Quarterly Report (10-q)

Date : 12/06/2019 @ 9:10PM
Source : Edgar (US Regulatory)
Stock : Vmware Inc (VMW)
Quote : 148.81  3.57 (2.46%) @ 12:59AM
Vmware share price Chart
After Hours
Last Trade
Last $ 146.54 ▼ -2.27 (-1.53%)

Quarterly Report (10-q)

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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 November 1, 2019
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 December 2, 2019, the number of shares of common stock, par value $0.01 per share, of the registrant outstanding was 409,910,050, of which 109,910,050 shares were Class A common stock and 300,000,000 shares were Class B common stock.



TABLE OF CONTENTS
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
9
 
 
 
Item 2.
32
 
 
 
Item 3.
45
 
 
 
Item 4.
46
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
47
 
 
 
Item 1A.
47
 
 
 
Item 2.
67
 
 
 
Item 6.
69
 
 
 
 
70
VMware, Carbon Black, NSX, Workspace ONE, Avi Networks, AetherPal, VMware Cloud, CloudHealth, Horizon, VMware vSAN, VMware Foundation, vSphere, vRealize, Heptio, VeloCloud, PKS, Tanzu, vCloud, and vCloud Air are registered trademarks or trademarks of VMware or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.


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
 
November 1,

November 2,
 
November 1,

November 2,
 
2019

2018
 
2019

2018
Revenue(1):
 
 
 
 
 
 
 
License
$
974

 
$
884

 
$
2,853

 
$
2,558

Services
1,482

 
1,316

 
4,308

 
3,825

Total revenue
2,456

 
2,200

 
7,161

 
6,383

Operating expenses(2):
 
 
 
 
 
 
 
Cost of license revenue
59

 
49

 
160

 
139

Cost of services revenue
319

 
266

 
936

 
777

Research and development
582

 
499

 
1,669

 
1,433

Sales and marketing
827

 
707

 
2,402

 
2,110

General and administrative
238

 
178

 
625

 
529

Realignment and loss on disposition

 
6

 

 
9

Operating income
431

 
495

 
1,369

 
1,386

Investment income
12

 
63

 
40

 
168

Interest expense
(40
)
 
(33
)
 
(107
)
 
(101
)
Other income (expense), net
263

 
(180
)
 
(97
)
 
839

Income before income tax
666

 
345

 
1,205

 
2,292

Income tax provision (benefit)
45

 
11

 
(4,846
)
 
372

Net income
$
621

 
$
334

 
$
6,051

 
$
1,920

Net income per weighted-average share, basic for Classes A and B
$
1.52

 
$
0.82

 
$
14.77

 
$
4.72

Net income per weighted-average share, diluted for Classes A and B
$
1.50

 
$
0.81

 
$
14.52

 
$
4.64

Weighted-average shares, basic for Classes A and B
409,165

 
408,708

 
409,780

 
406,929

Weighted-average shares, diluted for Classes A and B
414,054

 
414,477

 
416,668

 
413,378

__________
 
 
 
 
 
 
 
(1)   Includes related party revenue as follows (refer to Note C):
License
$
375

 
$
290

 
$
1,048

 
$
765

Services
387

 
260

 
1,072

 
694

(2)   Includes stock-based compensation as follows:
 
 
 
 
 
 
Cost of license revenue
$

 
$

 
$
1

 
$
1

Cost of services revenue
18

 
13

 
50

 
37

Research and development
110

 
98

 
306

 
272

Sales and marketing
67

 
53

 
183

 
147

General and administrative
35

 
28

 
92

 
74

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

3


VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
November 1,
 
November 2,
 
November 1,
 
November 2,
 
2019
 
2018
 
2019
 
2018
Net income
$
621

 
$
334

 
$
6,051

 
$
1,920

Other comprehensive income (loss):
 
 
 
 
 
 
 
Changes in market value of available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax provision (benefit) of $—, ($1), $— and ($4)

 
(2
)
 

 
(11
)
Changes in market value of effective foreign currency forward contracts:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax provision (benefit) of $— for all periods
(1
)
 
(4
)
 
3

 
(9
)
Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $— for all periods
(3
)
 
5

 
(2
)
 
(1
)
Net change in market value of effective foreign currency forward contracts
(4
)
 
1

 
1

 
(10
)
Total other comprehensive income (loss)
(4
)
 
(1
)
 
1

 
(21
)
Total comprehensive income, net of taxes
$
617

 
$
333

 
$
6,052

 
$
1,899

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)
 
November 1,

February 1,
 
2019

2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,025

 
$
2,830

Short-term investments

 
19

Accounts receivable, net of allowance for doubtful accounts of $4 and $2
1,488

 
1,576

Due from related parties, net
753

 
937

Other current assets
375

 
289

Total current assets
4,641

 
5,651

Property and equipment, net
1,238

 
1,133

Other assets
2,663

 
1,853

Deferred tax assets
5,260

 
103

Intangible assets, net
910

 
541

Goodwill
7,290

 
5,381

Total assets
$
22,002

 
$
14,662

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
156

 
$
135

Accrued expenses and other
1,563

 
1,593

Current portion of long-term debt and other borrowings
1,847

 

