | $ | (3) | ||||||||||||||
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 $—, $—, and $— | (1) | — | (1) | |||||||||||||||||
Other comprehensive income (loss), net | (1) | — | (1) | |||||||||||||||||
Balance, October 30, 2020 | $ | (1) | $ | (4) | $ | (5) | ||||||||||||||
The effective portion of gains or losses resulting from changes in the fair value of forward contracts designated as cash flow hedging instruments is reclassified to its related operating expense line item on the condensed consolidated statements of income in the same period that the underlying expenses are incurred. The amounts recorded to the related operating expense
25
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
functional line items on the condensed consolidated statements of income were not significant to the individual functional line items during the periods presented.
N. Segment Information
VMware operates in one reportable operating 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 order to allocate resources and assess 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 | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenue: | |||||||||||||||||||||||
License | $ | 710 | $ | 639 | $ | 2,093 | $ | 2,019 | |||||||||||||||
Subscription and SaaS | 820 | 676 | 2,336 | 1,880 | |||||||||||||||||||
Total license and subscription and SaaS | 1,530 | 1,315 | 4,429 | 3,899 | |||||||||||||||||||
Services: | |||||||||||||||||||||||
Software maintenance | 1,354 | 1,282 | 4,011 | 3,797 | |||||||||||||||||||
Professional services | 304 | 267 | 880 | 777 | |||||||||||||||||||
Total services | 1,658 | 1,549 | 4,891 | 4,574 | |||||||||||||||||||
Total revenue | $ | 3,188 | $ | 2,864 | $ | 9,320 | $ | 8,473 |
Revenue by geographic area during the periods presented was as follows (table in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
United States | $ | 1,582 | $ | 1,466 | $ | 4,587 | $ | 4,268 | |||||||||||||||
International | 1,606 | 1,398 | 4,733 | 4,205 | |||||||||||||||||||
Total | $ | 3,188 | $ | 2,864 | $ | 9,320 | $ | 8,473 |
Revenue by geographic area is based on the ship-to addresses of VMware’s customers. No individual country other than the U.S. accounted for 10% or more of revenue during the three and nine months ended October 29, 2021 and October 30, 2020.
Long-lived assets by geographic area, which primarily include property and equipment, net, as of the periods presented were as follows (table in millions):
October 29, | January 29, | ||||||||||
2021 | 2021 | ||||||||||
United States | $ | 864 | $ | 864 | |||||||
International | 245 | 241 | |||||||||
Total | $ | 1,109 | $ | 1,105 |
As of October 29, 2021, the U.S. accounted for approximately 80% of these assets. No individual country other than the U.S. accounted for 10% or more of these assets as of October 29, 2021. As of January 29, 2021, the U.S. and India accounted for approximately 80% and 10% of these assets, respectively.
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VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
O. Subsequent Event
On April 14, 2021, VMware and Dell entered into the Separation Agreement, pursuant to which, subject to the satisfaction of all closing conditions, Dell would distribute the shares of Class A Stock and Class B Stock (collectively, the “Common Stock”) owned by its wholly owned subsidiaries, to the holders of shares of Dell as of a record date determined pursuant to the Separation Agreement on a pro rata basis. On November 1, 2021, VMware’s Spin-Off from Dell was completed, and, in accordance with the Separation Agreement, upon the satisfaction of all conditions and immediately prior to the Spin-Off, VMware paid an $11.5 billion cash dividend, pro rata, to each of the holders of Common Stock, including Dell (the “Special Dividend”), as of the Record Date. Based upon the number of shares of Common Stock held by Dell as of the Record Date, approximately $9.3 billion in cash was paid to Dell. VMware funded the Special Dividend in part through the $10.0 billion of indebtedness incurred during fiscal 2022, including $6.0 billion in 2021 Senior Notes that VMware issued in August 2021 and $4.0 billion in aggregate drawdowns on its senior unsecured term loan facilities on November 1, 2021. Automatically as a result of the Spin-Off, each share of Class B Stock converted into one fully paid and non-assessable share of Class A Stock. As a result of the Spin-Off, entities affiliated with Michael Dell, VMware’s Chairman of the Board, and who also serves as chairman and chief executive officer of Dell (the “MSD Stockholders”), and entities affiliated with Silver Lake Partners (the “SLP Stockholders”), of which Egon Durban, a VMware director, is a managing partner, became owners of direct interests in VMware representing 40.3% and 10.0%, respectively, of VMware’s outstanding stock, based on the shares outstanding as of November 26, 2021. Due to the MSD Stockholders’ and SLP Stockholders’ direct ownership in both VMware and Dell, and Mr. Dell’s executive position with Dell, transactions with Dell will continue to be considered related party transactions following the Spin-Off.
