VMware, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019(1)
|
|
2018(1)
|
Revenue(2)(3):
|
|
|
|
|
|
License
|
$
|
3,181
|
|
|
$
|
3,042
|
|
|
$
|
2,628
|
|
Subscription and SaaS
|
1,877
|
|
|
1,303
|
|
|
927
|
|
Services
|
5,753
|
|
|
5,268
|
|
|
4,781
|
|
Total revenue
|
10,811
|
|
|
9,613
|
|
|
8,336
|
|
Operating expenses(2)(4):
|
|
|
|
|
|
Cost of license revenue
|
166
|
|
|
150
|
|
|
135
|
|
Cost of subscription and SaaS revenue
|
400
|
|
|
280
|
|
|
200
|
|
Cost of services revenue
|
1,233
|
|
|
1,122
|
|
|
1,072
|
|
Research and development
|
2,522
|
|
|
2,173
|
|
|
1,917
|
|
Sales and marketing
|
3,677
|
|
|
3,230
|
|
|
2,723
|
|
General and administrative
|
1,293
|
|
|
846
|
|
|
722
|
|
Realignment and loss on disposition
|
79
|
|
|
9
|
|
|
104
|
|
Operating income
|
1,441
|
|
|
1,803
|
|
|
1,463
|
|
Investment income
|
60
|
|
|
161
|
|
|
120
|
|
Interest expense
|
(149
|
)
|
|
(134
|
)
|
|
(74
|
)
|
Other income (expense), net
|
86
|
|
|
(1
|
)
|
|
68
|
|
Income before income tax
|
1,438
|
|
|
1,829
|
|
|
1,577
|
|
Income tax provision (benefit)
|
(4,918
|
)
|
|
239
|
|
|
1,152
|
|
Net income
|
6,356
|
|
|
1,590
|
|
|
425
|
|
Less: Net loss attributable to non-controlling interests
|
(56
|
)
|
|
(60
|
)
|
|
(12
|
)
|
Net income attributable to VMware, Inc.
|
$
|
6,412
|
|
|
$
|
1,650
|
|
|
$
|
437
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B
|
$
|
15.37
|
|
|
$
|
3.99
|
|
|
$
|
1.07
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B
|
$
|
15.08
|
|
|
$
|
3.92
|
|
|
$
|
1.04
|
|
Weighted-average shares, basic for Classes A and B
|
417,058
|
|
|
413,769
|
|
|
410,315
|
|
Weighted-average shares, diluted for Classes A and B
|
425,235
|
|
|
421,131
|
|
|
420,887
|
|
__________
|
|
|
|
|
|
(1) Adjusted to reflect the recast of prior period information due to the Pivotal Software, Inc. (“Pivotal”) acquisition, which was accounted for as a transaction between entities under common control (refer to Note B).
|
(2) Effective the fourth quarter of fiscal 2020, revenue recognized from subscription and SaaS offerings is being presented separately (refer to Note A).
|
(3) Includes related party revenue as follows (refer to Note D):
|
License
|
$
|
1,569
|
|
|
$
|
1,176
|
|
|
$
|
715
|
|
Subscription and SaaS
|
342
|
|
|
217
|
|
|
124
|
|
Services
|
1,459
|
|
|
1,003
|
|
|
671
|
|
(4) Includes stock-based compensation as follows:
|
|
|
|
|
|
Cost of license revenue
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Cost of subscription and SaaS revenue
|
13
|
|
|
7
|
|
|
5
|
|
Cost of services revenue
|
83
|
|
|
58
|
|
|
53
|
|
Research and development
|
459
|
|
|
391
|
|
|
363
|
|
Sales and marketing
|
293
|
|
|
226
|
|
|
205
|
|
General and administrative
|
168
|
|
|
117
|
|
|
84
|
|
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
|
2020
|
|
2019(1)
|
|
2018(1)
|
Net income
|
|
$
|
6,356
|
|
|
$
|
1,590
|
|
|
$
|
425
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Changes in market value of available-for-sale securities:
|
|
|
|
|
|
|
Unrealized gains (losses), net of tax provision (benefit) of $—, $— and ($5)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $—, $10 and $2
|
|
—
|
|
|
30
|
|
|
3
|
|
Net change in market value of available-for-sale securities
|
|
—
|
|
|
30
|
|
|
(9
|
)
|
Changes in market value of effective foreign currency forward contracts:
|
|
|
|
|
|
|
Unrealized gains (losses), net of tax provision (benefit) of $— for all periods
|
|
—
|
|
|
2
|
|
|
1
|
|
Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $— for all periods
|
|
(2
|
)
|
|
—
|
|
|
(3
|
)
|
Net change in market value of effective foreign currency forward contracts
|
|
(2
|
)
|
|
2
|
|
|
(2
|
)
|
Foreign currency translation adjustments
|
|
—
|
|
|
(26
|
)
|
|
35
|
|
Total other comprehensive income (loss)
|
|
(2
|
)
|
|
6
|
|
|
24
|
|
Total comprehensive income, net of taxes
|
|
6,354
|
|
|
1,596
|
|
|
449
|
|
Less: Net loss attributable to the non-controlling interests
|
|
(56
|
)
|
|
(60
|
)
|
|
(12
|
)
|
Less: Other comprehensive income (loss) attributable to non-controlling interests
|
|
—
|
|
|
4
|
|
|
(2
|
)
|
Comprehensive income attributable to VMware, Inc.
|
|
$
|
6,410
|
|
|
$
|
1,652
|
|
|
$
|
463
|
|
__________
|
|
|
|
|
|
|
(1) Adjusted to reflect the recast of prior period information due to the Pivotal acquisition, which was accounted for as a transaction between entities under common control (refer to Note B).