Unearned revenue
4,382

 
3,968

Total current liabilities
7,948

 
5,696

Note payable to Dell
270

 
270

Long-term debt
2,730

 
3,972

Unearned revenue
3,503

 
3,010

Income tax payable
803

 
889

Operating lease liabilities
644

 

Other liabilities
290

 
274

Total liabilities
16,188

 
14,111

Contingencies (refer to Note D)

 

Stockholders’ equity:
 
 
 
Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 109,725 and 110,715 shares
1

 
1

Class B convertible common stock, par value $0.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares
3

 
3

Additional paid-in capital
46

 
531

Accumulated other comprehensive income
3

 
2

Retained earnings
5,761

 
14

Total stockholders’ equity
5,814

 
551

Total liabilities and stockholders’ equity
$
22,002

 
$
14,662

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
 
November 1,
 
November 2,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
6,051

 
$
1,920

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
542

 
465

Stock-based compensation
632

 
531

Deferred income taxes, net
(5,140
)
 
163

Unrealized (gain) loss on equity securities, net
127

 
(837
)
(Gain) loss on disposition of assets, revaluation and impairment, net
(3
)
 
1

Other
3

 
10

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
148

 
297

Other current assets and other assets
(476
)
 
(264
)
Due to/from related parties, net
179

 
(10
)
Accounts payable
17

 
125

Accrued expenses and other liabilities
(58
)
 
(117
)
Income taxes payable
15

 
10

Unearned revenue
745

 
357

Net cash provided by operating activities
2,782

 
2,651

Investing activities:
 
 
 
Additions to property and equipment
(208
)
 
(178
)
Purchases of available-for-sale securities

 
(781
)
Sales of available-for-sale securities

 
186

Maturities of available-for-sale securities

 
1,905

Purchases of strategic investments
(18
)
 
(3
)
Proceeds from disposition of assets
20

 
35

Business combinations, net of cash acquired, and purchases of intangible assets
(2,437
)
 
(519
)
Net cash paid on disposition of a business
(3
)
 
(11
)
Net cash provided by (used in) investing activities
(2,646
)
 
634

Financing activities:
 
 
 
Proceeds from issuance of common stock
200

 
181

Borrowings under term loan, net of issuance costs
1,993

 

Repayment of term loan
(1,400
)
 

Repurchase of common stock
(1,279
)
 

Shares repurchased for tax withholdings on vesting of restricted stock
(393
)
 
(228
)
Payment for common control transaction with Dell

 
(8
)
Principal payments on finance lease obligations
(1
)
 

Net cash used in financing activities
(880
)
 
(55
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(744
)
 
3,230

Cash, cash equivalents and restricted cash at beginning of the period
2,894

 
6,003

Cash, cash equivalents and restricted cash at end of the period
$
2,150

 
$
9,233

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
131

 
$
126

Cash paid for taxes, net
283

 
206

Non-cash items:
 
 
 
Changes in capital additions, accrued but not paid
$
5

 
$
16

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)
 
Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Three Months Ended November 1, 2019
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, August 2, 2019
109

 
$
1

 
300

 
$
3

 
$

 
$
5,188

 
$
7

 
$
5,199

Proceeds from issuance of common stock
1

 

 

 

 
94

 

 

 
94

Issuance of stock-based awards in acquisition

 

 

 

 
10

 

 

 
10

Repurchase and retirement of common stock
(2
)
 

 

 

 
(194
)
 
(48
)
 

 
(242
)
Issuance of restricted stock
2

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock

 

 

 

 
(94
)
 

 

 
(94
)
Stock-based compensation

 

 

 

 
230

 

 

 
230

Total other comprehensive income (loss)

 

 

 

 

 

 
(4
)
 
(4
)
Net income

 

 

 

 

 
621

 

 
621

Balance, November 1, 2019
110

 
$
1

 
300

 
$
3

 
$
46

 
$
5,761

 
$
3

 
$
5,814


 
Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Nine Months Ended November 1, 2019
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, February 1, 2019
111

 
$
1

 
300

 
$
3

 
$
531

 
$
14

 
$
2

 
$
551

Cumulative effect of adoption of new accounting pronouncements

 

 

 

 

 
3

 

 
3

Proceeds from issuance of common stock
1

 

 

 

 
200

 

 

 
200

Issuance of stock-based awards in acquisition

 

 

 

 
12

 

 

 
12

Repurchase and retirement of common stock
(7
)
 

 

 

 
(972
)
 
(307
)
 

 
(1,279
)
Issuance of restricted stock
7

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(2
)
 

 

 

 
(442
)
 

 

 
(442
)
Stock-based compensation

 

 

 

 
632

 

 

 
632

Credit from tax sharing arrangement

 

 

 

 
85

 

 

 
85

Total other comprehensive income (loss)

 

 

 

 

 

 
1

 
1

Net income

 

 

 

 

 
6,051

 

 
6,051

Balance, November 1, 2019
110

 
$
1

 
300

 
$
3

 
$
46

 
$
5,761

 
$
3

 
$
5,814

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

7


VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)

Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Three Months Ended November 2, 2018
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, August 3, 2018
108

 
$
1

 
300

 
$
3

 
$
1,076

 
$
9,362

 
$
(50
)
 
$
10,392

Proceeds from issuance of common stock
1

 

 

 

 
82

 

 

 
82

Issuance of stock-based awards in acquisition

 

 

 

 
2

 

 

 
2

Issuance of restricted stock
2

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(1
)
 

 

 

 
(84
)
 

 

 
(84
)
Stock-based compensation

 

 

 

 
192

 

 

 
192

Total other comprehensive income (loss)

 

 

 

 

 

 
(1
)
 
(1
)
Common control transaction with Dell

 

 

 

 

 
(6
)
 

 
(6
)
Net income

 

 

 

 

 
334

 

 
334

Balance, November 2, 2018
110

 
$
1

 
300

 
$
3

 
$
1,268

 
$
9,690

 
$
(51
)
 
$
10,911


 
Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Nine Months Ended November 2, 2018
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, February 2, 2018
104

 
$
1

 
300

 
$
3

 
$
844

 
$
7,791

 
$
(15
)
 
$
8,624

Cumulative effect of adoption of new accounting pronouncements

 

 

 

 

 
(15
)
 
(15
)
 
(30
)
Proceeds from issuance of common stock
2

 

 

 

 
181

 

 

 
181

Issuance of stock-based awards in acquisition

 

 

 

 
2

 

 

 
2

Issuance of restricted stock
6

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(2
)
 

 

 

 
(287
)
 

 

 
(287
)
Stock-based compensation

 

 

 

 
531

 

 

 
531

Amount due from tax sharing arrangement

 

 

 

 
(3
)
 

 

 
(3
)
Total other comprehensive income (loss)

 

 

 

 

 

 
(21
)
 
(21
)
Common control transaction with Dell

 

 

 

 

 
(6
)
 

 
(6
)
Net income

 

 

 

 

 
1,920

 

 
1,920

Balance, November 2, 2018
110

 
$
1

 
300

 
$
3

 
$
1,268

 
$
9,690

 
$
(51
)
 
$
10,911

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

8


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 their business through a digital transformation. To take on these challenges, VMware is working with customers in the areas of hybrid cloud, multi-cloud, modern applications, networking and security, and digital workspaces. VMware’s software provides a flexible digital foundation to help enable customers in their digital transformations.
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
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 2020. 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 Form 10-K filed on March 29, 2019. 
Effective September 7, 2016, Dell Technologies Inc. (“Dell”) (formerly Denali Holding Inc.) acquired EMC Corporation (“EMC”), VMware’s parent company, including EMC’s majority control of VMware (the “Dell Acquisition”). As of November 1, 2019, Dell controlled 80.7% of VMware’s outstanding common stock and 97.5% of the combined voting power of VMware’s outstanding common stock, including 31 million shares of VMware’s Class A common stock and all of VMware’s Class B common stock.
As VMware is a majority-owned and controlled subsidiary of Dell, its results of operations and financial position are consolidated with Dell’s financial statements. Transactions prior to the effective date of the Dell Acquisition represent transactions only with EMC and its consolidated subsidiaries.
Management believes the assumptions underlying the condensed consolidated financial statements are reasonable. However, the amounts recorded for VMware’s 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.
Intra-Group Transfer of Intellectual Property
During the second quarter of fiscal 2020, the Company completed an intra-group transfer of certain of its intellectual property rights (the “IP”) to its Irish subsidiary, where its international business is headquartered (the “IP Transfer”). The

9

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

transaction will change the Company’s mix of international income from a lower non-U.S. tax jurisdiction to Ireland, which is subject to a statutory tax rate of 12.5%. However, the Company does not expect its effective income tax rate to increase significantly in fiscal 2020, as it expects the income earned in Ireland will largely be offset by certain tax deductions.
A discrete tax benefit of $4.9 billion was recognized as a deferred tax asset during the second quarter of fiscal 2020. This deferred tax asset was recognized as a result of the book and tax basis difference on the IP transferred to Ireland. The tax amortization related to the IP transferred will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely under Irish tax laws. The deferred tax asset and the tax benefit were measured based on the Irish tax rate expected to apply in the years the asset will be recovered. The Company expects to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset periodically. The impact of the transaction to net cash provided by or used in operating, investing and financing activities on the condensed consolidated statements of cash flows during the nine months ended November 1, 2019 was not material.
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.
Significant Accounting Policies
During February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (“Topic 842”). The updated standard requires the recognition of a liability for lease obligations and corresponding right-of-use (“ROU”) assets on the balance sheet, and disclosures of certain information regarding leasing arrangements. VMware adopted this standard effective February 2, 2019 and applied it retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. The Company elected to apply practical expedients upon transition to this standard, which allowed the Company to use the beginning of the period of adoption as the date of initial application, and to not reassess lease classification, treatment of initial direct costs, or whether an existing or expired contract contains a lease. Prior period amounts were not recast under this standard.
Upon adoption, VMware recognized ROU assets of $666 million, a liability for lease obligations of $629 million, and an immaterial cumulative-effect adjustment to retained earnings, net of taxes, as of February 2, 2019. The updated standard did not have a material impact on the condensed consolidated statements of income or net cash provided by or used in operating, investing and financing activities on the condensed consolidated statements of cash flows.
Significant accounting policies applicable to leases reflect the adoption of Topic 842. There were no other changes to VMware’s significant accounting policies described in the Form 10-K filed on March 29, 2019 that had a material impact on the Company’s condensed consolidated financial statements and related notes.
Leases
VMware determines if an arrangement contains a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all economic benefits from and has the ability to direct the use of the asset. ROU assets resulting from operating leases are included in other assets, and operating lease liabilities are included in accrued expenses and other and operating lease liabilities on the condensed consolidated balance sheets. ROU assets resulting from finance leases are included in property and equipment, net, and finance lease liabilities are included in accrued expenses and other and other liabilities on the condensed consolidated balance sheets. The current portion of finance lease liabilities included in accrued expenses and other was not material as of November 1, 2019.
Lease assets and liabilities are measured at the present value of the future minimum lease payments over the lease term at commencement date using the incremental borrowing rate. The incremental borrowing rate is generally determined using factors such as the Treasury yields, the Company’s credit rating and interest rates of similar debt instruments with comparable credit ratings, among others.
The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that VMware will exercise that option. Lease expense resulting from the minimum lease payments is amortized on a straight-line basis over the remaining lease term. VMware elected the practical expedient to exclude leasing arrangements with a duration of less than twelve months.