Stock awards that were outstanding at the time of the Special Dividend were adjusted pursuant to existing anti-dilution provisions in the Company’s stock plan documents that provide for equitable adjustments to be determined by VMware’s Compensation Committee in the event of an extraordinary cash dividend. A conversion ratio based on the per share dividend amount and VMware’s closing stock price on November 1, 2021 was used to adjust the stock awards outstanding at the time of the Special Dividend. The anti-dilution adjustments to awards proportionately increased the number of outstanding restricted stock units and stock options and reduced the exercise prices of outstanding stock options by a conversion ratio of 1.2191, resulting in an increase of 4.2 million restricted stock units and stock options. The adjustments did not result in incremental stock-based compensation expense as the anti-dilutive adjustments were required by the Company’s equity incentive plan.
Prior to the Spin-Off, VMware’s financial results were included in the Dell consolidated tax return for U.S. federal income tax purposes, but VMware’s income tax provision or benefit was calculated primarily as though VMware was a separate taxpayer, with certain transactions between VMware and Dell being assessed using consolidated tax return rules. As a result of the Spin-Off, VMware is no longer a member of the Dell consolidated tax group and the Company’s U.S. federal income tax will be reported separately from that of the Dell consolidated tax group. VMware and Dell have agreed to indemnify one another, pursuant to the Tax Matters Agreement, for certain tax liabilities relating to periods prior to the Spin-Off and adjustments to these amounts recognized in future periods will be recorded in other income (expense), net on the condensed consolidated statements of income. Additionally, VMware and Dell have agreed to pay one another for VMware’s tax benefits received from the use of certain tax attributes in any pre-Spin-Off period from a post-Spin-Off period. Due to the timing of the Spin-Off and the complexity in determining the income tax provision and related impact to tax assets and liabilities as a result of leaving the Dell consolidated group, which will also require adjustments to VMware’s tax assets and liabilities, the Company cannot reasonably estimate the impact to the tax provision in its consolidated financial statements for the fiscal year ended January 28, 2022 at this time.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis is provided in addition to the accompanying condensed consolidated financial statements and notes to assist in understanding our results of operations and financial condition. Financial information as of October 29, 2021 should be read in conjunction with our consolidated financial statements for the year ended January 29, 2021 contained in our Annual Report on Form 10-K filed on March 26, 2021.
Period-over-period changes are calculated based upon the respective underlying non-rounded data. We refer to our fiscal years ended January 28, 2022 and January 29, 2021 as “fiscal 2022” and “fiscal 2021,” 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
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”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. IT is working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses through a digital transformation. To take on these challenges, we are working with customers in the areas of hybrid and multi-cloud, modern applications, networking, security and digital workspaces. Our software provides a flexible digital foundation to enable customers in their digital transformations.
Our portfolio supports and addresses the key priorities of our customers including accelerating their cloud journey, migrating and modernizing their applications, empowering digital workspaces, transforming networking and embracing intrinsic security. We enable 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 offerings that may include license and subscription and SaaS, 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 resulting in additional sales of both our existing and newer products and solutions.