|
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019(1)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
2,915
|
|
|
$
|
3,532
|
|
Short-term investments
|
—
|
|
|
19
|
|
Accounts receivable, net of allowance for doubtful accounts of $7 and $6(1)
|
1,883
|
|
|
1,723
|
|
Due from related parties, net
|
1,457
|
|
|
1,090
|
|
Other current assets
|
436
|
|
|
305
|
|
Total current assets
|
6,691
|
|
|
6,669
|
|
Property and equipment, net
|
1,280
|
|
|
1,162
|
|
Other assets
|
2,266
|
|
|
1,088
|
|
Deferred tax assets
|
5,556
|
|
|
290
|
|
Intangible assets, net
|
1,172
|
|
|
966
|
|
Goodwill
|
9,329
|
|
|
7,418
|
|
Total assets
|
$
|
26,294
|
|
|
$
|
17,593
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
208
|
|
|
$
|
153
|
|
Accrued expenses and other
|
2,151
|
|
|
1,664
|
|
Current portion of long-term debt and other borrowings
|
2,747
|
|
|
—
|
|
Unearned revenue
|
5,218
|
|
|
4,339
|
|
Total current liabilities
|
10,324
|
|
|
6,156
|
|
Note payable to Dell
|
270
|
|
|
270
|
|
Long-term debt
|
2,731
|
|
|
3,972
|
|
Unearned revenue
|
4,050
|
|
|
3,100
|
|
Income tax payable
|
817
|
|
|
889
|
|
Operating lease liabilities
|
746
|
|
|
—
|
|
Other liabilities
|
347
|
|
|
315
|
|
Total liabilities
|
19,285
|
|
|
14,702
|
|
Contingencies (refer to Note E)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 110,484 and 110,715 shares
|
1
|
|
|
1
|
|
Class B convertible common stock, par value $0.01; authorized 1,000,000 shares; issued and outstanding 307,222 and 300,000 shares
|
3
|
|
|
3
|
|
Additional paid-in capital
|
2,000
|
|
|
2,959
|
|
Accumulated other comprehensive loss
|
(4
|
)
|
|
(2
|
)
|
Retained earnings (Accumulated deficit)
|
5,009
|
|
|
(1,096
|
)
|
Total VMware, Inc. stockholders’ equity
|
7,009
|
|
|
1,865
|
|
Non-controlling interests
|
—
|
|
|
1,026
|
|
Total stockholders’ equity
|
7,009
|
|
|
2,891
|
|
Total liabilities and stockholders’ equity
|
$
|
26,294
|
|
|
$
|
17,593
|
|
__________
|
|
|
|
(1) Adjusted to reflect the recast of prior period information due to the Pivotal acquisition, which was accounted for as a transaction between entities under common control (refer to Note B).
|
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019(1)
|
|
2018(1)
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
6,356
|
|
|
$
|
1,590
|
|
|
$
|
425
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
873
|
|
|
727
|
|
|
618
|
|
Stock-based compensation
|
1,017
|
|
|
800
|
|
|
712
|
|
Deferred income taxes, net
|
(5,284
|
)
|
|
(110
|
)
|
|
303
|
|
Unrealized (gain) loss on equity securities, net
|
(31
|
)
|
|
14
|
|
|
—
|
|
Loss on disposition
|
—
|
|
|
7
|
|
|
95
|
|
(Gain) loss on disposition of assets, revaluation and impairment, net
|
(4
|
)
|
|
2
|
|
|
(45
|
)
|
Gain on extinguishment of debt
|
—
|
|
|
—
|
|
|
(6
|
)
|
Loss on Dell stock purchase
|
—
|
|
|
—
|
|
|
2
|
|
Other
|
9
|
|
|
11
|
|
|
5
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
(119
|
)
|
|
(214
|
)
|
|
(76
|
)
|
Other current assets and other assets
|
(668
|
)
|
|
(347
|
)
|
|
(455
|
)
|
Due to/from related parties, net
|
(374
|
)
|
|
(480
|
)
|
|
(568
|
)
|
Accounts payable
|
35
|
|
|
105
|
|
|
(22
|
)
|
Accrued expenses and other liabilities
|
417
|
|
|
290
|
|
|
354
|
|
Income taxes payable
|
(23
|
)
|
|
(40
|
)
|
|
660
|
|
Unearned revenue
|
1,668
|
|
|
1,302
|
|
|
1,099
|
|
Net cash provided by operating activities
|
3,872
|
|
|
3,657
|
|
|
3,101
|
|
Investing activities:
|
|
|
|
|
|
Additions to property and equipment
|
(279
|
)
|
|
(254
|
)
|
|
(276
|
)
|
Purchases of available-for-sale securities
|
—
|
|
|
(780
|
)
|
|
(4,269
|
)
|
Sales of available-for-sale securities
|
—
|
|
|
3,999
|
|
|
2,195
|
|
Maturities of available-for-sale securities
|
—
|
|
|
2,393
|
|
|
1,573
|
|
Purchases of strategic investments
|
(30
|
)
|
|
(8
|
)
|
|
(37
|
)
|
Proceeds from disposition of assets
|
22
|
|
|
41
|
|
|
13
|
|
Business combinations, net of cash acquired, and purchases of intangible assets
|
(2,437
|
)
|
|
(938
|
)
|
|
(671
|
)
|
Net cash paid on disposition of a business
|
(4
|
)
|
|
(11
|
)
|
|
(52
|
)
|
Net cash provided by (used in) investing activities
|
(2,728
|
)
|
|
4,442
|
|
|
(1,524
|
)
|
Financing activities:
|
|
|
|
|
|
Proceeds from the initial public offering of Pivotal, net of issuance costs paid
|
—
|
|
|
544
|
|
|
—
|
|
Proceeds from issuance of common stock
|
308
|
|
|
259
|
|
|
131
|
|
Net proceeds from issuance of long-term debt
|
—
|
|
|
—
|
|
|
3,961
|
|
Borrowings under term loan, net of issuance costs
|
3,393
|
|
|
—
|
|
|
—
|
|
Borrowings on credit facility, net of debt issuance costs
|
—
|
|
|
15
|
|
|
19
|
|
Repayment of term loan
|
(1,900
|
)
|
|
—
|
|
|
—
|
|
Repayment of notes payable to Dell
|
—
|
|
|
—
|
|
|
(1,225
|
)
|
Repayments on credit facility
|
—
|
|
|
(35
|
)
|
|
—
|
|
Repurchase of common stock
|
(1,334
|
)
|
|
(42
|
)
|
|
(1,449
|
)
|
Shares repurchased for tax withholdings on vesting of restricted stock
|
(534
|
)
|
|
(357
|
)
|
|
(351
|
)
|
Payment for Special Dividend
|
—
|
|
|
(11,000
|
)
|
|
—
|
|
Payment to acquire non-controlling interests
|
(1,666
|
)
|
|
—
|
|
|
—
|
|
Contribution from Dell
|
27
|
|
|
44
|
|
|
43
|
|
Payment for common control transaction with Dell
|
—
|
|
|
(8
|
)
|
|
—
|
|
Principal payments on finance lease obligations
|
(1
|
)
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
(1,707
|
)
|
|
(10,580
|
)
|
|
1,129
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(2
|
)
|
|
1
|
|
|
(3
|
)
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
(565
|
)
|
|
(2,480
|
)
|
|
2,703
|
|
Cash, cash equivalents and restricted cash at beginning of the period
|
3,596
|
|
|
6,076
|
|
|
3,373
|
|
Cash, cash equivalents and restricted cash at end of the period
|
$
|
3,031
|
|
|
$
|
3,596
|
|
|
$
|
6,076
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Issuance of VMware Class B common stock for Pivotal Class B common stock held by Dell
|
$
|
1,101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid for interest
|
134
|
|
|
129
|
|
|
21
|
|
Cash paid for taxes, net
|
369
|
|
|
399
|
|
|
178
|
|
Non-cash items:
|
|
|
|
|
|
Changes in capital additions, accrued but not paid
|
$
|
18
|
|
|
$
|
9
|
|
|
$
|
10
|
|
Changes in tax withholdings on vesting of restricted stock, accrued but not paid
|
(13
|
)
|
|
17
|
|
|
(4
|
)
|
__________
|
|
|
|
|
|
(1) Adjusted to reflect the recast of prior period information due to the Pivotal acquisition, which was accounted for as a transaction between entities under common control (refer to Note B).