10

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. Certain lease agreements may contain lease and non-lease components, such as common-area maintenance costs. The Company elected to account for these components as a single lease component in determining the lease liability. Variable lease payments, which are primarily comprised of common-area maintenance, utilities and real estate taxes that are passed on from the lessor in proportion to the space leased by the Company, are recognized in operating expenses in the period in which the obligation for those payments are incurred.
The Company subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income was not material for all periods presented.
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 $31 million and $24 million as of November 1, 2019 and February 1, 2019, 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 November 1, 2019, customer deposits related to customer prepayments and cloud credits of $248 million were included in accrued expenses and other, and $102 million were included in other liabilities on the condensed consolidated balance sheets. As of February 1, 2019, customer deposits related to customer prepayments and cloud credits of $238 million were included in accrued expenses and other, and $60 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 November 1, 2019 and February 1, 2019 were not significant. Deferred commissions included in other assets were $799 million and $756 million as of November 1, 2019 and February 1, 2019, respectively.
Amortization expense for deferred commissions was included in sales and marketing on the condensed consolidated statements of income and was $79 million and $230 million during the three and nine months ended November 1, 2019, respectively, and $64 million and $193 million during the three and nine months ended November 2, 2018, respectively.

11

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
 
November 1,
 
February 1,
 
2019
 
2019
Unearned license revenue
$
458

 
$
255

Unearned software maintenance revenue
6,545

 
5,972

Unearned professional services revenue
882

 
751

Total unearned revenue
$
7,885

 
$
6,978


Unearned license revenue is primarily related to the allocated portion of VMware’s software-as-a-service (“SaaS”) offerings and 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 over time on a ratable basis over the contract duration. The weighted-average remaining contractual term as of November 1, 2019 was approximately two years. In addition, unearned software maintenance revenue also includes the allocated portion of VMware’s SaaS offerings. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.
The following tables summarize unearned revenue activity during the periods presented (table in millions):
 
Three Months Ended
 
May 3,
 
August 2,
 
November 1,
 
2019
 
2019
 
2019
Balance, beginning of the period
$
6,978

 
$
7,119

 
$
7,533

Current period billings
1,506

 
1,827

 
1,667

Revenue recognized from amounts previously classified as unearned revenue(1)
(1,365
)
 
(1,420
)
 
(1,469
)
Other(2)

 
7

 
154

Balance, end of the period
$
7,119

 
$
7,533

 
$
7,885


(1) Revenue recognized from performance obligations that were fully satisfied upon delivery, such as on-premises license, for contracts that were executed during the periods presented was not included.
(2) Amount for the three months ended November 1, 2019 primarily represents unearned revenue assumed in the acquisition of Carbon Black, Inc. (“Carbon Black”). Refer to Note E for disclosure regarding VMware’s acquisition of Carbon Black.
 
Three Months Ended
 
May 4,
 
August 3,
 
November 2,
 
2018
 
2018
 
2018
Balance, beginning of the period
$
5,839

 
$
5,756

 
$
6,030

Current period billings
1,210

 
1,507

 
1,464

Revenue recognized from amounts previously classified as unearned revenue(1)
(1,215
)
 
(1,233
)
 
(1,299
)
Other
(78
)
 

 
6

Balance, end of the period
$
5,756

 
$
6,030

 
$
6,201

(1) Revenue recognized from performance obligations that were fully satisfied upon delivery, such as on-premises license, for contracts that were executed during the periods presented was not included.
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