Our vSphere and vRealize Cloud Management products form the foundation of our customers’ private cloud environments and provide the capabilities for our customers to extend their private cloud to the public cloud and to help them run, manage, secure and connect all their applications across all clouds and devices.
During the nine months ended October 29, 2021, revenue growth in our subscription and SaaS offerings was primarily driven by our VMware Cloud Provider Program (“VCPP”), VMware Workspace ONE (“Workspace ONE”), VMware Tanzu, VMware Carbon Black Cloud, vRealize Cloud Management and VMware Cloud on AWS. We expect revenue growth derived from our subscription and SaaS offerings to continue. In addition, we expect operating margin to be negatively impacted in fiscal 2022 as a result of our incremental investment in our subscription and SaaS portfolio.
During the nine months ended October 29, 2021, we continued to see 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, which negatively impacted our operating margin. 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 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 on a stand-alone basis, and we believe that the overall growth rate of our combined license and subscription and SaaS revenue, as well as the growth in remaining performance obligations, will become better indicators of our future growth prospects.
Dell Go-to-Market Initiatives
We continue joint marketing, sales, branding and product development efforts with Dell Technologies Inc. (“Dell”) and its subsidiaries to enhance the collective value we deliver to our mutual customers. During the three and nine months ended October 29, 2021, revenue from Dell, including purchases of products and services directly from us, as well as through our channel partners, accounted for 38% and 37% of our consolidated revenue, respectively. During each of the three and nine months ended October 29, 2021, revenue recognized on transactions where Dell acted as an original equipment manufacturer (“OEM”) accounted for 13% of total revenue from Dell, or 5% of our consolidated revenue. The remaining revenue from Dell consisted of Dell acting as a distributor to other non-Dell resellers, reselling products and services as a reseller or purchasing products and services for its own internal use. On certain transactions, Dell Financial Services (“DFS”) also provided financing to our end users at our end users’ discretion.
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COVID-19 Impact
The worldwide spread of COVID-19 resulted in a global slowdown of economic activity while also disrupting sales channels and marketing activities, and the COVID-19 pandemic may cause economic disruption and market volatility in future periods. While the COVID-19 pandemic has not had a material adverse financial impact on our operations to date, the future course of the pandemic, the ongoing economic impact and the degree and rate of economic recovery remain highly uncertain and continue to rapidly evolve. Although the pandemic has not had the level of financial impact on our business we initially expected, we did experience negative impacts on our sales and certain of our financial results and there continues to be uncertainty regarding the magnitude and duration of the economic effects of the COVID-19 pandemic and the extent to which it will have a negative impact on our sales and our financial results for the remainder of fiscal 2022.
We continue to closely monitor the impact of the pandemic on all aspects of our business.
Spin-Off and Special Dividend
On April 14, 2021, we entered into a Separation and Distribution Agreement with Dell (the “Separation Agreement”), pursuant to which, subject to the satisfaction of all closing conditions, Dell would distribute the shares of Class A common stock (“Class A Stock”) and Class B common stock (“Class B Stock” and, collectively, the “Common Stock”) owned by its wholly owned subsidiaries, to the holders of shares of Dell as of a record date determined pursuant to the Separation Agreement on a pro rata basis (the “Spin-Off”). On November 1, 2021, the Spin-Off from Dell was completed, and, in accordance with the Separation Agreement, upon the satisfaction of all conditions and immediately prior to the Spin-Off, we paid an $11.5 billion cash dividend, pro rata, to each of the holders of Common Stock, including Dell (the “Special Dividend”), as of the close of business on October 29, 2021 (the “Record Date”). Based upon the number of shares of Common Stock held by Dell as of the Record Date, approximately $9.3 billion in cash was paid to Dell. We funded the Special Dividend in part through the $10.0 billion of indebtedness incurred during fiscal 2022, including $6.0 billion in senior notes that we issued in August 2021 and $4.0 billion in aggregate drawdowns on our senior unsecured term loan facilities on November 1, 2021. Refer to Note O to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding the Spin-Off and Special Dividend.