|
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock
|
|
Class B
Convertible
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Non-controlling Interests
|
|
Stockholders’
Equity
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
Balance, February 3, 2017(1)
|
110
|
|
|
$
|
1
|
|
|
300
|
|
|
$
|
3
|
|
|
$
|
4,115
|
|
|
$
|
7,016
|
|
|
$
|
(15
|
)
|
|
$
|
505
|
|
|
$
|
11,625
|
|
Proceeds from issuance of common stock
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
122
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
122
|
|
Issuance of stock-based awards in acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Repurchase and retirement of common stock
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,456
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,456
|
)
|
Issuance of restricted stock
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares withheld for tax withholdings on vesting of restricted stock
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(348
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(348
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
683
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
712
|
|
Amount due from tax sharing arrangement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Investment from Dell, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
77
|
|
Total other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
(2
|
)
|
|
24
|
|
Transactions with Pivotal’s non-controlling stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
26
|
|
|
9
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
437
|
|
|
—
|
|
|
(12
|
)
|
|
425
|
|
Balance, February 2, 2018(1)
|
104
|
|
|
1
|
|
|
300
|
|
|
3
|
|
|
3,171
|
|
|
7,453
|
|
|
11
|
|
|
551
|
|
|
11,190
|
|
Cumulative effect of adoption of new accounting pronouncements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
(15
|
)
|
|
—
|
|
|
(30
|
)
|
Proceeds from issuance of common stock
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
188
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
188
|
|
Issuance of stock-based awards in acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Repurchase and retirement of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42
|
)
|
Issuance of restricted stock
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares withheld for tax withholdings on vesting of restricted stock
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(373
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(373
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
731
|
|
|
—
|
|
|
—
|
|
|
69
|
|
|
800
|
|
Credit from tax sharing arrangement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Investment from Dell, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(53
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(52
|
)
|
Total other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
4
|
|
|
6
|
|
Transactions with Pivotal’s non-controlling stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154
|
|
|
—
|
|
|
—
|
|
|
461
|
|
|
615
|
|
Common control transaction with Dell
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Special Dividend
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(822
|
)
|
|
(10,178
|
)
|
|
—
|
|
|
—
|
|
|
(11,000
|
)
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,650
|
|
|
—
|
|
|
(60
|
)
|
|
1,590
|
|
Balance, February 1, 2019(1)
|
111
|
|
|
1
|
|
|
300
|
|
|
3
|
|
|
2,959
|
|
|
(1,096
|
)
|
|
(2
|
)
|
|
1,026
|
|
|
2,891
|
|
Cumulative effect of adoption of new accounting pronouncements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Proceeds from issuance of common stock
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
203
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
203
|
|
Issuance of stock-based awards in acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Repurchase and retirement of common stock
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,024
|
)
|
|
(310
|
)
|
|
—
|
|
|
—
|
|
|
(1,334
|
)
|
Issuance of restricted stock
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares withheld for tax withholdings on vesting of restricted stock
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(521
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(521
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
921
|
|
|
—
|
|
|
—
|
|
|
96
|
|
|
1,017
|
|
Credit from tax sharing arrangement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85
|
|
Investment from Dell, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
22
|
|
Total other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Transactions with Pivotal’s non-controlling stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(649
|
)
|
|
—
|
|
|
—
|
|
|
(1,075
|
)
|
|
(1,724
|
)
|
Issuance of VMware’s Class B common stock issued to Dell
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,412
|
|
|
—
|
|
|
(56
|
)
|
|
6,356
|
|
Balance, January 31, 2020
|
110
|
|
|
$
|
1
|
|
|
307
|
|
|
$
|
3
|
|
|
$
|
2,000
|
|
|
$
|
5,009
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
7,009
|
|
__________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Adjusted to reflect the retrospective combination of VMware and Pivotal, as if the combination had been in effect since the inception of common control (refer to Note B).
|
The accompanying notes are an integral part of the consolidated financial statements.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and multi-cloud, modern applications, networking, security, and digital workspaces. VMware’s software provides a flexible digital foundation to enable customers in their digital transformations.
Retrospective Combination of Historical Financial Statements
In December 2019, VMware completed the acquisition of Pivotal, a subsidiary of VMware’s parent company, Dell Technologies Inc. (“Dell”). The purchase of the controlling interest from Dell was accounted for as a transaction between entities under common control in accordance with Accounting Standards Codification (“ASC”) 805-50, Business Combination - Related Issues, which requires retrospective combination of entities for all periods presented, as if the combination had been in effect since the inception of common control. The consolidated financial statements of VMware and notes thereto are presented in a combined basis, as if both VMware and Pivotal were under common control for all periods presented. Refer to Note B for more information on VMware’s acquisition of Pivotal.
Basis of Presentation
The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for annual financial reporting.
Effective September 7, 2016, 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 January 31, 2020, Dell controlled 80.9% 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.
Management believes the assumptions underlying the 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 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 consolidated financial statements include the accounts of VMware and subsidiaries in which VMware has a controlling financial interest. The portion of results of operations attributable to the non-controlling interests for Pivotal prior to the acquisition was included in net loss attributable to non-controlling interests on the consolidated statements of income for the periods presented. The cumulative portion of the results of operations and changes in the net assets of Pivotal attributable to the non-controlling interests of $1.0 billion was included in non-controlling interests on the consolidated balance sheet as of February 1, 2019. Concurrent with the acquisition of Pivotal from Dell, VMware acquired the non-controlling interests in Pivotal from the holders of Pivotal Class A common stock, and as of January 31, 2020 holds 100% of the controlling financial interest in Pivotal. The cumulative portion of the results of operations and changes in the net assets of Pivotal attributable to the non-controlling interests through the acquisition date was reclassified to additional paid-in capital on the consolidated balance sheet as of January 31, 2020.
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 consolidated statements of cash flows based upon the nature of the underlying transaction.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Revenue Recognition
VMware derives revenue primarily from licensing software under perpetual licenses or consumption-based contracts and related software maintenance and support, subscriptions, hosted services, training and consulting services. VMware accounts for a contract with a customer if all criteria defined by ASC 606, Revenue from Contracts with Customers are met, including that collectibility of consideration is probable. At inception of a contract with a customer, the Company evaluates whether the promised products and services represent distinct performance obligations within the context of the contract. Performance obligations that are both capable of being distinct on their own and distinct within the context of the contract are recognized on their own as distinct performance obligations. Performance obligations under which both of these two criteria are not met are recognized as a combined, single performance obligation. Determining whether the Company’s licenses, subscriptions and services are considered distinct performance obligations that should be accounted for separately or together often involves assumptions and significant judgments that can have a significant impact on the timing and amount of revenue recognized.