12

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.
As of November 1, 2019, the aggregate transaction price allocated to remaining performance obligations was $8.5 billion, of which approximately 55% is expected to be recognized as revenue over the next twelve months and the remainder thereafter. As of February 1, 2019, the aggregate transaction price allocated to remaining performance obligations was $7.7 billion, of which approximately 56% was expected to be recognized as revenue during fiscal 2020, and the remainder thereafter.
C. Related Parties
The information provided below includes a summary of the transactions entered into with Dell and Dell’s consolidated subsidiaries, including EMC (collectively, “Dell”).
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 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.
Pursuant to an ongoing distribution agreement, VMware acts as the selling agent for certain products and services of Pivotal Software, Inc. (“Pivotal”), a subsidiary of Dell, in exchange for an agency fee. Under this agreement, cash is collected from the end user by VMware and remitted to Pivotal, net of the contractual agency fee.
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.
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

November 1,
 
November 2,
 
November 1,
 
November 2,

November 1,

February 1,

2019
 
2018
 
2019
 
2018

2019

2019
Reseller revenue
$
730


$
544

 
$
2,076

 
$
1,435


$
3,031


$
2,375

Internal-use revenue
32


5

 
43

 
17


49


13

Agency fee revenue



 
1

 
4





Collaborative technology project receipts
2


1

 
7

 
3


 n/a


 n/a


Customer deposits resulting from transactions with Dell were $151 million and $85 million as of November 1, 2019 and February 1, 2019, 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

13

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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 United States (“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.
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.
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
 
November 1,

November 2,
 
November 1,

November 2,
 
2019

2018
 
2019

2018
Purchases and leases of products and purchases of services(1)
$
60


$
38

 
$
196

 
$
129

Dell subsidiary support and administrative costs
14


25

 
60

 
79


(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.
During the fourth quarter of fiscal 2020, VMware entered into an arrangement with Dell to transfer approximately 250 employees from the Dell Technologies Consulting group to VMware. These employees are experienced in providing professional services delivering VMware technology and this transfer centralizes these resources within VMware in order to serve its customers more efficiently and effectively. The transfer is expected to be substantially completed during the fourth quarter of fiscal 2020 and VMware also expects that Dell will resell VMware consulting solutions to its customers.
Dell Financial Services (“DFS”)
DFS provided 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 of $34 million and $29 million during the nine months ended November 1, 2019 and November 2, 2018, respectively. Financing fees during the three months ended November 1, 2019 and November 2, 2018 were not significant.
Tax Sharing Agreement with Dell
The following table summarizes the payments made to Dell pursuant to a tax sharing agreement during the periods presented (table in millions):
 
Three Months Ended
 
Nine Months Ended
 
November 1,
 
November 2,
 
November 1,
 
November 2,
 
2019
 
2018
 
2019
 
2018
Payments from VMware to Dell, net
$
43

 
$
100

 
$
132

 
$
103


Payments from VMware to Dell under the tax sharing agreement relate to VMware’s portion of federal income taxes on Dell’s consolidated tax return as well as state tax payments for combined states. The timing of the tax payments due to and from related parties is governed by the tax sharing agreement. VMware’s portion of the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (the “Transition Tax”) is governed by a letter agreement between Dell, EMC and VMware executed during the first quarter of fiscal 2020 (the “Letter Agreement”). The amounts that VMware pays to Dell for its portion of federal income taxes on Dell’s consolidated tax return differ from the amounts VMware would owe on a separate tax return basis and the difference is recognized as a component of additional paid-in capital, generally in the period in which

14

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

the consolidated tax return is filed. The difference between the amount of tax calculated on a separate tax return basis and the amount of tax calculated pursuant to the tax sharing agreement recorded in additional paid-in capital during the nine months ended November 1, 2019 was $85 million, primarily due to a reduction in Transition Tax liability based on the terms of the Letter Agreement and certain tax attribute determination made by Dell. The amount recognized in additional paid-in capital during the three months ended November 1, 2019 and the three and nine months ended November 2, 2018 was not significant.
During the third quarter of fiscal 2020, VMware and Dell entered into a support agreement in connection with VMware’s entry into a definitive agreement to acquire Pivotal, which provides that, prior to the close of the proposed acquisition of Pivotal, VMware and Dell will execute an amended tax sharing agreement that will, subject to certain exceptions, generally limit VMware’s maximum annual tax liability to Dell to the amount VMware would owe on a separate tax return basis.
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):
 
November 1,
 
February 1,
 
2019
 
2019
Due from related parties, current
$
906

 
$
1,079

Due to related parties, current(1)
153

 
142

Due from related parties, net, current(2)
$
753


$
937

 
 
 
 