Results of Operations
Approximately 70% of our sales are denominated in the United States (“U.S.”) dollar. In certain countries, however, we also invoice and collect in various foreign currencies, principally euro, British pound, Japanese yen, Australian 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.
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Revenue
Our revenue during the periods presented was as follows (dollars in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
License | $ | 710 | $ | 639 | $ | 70 | 11 | % | $ | 2,093 | $ | 2,019 | $ | 75 | 4 | % | |||||||||||||||||||||||||||||||
Subscription and SaaS | 820 | 676 | 144 | 21 | 2,336 | 1,880 | 456 | 24 | |||||||||||||||||||||||||||||||||||||||
Total license and subscription and SaaS | 1,530 | 1,315 | 214 | 16 | 4,429 | 3,899 | 531 | 14 | |||||||||||||||||||||||||||||||||||||||
Services: | |||||||||||||||||||||||||||||||||||||||||||||||
Software maintenance | 1,354 | 1,282 | 72 | 6 | 4,011 | 3,797 | 213 | 6 | |||||||||||||||||||||||||||||||||||||||
Professional services | 304 | 267 | 37 | 14 | 880 | 777 | 102 | 13 | |||||||||||||||||||||||||||||||||||||||
Total services | 1,658 | 1,549 | 110 | 7 | 4,891 | 4,574 | 315 | 7 | |||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 3,188 | $ | 2,864 | $ | 324 | 11 | $ | 9,320 | $ | 8,473 | $ | 847 | 10 | |||||||||||||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
United States | $ | 1,582 | $ | 1,466 | $ | 116 | 8 | % | $ | 4,587 | $ | 4,268 | $ | 319 | 7 | % | |||||||||||||||||||||||||||||||
International | 1,606 | 1,398 | 208 | 15 | 4,733 | 4,205 | 528 | 13 | |||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 3,188 | $ | 2,864 | $ | 324 | 11 | $ | 9,320 | $ | 8,473 | $ | 847 | 10 |
Revenue from our subscription offerings consisted primarily of our VCPP cloud-based offerings that are billed to customers on a consumption basis and revenue from VMware Tanzu and other offerings that are billed on a subscription basis. Revenue from our SaaS offerings consisted primarily of our Unified Endpoint Management mobile solution within Workspace ONE, VMware Cloud on AWS, CloudHealth by VMware, VMware SD-WAN by VeloCloud and VMware Carbon Black Cloud.
License revenue relating to the sale of on-premises licenses that are part of a multi-year contract is generally recognized upon delivery of the underlying license, whereas revenue derived from our subscription and SaaS offerings is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
License Revenue
License revenue increased during the three and nine months ended October 29, 2021 compared to the three and nine months ended October 30, 2020. As customers adopt our cloud-based offerings, license revenue 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 and nine months ended October 29, 2021 compared to the three and nine months ended October 30, 2020. Revenue growth primarily from our VCPP, Workspace ONE, VMware Tanzu, VMware Carbon Black Cloud, vRealize Cloud Management and VMware Cloud on AWS offerings continued to contribute to subscription and SaaS revenue growth during the three and nine months ended October 29, 2021 compared to the three and nine months ended October 30, 2020.
Services Revenue
During the three and nine months ended October 29, 2021, software maintenance revenue continued to benefit from maintenance contracts sold in previous periods. In each period presented, customers purchased, on a weighted-average basis, greater than two years of support and maintenance with each new license purchased.
Professional services revenue increased during the three and nine months ended October 29, 2021 compared to the three and nine months ended October 30, 2020. Services we provide through our technical account managers and our continued focus on solution deployments, including our networking, security, cloud management and digital workspace offerings, contributed to the increase in professional services revenue. We continue to also focus on enabling our partners to deliver professional
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services for our solutions, and as such, our professional services revenue may vary as we continue to leverage our partners. The timing of services rendered will also impact the amount of professional services revenue we recognize during a period.
Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
October 29, | January 29, | ||||||||||
2021 | 2021 | ||||||||||
Unearned license revenue | $ | 17 | $ | 15 | |||||||
Unearned subscription and SaaS revenue | 2,238 | 1,998 | |||||||||
Unearned software maintenance revenue | 6,773 | 7,092 | |||||||||
Unearned professional services revenue | 1,205 | 1,209 | |||||||||
Total unearned revenue | $ | 10,233 | $ | 10,314 |
Unearned subscription and SaaS revenue is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
Unearned software maintenance revenue is attributable to our maintenance contracts and is generally recognized ratably over the contract duration. The weighted-average remaining contractual term as of October 29, 2021 was approximately two years. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.
Remaining Performance Obligations and Backlog
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted non-cancellable customer contracts at the end of any given period.
As of October 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.1 billion, of which approximately 56% is expected to be recognized as revenue over the next twelve months and the remainder thereafter. As of January 29, 2021, the aggregate transaction price allocated to remaining performance obligations was $11.3 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2022, and the remainder thereafter.
Backlog
Backlog is comprised of unfulfilled purchase orders or unfulfilled executed agreements at the end of a given period and is net of related estimated rebates and marketing development funds. Backlog consists of licenses, subscription and SaaS, and services. As of October 29, 2021, our total backlog was $124 million, and our backlog related to licenses was $34 million. For our backlog related to licenses, we generally expect to deliver and recognize as revenue during the following quarter. Backlog totaling $17 million as of October 29, 2021 was excluded from the remaining performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs.
As of January 29, 2021, our total backlog was $93 million, and our backlog related to licenses was $23 million. The amount excluded from the remaining performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs was $18 million as of January 29, 2021.
The amount and composition of backlog will fluctuate period to period, and backlog is managed based upon multiple considerations, including product and geography. We do not believe the amount of backlog is indicative of future sales or revenue or that the mix of backlog at the end of any given period correlates with actual sales performance of a particular geography or particular products and services.
Cost of License Revenue, Cost of Subscription and SaaS Revenue, Cost of Services Revenue and Operating Expenses
Collectively, our cost of license revenue, cost of subscription and SaaS revenue, cost of services revenue and operating expenses primarily reflected increasing cash-based employee-related expenses, driven by incremental growth in headcount and salaries across most of our income statement expense categories for the three and nine months ended October 29, 2021.
Cost of License Revenue
Cost of license revenue primarily consists of the cost of fulfillment of our 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
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software and hardware SD-WAN offerings includes personnel costs and related overhead associated with delivery of our products.
Cost of license revenue during the periods presented was as follows (dollars in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
Cost of license revenue | $ | 37 | $ | 44 | $ | (8) | (17) | % | $ | 110 | $ | 118 | $ | (7) | (6) | % | |||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | (28) | 1 | 1 | — | (9) | |||||||||||||||||||||||||||||||||||||||
Total expenses | $ | 37 | $ | 44 | $ | (8) | (17) | $ | 111 | $ | 119 | $ | (7) | (6) | |||||||||||||||||||||||||||||||||
% of License revenue | 5 | % | 7 | % | 5 | % | 6 | % |
Cost of license revenue remained relatively consistent during the three and nine months ended October 29, 2021 compared to the three and nine months ended October 30, 2020.
Cost of Subscription and SaaS Revenue
Cost of subscription and SaaS revenue primarily includes personnel costs and related overhead associated with hosted services supporting our SaaS offerings. Additionally, cost of subscription and SaaS revenue also includes depreciation of equipment supporting our subscription and SaaS offerings.