Revenue is recognized upon transfer of control of licenses, subscriptions or services to the customer in an amount that reflects the consideration VMware expects to receive in exchange for those licenses, services or subscriptions. Control of a promised license, subscription or service may be transferred to a customer either at a point in time or over time, which affects the timing of revenue recognition. VMware’s contracts with customers may include a combination of licenses, subscriptions and services that are accounted for as distinct performance obligations. Licenses that represent distinct performance obligations are recognized at a point in time when the software license keys have been made available. Licenses sold as part of the Company’s subscriptions that do not represent distinct performance obligations are recognized over time along with the associated services that form a combined performance obligation with the software. Management assesses relevant contractual terms in contracts with customers and applies significant judgment in identifying and accounting for all terms and conditions in certain contracts. Certain contracts include third-party offerings and revenue that may be recognized net of the third-party costs, based upon an assessment as to whether VMware had control of the underlying third-party offering. Revenue is recognized net of any taxes invoiced to customers, which are subsequently remitted to governmental authorities.
From time to time, VMware may enter into revenue and purchase contracts with the same customer within a short period of time. VMware evaluates the underlying economics and fair value of the consideration payable to the customer to determine if any portion of the consideration payable to the customer exceeds the fair value of the goods and services received and should be accounted for as a reduction of the transaction price of the revenue contract.
Effective with the fourth quarter of fiscal 2020, VMware is presenting a new revenue line item in this Annual Report on Form 10-K entitled, “subscription and SaaS revenue.” Previously, subscription and software-as-a-service (“SaaS”) revenue was referred to as “hybrid cloud subscription and SaaS revenue” and was allocated between license revenue and services revenue in the consolidated statements of income. In light of the Company’s recent acquisitions, management decided that revenue recognized from subscription and SaaS offerings will be presented separately as it provides a more meaningful representation of the nature of its revenue. The new subscription and SaaS revenue line item includes revenue from VMware Cloud Provider Program (“VCPP”) cloud offerings that are billed to customers on a consumption basis, revenue from Pivotal and other offerings that are billed on a subscription basis as well as revenue from SaaS offerings, such as VMware Workspace ONE and VMware Cloud on AWS. Revenue and related costs from prior periods have been reclassified to conform to the fiscal 2020 presentation.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the prior period reclassifications for revenue and the corresponding costs resulting from the presentation of the new revenue line item (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
February 1, 2019
|
|
As Previously Reported
|
|
Reclassification For New Revenue Line
|
|
Pivotal Adjustments(1)
|
|
As Adjusted
|
Revenue:
|
|
|
|
|
|
|
|
License
|
$
|
3,788
|
|
|
$
|
(745
|
)
|
|
$
|
(1
|
)
|
|
$
|
3,042
|
|
Subscription and SaaS
|
—
|
|
|
924
|
|
|
379
|
|
|
1,303
|
|
Services
|
5,186
|
|
|
(179
|
)
|
|
261
|
|
|
5,268
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost of license revenue
|
191
|
|
|
(41
|
)
|
|
—
|
|
|
150
|
|
Cost of subscription and SaaS revenue
|
—
|
|
|
198
|
|
|
82
|
|
|
280
|
|
Cost of services revenue
|
1,067
|
|
|
(157
|
)
|
|
212
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
February 2, 2018
|
|
As Previously Reported
|
|
Reclassification For New Revenue Line
|
|
Pivotal Adjustments(1)
|
|
As Adjusted
|
Revenue:
|
|
|
|
|
|
|
|
License
|
$
|
3,200
|
|
|
$
|
(578
|
)
|
|
$
|
6
|
|
|
$
|
2,628
|
|
Subscription and SaaS
|
—
|
|
|
708
|
|
|
219
|
|
|
927
|
|
Services
|
4,662
|
|
|
(130
|
)
|
|
249
|
|
|
4,781
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost of license revenue
|
157
|
|
|
(22
|
)
|
|
—
|
|
|
135
|
|
Cost of subscription and SaaS revenue
|
—
|
|
|
134
|
|
|
66
|
|
|
200
|
|
Cost of services revenue
|
984
|
|
|
(112
|
)
|
|
200
|
|
|
1,072
|
|
(1) Includes adjustments related to the recast of prior periods resulting from the acquisition of Pivotal.
License Revenue
VMware generally sells its license software through distributors, resellers, system vendors, systems integrators and its direct sales force. Performance obligations related to license revenue, including the license portion of term licenses, represent functional intellectual property under which a customer has the legal right to the on-premises license. The license provides significant standalone functionality and is a separate performance obligation from the maintenance and support and professional services sold by VMware. On-premises license revenue is recognized at a point in time, upon delivery and transfer of control of the underlying license to the customer.
License revenue from on-premises license software sold to original equipment manufacturers (“OEMs”) is recognized when the sale to the end user occurs. Revenue is recognized upon reporting by the OEMs of their sales, and for the period where information of the underlying sales has not been made available, revenue is recognized based upon estimated sales.
Subscription and SaaS Revenue
VMware’s subscription and SaaS revenue consists of hosted services, license usage fees from the Company’s VCPP, and perpetual or subscription license sales of its software platform with open source licenses or offerings under which licenses and services are accounted for as combined performance obligations.
VMware’s hosted services consist of certain software offerings sold as a service-based technology without the customer’s ability to take possession of the software over the subscription term. Hosted services are recognized as SaaS revenue over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VCPP partners license on-premises software from VMware on a monthly basis under a usage-based model. Generally, contracts with VCPP partners include cancellation rights. Revenue recognition is based on fees associated with reported license consumption by the VCPP partners and includes estimates for the period when consumption information has not been made available.
Subscription license sales of the Company’s software platform offering provides customers with a term-based license to its platform, which includes, among other items, open-source software, support, enhancements, upgrades and compatibility to certified systems, all of which are offered on an if-and-when available basis. Subscription revenue is recognized ratably over the contract term beginning on the date that the Company’s platform is made available to the customer.
Subscription sales also include offerings sold on a perpetual and term basis where licenses provide customers with access to and the right to utilize the threat intelligence capabilities and ongoing support. VMware considers the software license and access to critical threat intelligence capabilities to be a single performance obligation. Subscription revenue is recognized on a ratable basis over the contract term beginning on the date the software is delivered to the customer.
Subscription licenses sold on a term-basis are generally over a one or three-year duration and invoiced to the customers either upfront, annually, quarterly or monthly.