Income tax due to related parties, current
$
60


$

Income tax due to related parties, non-current
492


646


(1) Includes an immaterial amount related to the Company’s current operating lease liabilities due to related parties as of November 1, 2019.
(2) 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 November 1, 2019.
Amounts included in due from related parties, net, excluding DFS and tax obligations, includes the current portion of amounts due to and due from related parties. Amounts included in due from related parties, net are generally settled in cash within 60 days of each quarter-end.
Notes Payable to Dell
On January 21, 2014, VMware entered into a note exchange agreement with its parent company providing for the issuance of three promissory notes in the aggregate principal amount of $1.5 billion, which consisted of outstanding principal due on the following dates: $680 million due May 1, 2018, $550 million due May 1, 2020 and $270 million due December 1, 2022.
On August 21, 2017, VMware repaid two of the notes payable to Dell in the aggregate principal amount of $1.2 billion, representing repayment of the note due May 1, 2018 at par value and repayment of the note due May 1, 2020 at a discount. The remaining note payable of $270 million due December 1, 2022 may be prepaid without penalty or premium.
Interest is payable quarterly in arrears at the annual rate of 1.75%. During the three and nine months ended November 1, 2019 and November 2, 2018, interest expense on the notes payable to Dell was not significant.
Pivotal
Prior to Pivotal’s initial public offering on April 20, 2018, VMware’s previously held preferred shares were converted to shares of non-trading Class B common stock, resulting in VMware having a financial interest of 17% and a voting interest of 24% in Pivotal as of February 1, 2019. As of November 1, 2019, VMware had a financial interest of 16% and a voting interest of 24% in Pivotal. Refer to Note I for disclosure regarding VMware’s current investment in Pivotal and Note N for disclosure of VMware’s proposed acquisition of Pivotal.
D. Contingencies
Litigation
On April 25, 2019, Cirba Inc. (“Cirba”) filed a lawsuit against VMware in the United States District Court for the District of Delaware, alleging two patent infringement claims and three trademark infringement-related claims. On May 6, 2019, Cirba filed a motion seeking a preliminary injunction tied to one of the two patents it alleges VMware infringes. Following a hearing on August 6, 2019, the Court denied Cirba’s preliminary injunction motion. On August 20, 2019,

15

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

VMware filed counterclaims against Cirba, asserting among other claims that Cirba is infringing four VMware patents. The parties are in the fact discovery and claim construction stage of the case. Trial on Cirba’s claims is currently scheduled for mid-January 2020. No trial date has yet been set on VMware’s claims. On October 22, 2019, VMware filed a separate patent infringement lawsuit against Cirba in the United States District Court for the Eastern District of Virginia, alleging that Cirba also infringes each of these patents. 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 against this matter. 
On August 10, 2015, the Company received a subpoena from the California Attorney General’s office (“California AG”), following the Company’s settlement with the Department of Justice and the General Services Administration during June 2015. In this matter, the California AG is investigating the accuracy of the Company’s sales practices with departments and agencies within the State of California. The Company held meetings with the California AG’s representatives on November 5, 2015 and on October 30, 2019 and discussions are ongoing. 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 against this matter.
On September 11, 2019, Bernard Winkler, a purported stockholder of Carbon Black, filed a class action lawsuit against Carbon Black, the Carbon Black Board and VMware in the United States District Court for the District of Delaware. The complaint alleges, among other things, that the defendants violated Section 14(e) of the Exchange Act by causing a materially incomplete and misleading Schedule 14D-9 Recommendation Statement that was filed with the SEC on September 6, 2019, and against the Carbon Black Board under Section 20(a) of the Exchange Act as control persons. As relief, the complaint seeks, among other things, rescission of the proposed transaction or rescissory damages, an accounting by defendants for all damages caused to the plaintiff and the class, and the award of attorneys’ fees and expenses. Approximately seven similar lawsuits were filed in various district courts around the country. To date, no plaintiff has filed a motion seeking an injunction or taken any other substantive action. 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 against this matter. 
While VMware believes that it has valid defenses against each of the above legal matters, given the unpredictable nature of legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a material adverse effect on VMware’s condensed consolidated financial statements.
VMware accrues for a liability when a determination has been made that a loss is both probable and the amount of the loss can be reasonably estimated. If only a range can be estimated and no amount within the range is a better estimate than any other amount, an accrual is recorded for the minimum amount in the range. Significant judgment is required in both the determination that the occurrence of a loss is probable and is reasonably estimable. In making such judgments, VMware considers the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs are generally recognized as expense when incurred.
VMware is also subject to other legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business or in connection with business mergers and acquisitions, including claims with respect to commercial, contracting and sales practices, product liability, intellectual property, employment, corporate and securities law, class action, whistleblower and other matters. From time to time, VMware also receives inquiries from and has discussions with government entities and stockholders on various matters. As of November 1, 2019, 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 foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on its condensed consolidated financial statements.
E. Business Combinations, Definite-Lived Intangible Assets, Net and Goodwill
Business Combinations
Acquisition of Carbon Black
On October 8, 2019, VMware completed the acquisition of Carbon Black, a developer of cloud-native endpoint protection, in a cash tender offer for all of the outstanding shares of Carbon Black’s common stock, at a price of $26.00 per share. VMware acquired Carbon Black to create a comprehensive intrinsic security portfolio to protect workloads, clients and infrastructure from cloud to edge. Management believes the acquisition will result in synergies with the Carbon Black platform and its VMware NSX and VMware Workspace ONE offerings, among others, and enable VMware to offer a highly-differentiated intrinsic security platform addressing multiple concerns of the security industry. The total preliminary purchase price was $2.0 billion, net of cash acquired of $111 million.