Cost of subscription and SaaS revenue during the periods presented was as follows (dollars in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
Cost of subscription and SaaS revenue | $ | 170 | $ | 138 | $ | 32 | 23 | % | $ | 486 | $ | 387 | $ | 99 | 26 | % | |||||||||||||||||||||||||||||||
Stock-based compensation | 5 | 4 | — | 9 | 16 | 13 | 3 | 21 | |||||||||||||||||||||||||||||||||||||||
Total expenses | $ | 175 | $ | 142 | $ | 33 | 23 | $ | 502 | $ | 400 | $ | 102 | 25 | |||||||||||||||||||||||||||||||||
% of Subscription and SaaS revenue | 21 | % | 21 | % | 21 | % | 21 | % |
Cost of subscription and SaaS revenue increased during the three months ended October 29, 2021 compared to the three months ended October 30, 2020. The increase was primarily driven by growth in costs associated with hosted services to support our SaaS offerings of $12 million and increased equipment and depreciation of $11 million. The increase was also driven by growth in cash-based employee-related cost of $10 million, which was primarily driven by incremental growth in headcount.
Cost of subscription and SaaS revenue increased during the nine months ended October 29, 2021 compared to the nine months ended October 30, 2020. The increase was primarily driven by growth in costs associated with hosted services to support our SaaS offerings of $38 million and increased equipment and depreciation of $34 million. The increase was also driven by growth in cash-based employee-related cost of $34 million, which was primarily driven by incremental growth in headcount.
Cost of Services Revenue
Cost of services revenue primarily includes the costs of personnel and related overhead to deliver technical support for our products and costs to deliver professional services. Additionally, cost of services revenue includes depreciation of equipment supporting our service offerings.
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Cost of services revenue during the periods presented was as follows (dollars in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
Cost of services revenue | $ | 341 | $ | 305 | $ | 36 | 12 | % | $ | 981 | $ | 895 | $ | 85 | 9 | % | |||||||||||||||||||||||||||||||
Stock-based compensation | 21 | 25 | (4) | (16) | 70 | 74 | (3) | (5) | |||||||||||||||||||||||||||||||||||||||
Total expenses | $ | 362 | $ | 330 | $ | 32 | 10 | $ | 1,051 | $ | 969 | $ | 82 | 8 | |||||||||||||||||||||||||||||||||
% of Services revenue | 22 | % | 21 | % | 21 | % | 21 | % |
Cost of services revenue increased during the three months ended October 29, 2021 compared to the three months ended October 30, 2020. The increase was primarily driven by growth in cash-based employee-related cost of $33 million, which was primarily driven by incremental growth in headcount and salaries.
Cost of services revenue increased during the nine months ended October 29, 2021 compared to the nine months ended October 30, 2020. The increase was primarily due to growth in cash-based employee-related expenses of $87 million, primarily driven by incremental growth in headcount and salaries. The increase was also driven by increased third-party professional services costs of $18 million. These increases were partially offset by decreased equipment and depreciation of $22 million.
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 and focus on expanding our subscription and SaaS offerings.
Research and development expenses during the periods presented were as follows (dollars in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
Research and development | $ | 643 | $ | 574 | $ | 69 | 12 | % | $ | 1,849 | $ | 1,661 | $ | 187 | 11 | % | |||||||||||||||||||||||||||||||
Stock-based compensation | 125 | 140 | (15) | (11) | 402 | 397 | 6 | 1 | |||||||||||||||||||||||||||||||||||||||
Total expenses | $ | 768 | $ | 714 | $ | 54 | 8 | $ | 2,251 | $ | 2,058 | $ | 192 | 9 | |||||||||||||||||||||||||||||||||
% of Total revenue | 24 | % | 25 | % | 24 | % | 24 | % |
Research and development expenses increased during the three months ended October 29, 2021 compared to the three months ended October 30, 2020. The increase was primarily due to growth in cash-based employee-related expenses of $64 million, primarily driven by incremental growth in headcount and salaries, as well as increased equipment and depreciation of $13 million. These increases were partially offset by increased capitalized internal-use software development costs of $19 million and decreased stock-based compensation of $15 million, primarily due to departure of certain executives.