Services Revenue
VMware’s services revenue generally consists of software maintenance and support and professional services. Software maintenance and support offerings entitle customers to receive major and minor product upgrades, on a when-and-if-available basis, and technical support. Maintenance and support services are comprised of multiple performance obligations including updates, upgrades to licenses and technical support. While separate performance obligations are identified within maintenance and support services, the underlying performance obligations generally have a consistent continuous pattern of transfer to a customer during the term of a contract. Maintenance and support services revenue is recognized over time on a ratable basis over the contract duration.
Professional services include design, implementation, training and consulting services. Professional services performed by VMware represent distinct performance obligations as they do not modify or customize licenses sold. These services are not highly interdependent or highly interrelated to licenses sold such that a customer would not be able to use the licenses without the professional services. Revenue from fixed fee professional services engagements is recognized based on progress made toward the total project effort, which can be reasonably estimated. As a practical expedient, VMware recognizes revenue from professional services engagements invoiced on a time and materials basis as the hours are incurred based on VMware’s right to invoice amounts for performance completed to date.
Contracts with Multiple Performance Obligations
VMware enters into revenue contracts with multiple performance obligations in which a customer may purchase combinations of licenses, maintenance and support, subscriptions, hosted services, training, consulting services, and rights to future products and services. For contracts with multiple performance obligations, VMware allocates total transaction value to the identified underlying performance obligations based on relative standalone selling price (“SSP”). VMware typically estimates SSP of services based on observable transactions when the services are sold on a standalone basis and those prices fall within a reasonable range. VMware utilizes the residual approach to estimate SSP for products or services sold to customers due to highly variable pricing.
Rebates and Marketing Development Funds
Rebates, which are offered to certain channel partners and represent a form of variable consideration, are accounted for as a reduction to the transaction price on eligible contracts.
Rebates are determined based on eligible sales during the quarter or based on actual achievement to quarterly target sales. The reduction of the aggregate transaction price against eligible contracts is allocated to the applicable performance obligations. The difference between the estimated rebates recognized and the actual amounts paid has not been material to date.
Certain channel partners are also reimbursed for direct costs related to marketing or other services that are defined under the terms of the marketing development programs. Estimated reimbursements for marketing development funds are accounted for as consideration payable to a customer, reducing the transaction price of the underlying contracts. The most likely amount method is used to estimate the marketing fund reimbursements at the end of the quarter and the reduction of transaction price is allocated to the applicable performance obligations. The difference between the estimated reimbursement and the actual amount paid to channel partners has not been material to date.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Returns Reserves
With limited exceptions, VMware’s return policy does not allow product returns for a refund. VMware estimates and records reserves for product returns at the time of sale based on historical return rates. Amounts are recorded as a reduction of revenue or unearned revenue. Returns reserves were not material for all periods presented.
Deferred Commissions
Sales commissions, including the employer portion of payroll taxes, earned by VMware’s sales force are considered incremental and recoverable costs of obtaining a contract, and are deferred and generally amortized on a straight-line basis over the expected period of benefit. The expected period of benefit is generally determined using the contract term or underlying technology life, if renewals are expected and the renewal commissions are not commensurate with the initial commissions. Sales commissions related to software maintenance and support renewals are deferred and amortized on a straight-line basis over the contractual renewal period.
Foreign Currency Remeasurement and Translation
The United States (“U.S.”) dollar is the functional currency of VMware’s foreign subsidiaries, except for certain Pivotal foreign subsidiaries. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. VMware records net gains and losses resulting from foreign exchange transactions as a component of foreign currency exchange gains and losses in other income (expense), net on the consolidated statements of income. These gains and losses are net of those recognized on foreign currency forward contracts (“forward contracts”) not designated as hedges that VMware enters into to partially mitigate its exposure to foreign currency fluctuations. Net gains of $31 million and $10 million were recognized during the years ended January 31, 2020 and February 2, 2018, respectively. The net gain recognized during the year ended February 1, 2019 was not significant. VMware records foreign currency translation adjustments in other comprehensive income (loss), and recognized a loss of $26 million during the year ended February 1, 2019 and a gain of $35 million during the year ended February 2, 2018. The amount recognized for foreign currency translation during the year ended January 31, 2020 was not significant.
Cash and Cash Equivalents, Short-Term Investments, and Restricted Cash
From time to time, VMware invests primarily in money market funds, highly liquid debt instruments of the U.S. government and its agencies and U.S. and foreign corporate debt securities. All highly liquid investments with maturities of 90 days or less from date of purchase are classified as cash equivalents and all highly liquid investments with maturities of greater than 90 days from date of purchase as short-term investments. Short-term investments are classified as available-for-sale securities. VMware may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions and strategic investments.
When invested, fixed income investments are reported at market value and unrealized gains and losses on these investments, net of tax, are included in accumulated other comprehensive income, a component of stockholders’ equity. Realized gains or losses are included on the consolidated statements of income. Gains and losses on the sale of fixed income securities issued by the same issuer and of the same type are determined using the first-in first-out method. When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included on the consolidated statements of income.
Cash balances that are restricted pursuant to the terms of various agreements are classified as restricted cash and included in other current assets and other assets in the accompanying consolidated balance sheets. Refer to Note I for more information.
Investments in Equity Securities
VMware holds equity securities in publicly and privately held companies. VMware elected to measure securities in privately held companies at cost less impairment, if any, adjusted for observable price changes in orderly transactions for the identical or a similar security of the same issuer. VMware’s securities in publicly held companies are generally measured at fair value using quoted prices for identical assets in an active market. All gains and losses on these securities, whether realized or unrealized, are recognized in other income (expense), net on the consolidated statements of income. Refer to Note K for more information.
Allowance for Doubtful Accounts
VMware maintains an allowance for doubtful accounts for estimated losses on uncollectible accounts receivable. The allowance for doubtful accounts considers such factors as creditworthiness of VMware’s customers, historical experience, the age of the receivable and current economic conditions. The allowance for doubtful accounts was not significant for all periods presented.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property and Equipment, Net
Property and equipment, net is recorded at cost. Depreciation commences upon placing the asset in service and is recognized on a straight-line basis over the estimated useful life of the assets, as follows:
|
|
|
|
Buildings
|
|
Term of underlying land lease
|
Land improvements
|
|
15 years
|
Furniture and fixtures
|
|
5 to 10 years
|
Equipment
|
|
3 to 6 years
|
Software
|
|
3 to 8 years
|
Leasehold improvements
|
|
20 years, not to exceed the shorter of the estimated useful life or remaining lease term
|
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized on the consolidated statements of income. Repair and maintenance costs that do not extend the economic life of the underlying assets are expensed as incurred.
Capitalized Software Development Costs
Costs associated with internal-use software systems, including those used to provide hosted services, during the application development stage are capitalized. Capitalization of costs begins when the preliminary project stage is completed, management has committed to funding the project, and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization ceases at the point when the project is substantially complete and is ready for its intended purpose. The capitalized amounts are included in property and equipment, net on the consolidated balance sheets.
Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when technological feasibility for the product has been established and ending when the product is available for general release. During the years presented, software development costs incurred for products during the time period between reaching technological feasibility and general release were not material and accordingly were expensed as incurred.
Business Combinations
For business combinations, with the exception of acquisition of entities under common control, VMware recognizes the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in an acquiree, which are measured based on the acquisition date fair value. Goodwill acquired is measured as the excess of consideration transferred over the net amounts of the identifiable tangible and intangible assets acquired and the liabilities assumed at the acquisition date.
VMware uses significant estimates and assumptions, including fair value estimates, to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the acquisition date. When those estimates are provisional, VMware refines them as necessary during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which VMware may gather and analyze the necessary information about facts and circumstances that existed as of the acquisition date to adjust the provisional amounts recognized. Measurement period adjustments are recorded during the period in which the adjustment amount is determined. All other adjustments are recorded to the consolidated statements of income.
Acquisitions of entities under common control requires retrospective combination of entities for all periods presented, as if the combination had been in effect since the inception of common control. Assets and liabilities transferred are recorded at their historical carrying amounts on the date of the transfer. The difference between purchase consideration and historical value of the net assets on the date of the transfer are recognized in total stockholders’ equity on the consolidated balance sheets.
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income as the expenses are incurred. Gains recognized for the remeasurement of ownership interest to fair value upon completion of a step acquisition are recorded in other income (expense), net on the consolidated statements of income.
Purchased Intangible Assets and Goodwill
Goodwill is evaluated for impairment during the third quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. VMware elected to perform a quantitative assessment of goodwill with respect to its one reporting unit. In doing so, VMware compared the enterprise fair value to the carrying amount of the reporting unit, including goodwill. VMware concluded that, to date, there have been no impairments of goodwill.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Purchased intangible assets with finite lives are generally amortized over their estimated useful lives using the straight-line method. VMware reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.
Derivative Instruments and Hedging Activities
Derivative instruments are measured at fair value and reported as current assets and current liabilities on the consolidated balance sheets, as applicable.
To manage VMware’s exposure to foreign currency fluctuations, VMware enters into forward contracts to hedge a portion of VMware’s net outstanding monetary asset or liability positions. These forward contracts are generally entered into on a monthly basis, with a typical contractual term of one month. These forward contracts are not designated as hedging instruments under applicable accounting guidance and therefore are adjusted to fair value through other income (expense), net on the consolidated statements of income.
Additionally, VMware enters into forward contracts, which it designates as cash flow hedges to manage the volatility of cash flows that relate to operating expenses denominated in certain foreign currencies. These forward contracts are entered into annually, have maturities of twelve months or less, and are adjusted to fair value through accumulated other comprehensive income, net of tax, on the consolidated balance sheets. When the underlying expense transaction occurs, the gains or losses on the forward contract are subsequently reclassified from accumulated other comprehensive income to the related operating expense line item on the consolidated statements of income.
The Company does not, and does not intend to, use derivative financial instruments for trading or speculative purposes.
Employee Benefit Plans
The Company has a defined contribution program for U.S. employees that complies with Section 401(k) of the Internal Revenue Code. In addition, the Company offers defined contribution plans to employees in certain countries outside the U.S. During the years ended January 31, 2020, February 1, 2019 and February 2, 2018, the Company contributed $169 million, $122 million and $107 million, respectively, to its defined contribution plans.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $25 million, $33 million and $40 million during the years ended January 31, 2020, February 1, 2019 and February 2, 2018, respectively.
Income Taxes
Income taxes as presented herein are calculated on a separate tax return basis, although VMware is included in the consolidated tax return of Dell. However, under certain circumstances, transactions between VMware and Dell are assessed using consolidated tax return rules. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax credits are generally recognized as reductions of income tax provisions in the year in which the credits arise. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
During the fourth quarter of fiscal 2020, VMware completed the acquisition of Pivotal. Pivotal will continue to file its separate tax return for U.S. federal income tax purposes as it has since left the Dell consolidated tax group at the time of Pivotal’s initial public offering (“IPO”) in April 2018.
The U.S. Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Tax Act”) introduced significant changes to U.S. income tax law. During December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allowed for the recognition of provisional tax amounts during a measurement period not to extend beyond one year of the enactment date. Provisional taxes relating to the effect of the tax law changes, including the estimated transition tax and the remeasurement of U.S. deferred tax assets and liabilities, among others, were recognized during fiscal 2018. The Company completed its analysis of the impact of the 2017 Tax Act and recorded immaterial adjustments during the fourth quarter of fiscal 2019.
The Global Intangible Low-Taxed Income (“GILTI”) provisions of the 2017 Tax Act require VMware to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. GAAP allows the Company to choose between an accounting policy that treats the U.S. tax under GILTI provisions as either a current expense, as incurred, or as a component of the Company’s measurement of deferred taxes. VMware has elected to record
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
impacts of GILTI as period costs and recognized the tax impacts associated with GILTI as a current expense on its consolidated statements of income beginning with the year ended February 1, 2019.
The difference between the income taxes payable or receivable that is calculated on a separate return basis and the amount paid to or received from Dell pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital, generally in the period in which the consolidated return is filed. Refer to Note P for further information.
Net Income Per Share
Basic net income per share is calculated using the weighted-average number of shares of VMware’s common stock outstanding during the period. Diluted net income per share is calculated using the weighted-average number of common stock, including the dilutive effect of equity awards as determined under the treasury stock method. VMware has two classes of common stock, Classes A and B. For purposes of calculating net income per share, VMware uses the two-class method. As both classes share the same rights in dividends, basic and diluted net income per share are the same for both classes.
Concentrations of Risks
Financial instruments, which potentially subject VMware to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash on deposit with banks may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand. VMware places cash and cash equivalents and short-term investments primarily in money market funds and fixed income securities and limits the amount of investment with any single issuer and any single financial institution. VMware held a diversified portfolio of money market funds and fixed income securities, which primarily consisted of various highly liquid debt instruments of the U.S. government and its agencies and U.S. and foreign corporate debt securities. VMware’s fixed income investment portfolio was denominated in U.S. dollars and consisted of securities with various maturities.
VMware manages counterparty risk through necessary diversification of the investment portfolio among various financial institutions and by entering into derivative contracts with financial institutions that are of high credit quality.
VMware provides credit to its customers, including distributors, OEMs, resellers, and end-user customers, in the normal course of business. To reduce credit risk, VMware performs periodic credit evaluations, which consider the customer’s payment history and financial stability.
As of January 31, 2020 and February 1, 2019, one distributor accounted for 14% and 13%, respectively, of VMware’s accounts receivable balance, and a second distributor accounted for 11% and 11%, respectively, of VMware’s accounts receivable balance. Another distributor accounted for 10% and 12% of VMware’s accounts receivable balance as of January 31, 2020 and February 1, 2019, respectively.