16

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Merger consideration totaling $18 million is held with a third-party paying agent and is payable to a certain employee of Carbon Black subject to specified future employment conditions, and is being recognized as expense over the requisite service period of approximately two years on a straight-line basis.
VMware assumed all of Carbon Black’s unvested stock options and restricted stock outstanding at the completion of the acquisition with an estimated fair value of $181 million. Of the total consideration, $10 million was allocated to the purchase price and $171 million was allocated to future services and will be expensed over the remaining requisite service periods of approximately three years on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.2 was applied to convert Carbon Black’s outstanding stock awards into shares of VMware's common stock.
The following table summarizes the preliminary allocation of the consideration to the fair value of the assets acquired and liabilities assumed on the date of acquisition (table in millions):
Cash
$
111

Accounts receivable
58

Intangible assets
492

Goodwill
1,588

Other acquired assets
52

Total assets acquired
2,301

Unearned revenue
151

Other assumed liabilities
45

Total liabilities assumed
196

Fair value of assets acquired and liabilities assumed
$
2,105


The following table summarizes the components of the intangible assets acquired and their estimated useful lives by VMware in conjunction with the acquisition (amounts in table in millions):
 
Weighted-Average Useful Lives
(in years)
 
Fair Value Amount
Purchased technology
4.2
 
$
232

Customer relationships and customer lists
7.0
 
215

Trademarks and tradenames
5.0
 
25

Other
2.0
 
20

Total definite-lived intangible assets
 
 
$
492


The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The estimated fair value assigned to the tangible assets, identifiable intangible assets, and assumed liabilities were based on management's estimates and assumptions. The initial allocation of the purchase price was based on preliminary valuations and assumptions and is subject to change within the measurement period, including current and non-current income taxes payable and deferred taxes as additional information is received and tax returns are finalized. VMware expects to finalize the allocation of the purchase price within the measurement period. Management expects that goodwill and identifiable intangible assets will not be deductible for tax purposes.
The pro forma financial information assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
Other Business Combinations completed during the third quarter of fiscal 2020
During the third quarter of fiscal 2020, VMware completed four other acquisitions, which were not material individually to the condensed consolidated financial statements. VMware expects these acquisitions to enhance its product features and capabilities for its Software-Defined Data Center solutions and SaaS offerings. The aggregate purchase price, net of cash acquired for these four acquisitions was $68 million, which primarily included $21 million of identifiable intangible assets and

17

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

$48 million of goodwill, of which the majority is not expected to be deductible for tax purposes. The identifiable intangible assets had estimated useful lives of one year to five years and primarily consisted of completed technology.
The pro forma financial information assuming the acquisitions had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisitions, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes, both individually or in the aggregate.
Acquisition of Avi Networks, Inc.
During the second quarter of fiscal 2020, VMware completed the acquisition of Avi Networks, Inc. (“Avi Networks”), a provider of multi-cloud application delivery services. VMware acquired Avi Networks to provide customers with application delivery controller capabilities that include server load balancing for various applications and analytics. Together, VMware and Avi Networks expect to deliver a software defined networking stack built for the multi-cloud environment. The total purchase price was $326 million, net of cash acquired of $9 million. The purchase price primarily included $94 million of identifiable intangible assets and $228 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets primarily consisted of completed technology of $79 million and customer relationships of $15 million, with estimated useful lives of one year to eight years.
Merger consideration totaling $27 million is held in escrow and is payable to certain employees of Avi Networks subject to specified future employment conditions, and is being recognized as expense over the requisite service period of approximately three years on a straight-line basis.
The fair value of assumed unvested equity awards attributed to post-combination services was $32 million and is being expensed over the remaining requisite service periods of approximately three years on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
The initial allocation of the purchase price was based on preliminary valuations and assumptions and is subject to change within the measurement period. VMware expects to finalize the allocation of the purchase price within the measurement period.
The pro forma financial information assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
Acquisition of AetherPal, Inc.
During the first quarter of fiscal 2020, VMware completed the acquisition of AetherPal Inc., a provider of remote support solutions, to enhance VMware’s Workspace ONE offerings. The total purchase price was $45 million, which primarily included $12 million of identifiable intangible assets and $33 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets primarily consisted of completed technology and customer relationships, with estimated useful lives of three years to five years.
The pro forma financial information assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
Definite-Lived Intangible Assets, Net
As of the periods presented, definite-lived intangible assets consisted of the following (amounts in tables in millions):
 
November 1, 2019
 
Weighted-Average Useful Lives
(in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Purchased technology
5.4
 
$
827

 
$
(309
)
 
$
518

Customer relationships and customer lists
7.2
 
426

 
(116
)
 
310

Trademarks and tradenames
7.2
 
111

 
(49
)
 
62

Other
2.0
 
21

 
(1
)
 
20

Total definite-lived intangible assets
 
 
$
1,385

 
$
(475
)
 
$
910


18

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

 
February 1, 2019
 
Weighted-Average Useful Lives
(in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Purchased technology
6.3
 
$
781

 
$
(503
)
 
$
278

Leasehold interest
34.9
 
149

 
(33
)
 
116

Customer relationships and customer lists
7.5
 
193

 
(96
)
 