Research and development expenses increased during the nine months ended October 29, 2021 compared to the nine months ended October 30, 2020. The increase was primarily due to growth in cash-based employee-related expenses of $181 million, primarily driven by incremental growth in headcount and salaries, as well as increased equipment and depreciation of $34 million and increased third-party professional service cost of $11 million. These increases were partially offset by increased capitalized internal-use software development costs of $47 million.
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Sales and Marketing Expenses
Sales and marketing expenses include personnel costs, sales commissions and related overhead associated with the sale and marketing of our license, subscription and SaaS and services offerings, as well as the cost of product launches and marketing initiatives. A significant portion of our sales commissions are deferred and recognized over the expected period of benefit.
Sales and marketing expenses during the periods presented were as follows (dollars in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
Sales and marketing | $ | 937 | $ | 827 | $ | 109 | 13 | % | $ | 2,766 | $ | 2,484 | $ | 283 | 11 | % | |||||||||||||||||||||||||||||||
Stock-based compensation | 74 | 85 | (10) | (12) | 227 | 243 | (17) | (7) | |||||||||||||||||||||||||||||||||||||||
Total expenses | $ | 1,011 | $ | 912 | $ | 99 | 11 | $ | 2,993 | $ | 2,727 | $ | 266 | 10 | |||||||||||||||||||||||||||||||||
% of Total revenue | 32 | % | 32 | % | 32 | % | 32 | % |
Sales and marketing expenses increased during the three months ended October 29, 2021 compared to the three months ended October 30, 2020. The increase was primarily due to growth in cash-based employee-related expenses of $78 million, primarily driven by incremental growth in headcount and salaries, as well as higher commission costs of $21 million resulting from increased sales volume. These increases were partially offset by decreased stock-based compensation of $10 million, primarily due to the vesting of awards associated with prior acquisitions.
Sales and marketing expenses increased during the nine months ended October 29, 2021 compared to the nine months ended October 30, 2020. The increase was primarily due to growth in cash-based employee-related expenses of $217 million, primarily driven by incremental growth in headcount and salaries, as well as higher commission costs of $84 million resulting from increased sales volume. These increases were partially offset by decreased stock-based compensation of $17 million, primarily due to the vesting of awards associated with prior acquisitions, offset in part by an increase in restricted stock unit awards granted to our employees. Additionally, these increases were partially offset by decreased costs incurred for sales enablement-based initiatives of $16 million.
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.
General and administrative expenses during the periods presented were as follows (dollars in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
October 29, | October 30, | October 29, | October 30, | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
General and administrative | $ | 283 | $ | 200 | $ | 83 | 41 | % | $ | 711 | $ | 632 | $ | 79 | 13 | % | |||||||||||||||||||||||||||||||
Stock-based compensation | 33 | 50 | (17) | (34) | 97 | 141 | (44) | (31) | |||||||||||||||||||||||||||||||||||||||
Total expenses | $ | 316 | $ | 250 | $ | 66 | 27 | $ | 808 | $ | 773 | $ | 35 | 5 | |||||||||||||||||||||||||||||||||
% of Total revenue | 10 | % | 9 | % | 9 | % | 9 | % |
General and administrative expenses increased during the three months ended October 29, 2021 compared to the three months ended October 30, 2020. The increase was primarily driven by certain costs incurred related to the Spin-Off, such as legal and advisory fees, of $66 million, offset in part by a decrease in acquisition-related costs $11 million. In addition, cash-based employee-related expenses increased $20 million, primarily driven by incremental growth in headcount and salaries. The increases were partially offset by decreased stock-based compensation of $17 million, primarily due to departure of certain executives.
General and administrative expenses increased during the nine months ended October 29, 2021 compared to the nine months ended October 30, 2020. The increase was primarily driven by certain costs incurred related to the Spin-Off, such as legal and advisory fees, of $72 million, offset in part by a decrease in acquisition-related costs of $49 million. In addition, cash-based employee-related expenses increased $56 million, primarily driven by incremental growth in headcount and salaries. These increases were partially offset by decreased stock-based compensation of $44 million, which was primarily due to the vesting of awards associated with prior acquisitions.
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