One distributor accounted for 12% 13% and 14% of revenue in each of the years ended January 31, 2020, February 1, 2019 and February 2, 2018, respectively. Another distributor accounted for 10% of revenue for each of the years ended January 31, 2020 and February 2, 2018, respectively, and 12% of revenue for the year ended February 1, 2019.
Accounting for Stock-Based Compensation
VMware restricted stock, including performance stock unit (“PSU”) awards, are valued based on the Company’s stock price on the date of grant. For those awards expected to vest, which only contain a service vesting feature, compensation cost is recognized on a straight-line basis over the awards’ requisite service periods.
PSU awards will vest if certain VMware-designated performance targets, including in certain cases a time-based or market-based vesting component, are achieved. All PSU awards also include a time-based vesting component. If minimum performance thresholds are achieved, each PSU award will convert into VMware’s Class A common stock at a defined ratio depending on the degree of achievement of the performance target designated by each individual award. If minimum performance thresholds are not achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is recognized on a straight-line basis over the PSU awards’ requisite service periods. The expected levels of achievement are reassessed over the requisite service periods and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted and recorded on the consolidated statements of income and the remaining unrecognized stock-based compensation is recognized over the remaining requisite service period.
With the exception of stock options assumed as a part of transactions under common control, the Black-Scholes option-pricing model is used to determine the fair value of VMware’s stock option awards and Employee Stock Purchase Plan shares. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected term and risk-free interest rates. These assumptions reflect the Company’s best estimates, but these items involve uncertainties based on market and other conditions outside of the Company’s control.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For outstanding stock options assumed as a part of a transaction between entities under common control, equity awards are converted to VMware’s Class A common stock and valued at historical carrying amounts.
Leases
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 contained a lease. Prior period amounts were not recast under this standard.
Upon adoption, VMware recognized ROU assets of $802 million, a liability for lease obligations of $778 million, and an immaterial cumulative-effect adjustment to retained earnings, net of tax, as of February 2, 2019. The updated standard did not have a material impact on the consolidated statements of income or net cash provided by or used in operating, investing and financing activities on the consolidated statements of cash flows.
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 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 consolidated balance sheets. The current portion of finance lease liabilities included in accrued expenses and other was not material as of January 31, 2020.
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.
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 $22 million during the year ended January 31, 2020.
B. Pivotal Acquisition
In December 2019, VMware completed the acquisition of Pivotal at a blended price per share of $11.71 and an aggregate purchase consideration of $2.9 billion. The purchase consideration of $2.9 billion was comprised of $15.00 per share or $1.7 billion of cash paid to the non-controlling interest holders of Pivotal’s Class A common stock, the exchange of $1.1 billion of VMware’s Class B common stock for Pivotal’s Class B common stock held by Dell, at an exchange ratio of 0.055 VMware shares for each Pivotal share, and a $155 million accrual for amounts owed to dissenting shareholders in connection with the acquisition, which was recorded in accrued expenses and other on the consolidated balance sheet as of January 31, 2020. In recording the repurchase of the non-controlling interest, the Company recognized a reduction of additional paid in capital of $649 million, which corresponds to the excess of the purchase consideration of $1.8 billion that was paid and accrued, over the carrying value of the non-controlling interest of $1.2 billion. In the aggregate, this transaction resulted in a cash payout, net of cash acquired, of $838 million and the issuance of 7.2 million shares of VMware’s Class B common stock to Dell. Pivotal’s Class B common stock previously held by VMware was canceled. Following the completion of the acquisition, shares of
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pivotal Class A common stock ceased to be listed on the New York Stock Exchange and registration of the Pivotal Class A common stock under the Exchange Act was terminated.
The purchase was accounted for as a transaction between entities under common control. Assets and liabilities transferred were recorded at historical carrying amounts of Pivotal on the date of the transfer, except for certain goodwill and intangible assets that were recorded in the amounts previously recognized by Dell for Pivotal in connection with Dell’s acquisition of EMC during fiscal 2016. VMware’s previous investment in Pivotal, including any unrealized gain or loss previously recognized in other income (expense), net on the consolidated statements of income, were derecognized. Transactions with Pivotal that were previously accounted for as transactions between related parties were eliminated in the consolidated financial statements for all periods presented. All intercompany transactions and account balances between VMware and Pivotal have been eliminated upon consolidation for all periods presented.
The effect of the change from the combination to the consolidated statements of income was as follows (amounts in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Total revenue
|
$
|
777
|
|
|
$
|
639
|
|
|
$
|
474
|
|
Operating income
|
(287
|
)
|
|
(247
|
)
|
|
(239
|
)
|
Net income
|
(204
|
)
|
|
(832
|
)
|
|
(234
|
)
|
Net income attributable to VMware
|
(148
|
)
|
|
(772
|
)
|
|
(222
|
)
|
Net income per weighted-average share attributable to VMware common stockholders, basic for Classes A and B
|
$
|
(0.63
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(0.56
|
)
|
Net income per weighted-average share attributable to VMware common stockholders, diluted for Classes A and B
|
$
|
(0.67
|
)
|
|
$
|
(1.93
|
)
|
|
$
|
(0.56
|
)
|
Other comprehensive income (loss)
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
35
|
|
C. Revenue, Unearned Revenue and Remaining Performance Obligations
Revenue
Receivables
VMware records a receivable when an unconditional right to consideration exists and transfer of control has occurred, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of invoicing to customers.
Payment terms vary based on license, subscription or service offerings and payment is generally required within 30 to 45 days from date of invoicing. Certain performance obligations may require payment before delivery of the license or service to the customer.
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 consolidated balance sheets. Contract assets were $26 million and $24 million as of January 31, 2020 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
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 January 31, 2020, customer deposits related to customer prepayments and cloud credits of $247 million were included in accrued expenses and other, and $143 million were included in other liabilities on the consolidated balance sheets. As of February 1, 2019, customer deposits related to customer prepayments and cloud credits of $239 million were included in accrued expenses and other, and $60 million were included in other liabilities on the 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 January 31, 2020 and February 1, 2019 were $13 million and $15 million, respectively. Deferred commissions included in other assets were $938 million and $820 million as of January 31, 2020 and February 1, 2019, respectively.
Amortization expense for deferred commissions was included in sales and marketing on the consolidated statements of income and was $354 million, $311 million and $275 million during the years ended January 31, 2020, February 1, 2019 and February 2, 2018, respectively.
Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Unearned license revenue
|
$
|
19
|
|
|
$
|
15
|
|
Unearned subscription and SaaS revenue
|
1,534
|
|
|
916
|
|
Unearned software maintenance revenue
|
6,700
|
|
|
5,741
|
|
Unearned professional services revenue
|
1,015
|
|
|
767
|
|
Total unearned revenue
|
$
|
9,268
|
|
|
$
|
7,439
|
|
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. Previously, unearned subscription and SaaS revenue was allocated between unearned license revenue and unearned software maintenance revenue in prior periods and has been reclassified to conform with current period presentation.