97

Trademarks and tradenames
7.9
 
86

 
(40
)
 
46

Other
3.9
 
7

 
(3
)
 
4

Total definite-lived intangible assets
 
 
$
1,216

 
$
(675
)
 
$
541


Upon adoption of Topic 842 on February 2, 2019, leasehold interest of $116 million related to favorable terms of certain ground lease agreements was derecognized and adjusted to the carrying amount of the operating lease ROU assets and classified as other assets on the condensed consolidated balance sheets. Prior to adoption, these assets were classified as intangible assets, net on the condensed consolidated balance sheets.
Amortization expense on definite-lived intangible assets was $49 million and $138 million during the three and nine months ended November 1, 2019, respectively, and $39 million and $117 million during the three and nine months ended November 2, 2018, respectively.
Based on intangible assets recorded as of November 1, 2019 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 2020
$
62

2021
218

2022
199

2023
168

2024
133

Thereafter
130

Total
$
910


Goodwill
The following table summarizes the changes in the carrying amount of goodwill during the nine months ended November 1, 2019 (table in millions):
Balance, February 1, 2019
$
5,381

Increase in goodwill related to business combinations
1,909

Balance, November 1, 2019
$
7,290


F. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding and potentially dilutive securities outstanding during the period, as calculated using the treasury stock method. Potentially dilutive securities primarily include unvested restricted stock units (“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 as both classes share the same rights in dividends; therefore, basic and diluted earnings per share are the same for both classes.

19

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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
 
November 1,

November 2,
 
November 1,

November 2,
 
2019

2018
 
2019

2018
Net income
$
621

 
$
334

 
$
6,051

 
$
1,920

Weighted-average shares, basic for Classes A and B
409,165

 
408,708

 
409,780

 
406,929

Effect of other dilutive securities
4,889

 
5,769

 
6,888

 
6,449

Weighted-average shares, diluted for Classes A and B
414,054

 
414,477

 
416,668

 
413,378

Net income per weighted-average share, basic for Classes A and B
$
1.52

 
$
0.82

 
$
14.77

 
$
4.72

Net income per weighted-average share, diluted for Classes A and B
$
1.50

 
$
0.81

 
$
14.52

 
$
4.64


The following table sets forth the weighted-average common share equivalents of Class A common stock that were excluded from the diluted net income per share calculations during the periods presented because their effect would have been anti-dilutive (shares in thousands):
 
Three Months Ended
 
Nine Months Ended
 
November 1,
 
November 2,
 
November 1,

November 2,
 
2019
 
2018
 
2019

2018
Anti-dilutive securities:
 
 
 
 
 
 
 
Employee stock options
147

 
50

 
6

 
20

Restricted stock units
4,220

 
219

 
363

 
2,045

Employee stock purchase plan
12

 

 
4

 

Total
4,379

 
269

 
373

 
2,065


G. Cash and Cash Equivalents
Cash and cash equivalents as of the periods presented consisted of the following (tables in millions):
 
November 1, 2019
 
Cost or Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
Cash
$
505

 
$

 
$

 
$
505

Cash equivalents:
 
 
 
 
 
 
 
Money-market funds
$
1,468

 
$

 
$

 
$
1,468

Demand deposits and time deposits
52

 

 

 
52

Total cash equivalents
$
1,520

 
$

 
$

 
$
1,520


20

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

 
February 1, 2019
 
Cost or Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
Cash
$
461

 
$

 
$

 
$
461

Cash equivalents:
 
 
 
 
 
 
 
Money-market funds
$
2,316

 
$

 
$

 
$
2,316

Demand deposits and time deposits
53

 

 

 
53

Total cash equivalents
$
2,369

 
$

 
$

 
$
2,369


Restricted Cash
The following table provides a reconciliation of the Company’s cash and cash equivalents, current portion 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 November 1, 2019 and February 1, 2019 (table in millions):
 
November 1,
 
February 1,
 
2019
 
2019
Cash and cash equivalents
$
2,025

 
$
2,830

Restricted cash within other current assets
83

 
35

Restricted cash within other assets
42

 
29

Total cash, cash equivalents and restricted cash
$
2,150

 
$
2,894


Amounts included in restricted cash primarily relate to certain employee-related benefits, as well as amounts related to installment payments to certain employees as part of acquisitions, subject to the achievement of specified future employment conditions.
H. Debt
Unsecured Senior Notes
On August 21, 2017, VMware issued three series of unsecured senior notes (“Senior Notes”) pursuant to a public debt offering. The proceeds from the issuance were $4.0 billion, net of debt discount of $9 million and debt issuance costs of $30 million.
The carrying value of the Senior Notes as of the periods presented was as follows (amounts in millions):
 
November 1,
 
February 1,
 
Effective Interest Rate
 
2019
 
2019
 
Senior Notes:
 
 
 
 
 
2.30% Senior Note Due August 21, 2020
$
1,250

 
$
1,250

 
2.56%
2.95% Senior Note Due August 21, 2022
1,500

 
1,500

 
3.17%
3.90% Senior Note Due August 21, 2027
1,250

 
1,250

 
4.05%
Total principal amount
4,000

 
4,000