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 January 31, 2020 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 year ended January 31, 2020, were $8.1 billion and $6.4 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premise licenses. During the year ended January 31, 2020, VMware assumed $154 million in unearned revenue in the acquisition of Carbon Black, Inc. (“Carbon Black”).
Total billings and revenue recognized during the year ended February 1, 2019, were $6.9 billion and $5.5 billion, respectively, and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premise licenses.
Revenue recognized during the year ended February 2, 2018 was $4.8 billion and did not include amounts for performance obligations that were fully satisfied upon delivery, such as on-premise 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 customer contracts at the end of any given period.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of January 31, 2020, the aggregate transaction price allocated to remaining performance obligations was $10.3 billion, of which approximately 54% 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 $8.7 billion, of which approximately 55% was expected to be recognized as revenue during fiscal 2020, and the remainder thereafter.
D. 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”) from the effective date of the Dell Acquisition through January 31, 2020.
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 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.
|
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
|
|
For the Year Ended
|
|
As of
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
Reseller revenue
|
$
|
3,288
|
|
|
$
|
2,355
|
|
|
$
|
1,464
|
|
|
$
|
3,787
|
|
|
$
|
2,554
|
|
Internal-use revenue
|
82
|
|
|
41
|
|
|
46
|
|
|
57
|
|
|
29
|
|
Collaborative technology project receipts
|
10
|
|
|
4
|
|
|
—
|
|
|
n/a
|
|
|
n/a
|
|
Customer deposits resulting from transactions with Dell were $194 million and $85 million as of January 31, 2020 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 costs are included as expenses on VMware’s 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 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.
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
•
|
From time to time, VMware also 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Purchases and leases of products and purchases of services(1)
|
$
|
242
|
|
|
$
|
200
|
|
|
$
|
142
|
|
Dell subsidiary support and administrative costs
|
119
|
|
|
145
|
|
|
212
|
|
(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 professional services employees from Dell to VMware. These employees are experienced in providing professional services delivering VMware technology and this transfer centralizes these resources within the Company in order to serve its customers more efficiently and effectively. The transfer was substantially completed during the fourth quarter of fiscal 2020 and did not have a material impact to the consolidated financial statements. VMware also expects that Dell will resell VMware consulting solutions.
During the third quarter of fiscal 2019, VMware acquired technology and employees related to the Dell EMC Service Assurance Suite, which provides root cause analysis management software for communications service providers, from Dell. The purchase of the Dell EMC Service Assurance Suite was accounted for as a transaction by entities under common control. The amount of the purchase price in excess of the historical cost of the acquired assets was recognized as a reduction to retained earnings on the consolidated balance sheets. Transition services were provided by Dell over a period of 18 months, starting from the date of the acquisition, which were not significant.
During the second quarter of fiscal 2018, VMware acquired Wavefront, Inc. (“Wavefront”). Upon closing of the acquisition, Dell was paid $20 million in cash for its non-controlling ownership interest in Wavefront.
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 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 $66 million, $40 million and $25 million during the years ended January 31, 2020, February 1, 2019 and February 2, 2018 respectively.
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):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Due from related parties, current
|
$
|
1,618
|
|
|
$
|
1,248
|
|
Due to related parties, current(1)
|
161
|
|
|
158
|
|
Due from related parties, net, current
|
$
|
1,457
|
|
|
$
|
1,090
|
|
(1) Includes an immaterial amount related to the Company’s current operating lease liabilities due to related parties as of January 31, 2020.
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 consolidated balance sheet as of January 31, 2020.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Special Dividend
On July 1, 2018, VMware’s board of directors declared a conditional $11.0 billion one-time special cash dividend (the “Special Dividend”), payable pro-rata to VMware stockholders as of the record date. The Special Dividend was paid on December 28, 2018 to stockholders of record as of the close of business on December 27, 2018 in the amount of $26.81 per outstanding share of VMware common stock. Dell was paid approximately $9.0 billion in cash as a result of its financial interest in VMware’s common stock as of the record date.
The Special Dividend was paid in connection with the closing of a transaction by Dell pursuant to which holders of Dell Class V common stock, which was designed to track the economic performance of VMware, exchanged the Dell Class V common stock for Dell Class C common stock or cash or both, resulting in the elimination of the Dell Class V common stock. Refer to Note Q for more information.
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 years ended January 31, 2020 and February 1, 2019, interest expense on the notes payable to Dell was not significant. Interest expense recognized during the year ended February 2, 2018 was $16 million.
Other Related Party Transactions
Prior to the acquisition of Pivotal, certain members of Pivotal’s board of directors were executives of Ford Motor Company (“Ford”) and General Electric Company (“GE”), and these companies were customers of Pivotal. During the year ended January 31, 2020, revenue recognized from sales to Ford while it was a related party was not significant. During the years ended February 1, 2019 and February 2, 2018, revenue recognized from sales to Ford while it was a related party was $12 million and $31 million, respectively. Accounts receivable related to transactions with Ford was not significant as of February 1, 2019. During the year ended February 1, 2019, revenue recognized from sales to GE while it was a related party was not significant. During the year ended February 2, 2018, revenue recognized from sales to GE while it was a related party was $11 million. Subsequent to fiscal 2019, GE was no longer a related party. Subsequent to VMware’s acquisition of Pivotal, Ford was no longer a related party.
E. Commitments and 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 and set the case for trial in mid-January 2020. On August 20, 2019, VMware filed counterclaims against Cirba, asserting among other claims that Cirba is infringing four VMware patents. The Delaware Court severed those claims from the January 2020 trial on Cirba’s claims, and the trial on VMware’s patent claims is currently set for September 2021. 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, asserting that Cirba infringes four additional VMware patents. The trial on Cirba’s claims in Delaware was completed on January 23, 2020, and on January 24, 2020, the jury returned a verdict finding that VMware willfully infringed the two asserted patents and awarding approximately $237 million in damages. The jury further found that VMware was not liable on Cirba’s trademark infringement-related claims. A total of $237 million has been accrued for the Delaware action and reflects the estimated losses that are considered both probable and reasonably estimable at this time. The parties will now move to the post-trial briefing stage in the Delaware Court. The Company intends to vigorously defend itself in this matter, including seeking to overturn the jury’s verdict in the first Delaware trial during the post-trial briefing stage and, if necessary, on appeal. Cirba has expressed its intent to seek a
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
permanent injunction, enhanced damages, and attorneys’ fees in the Delaware action. As noted above, the Company intends to pursue arguments both in the Delaware Court and, if necessary, the Federal Circuit to overturn the jury’s verdict. Final resolution of this matter could be materially different from the amount accrued. The amount accrued for this matter is included in accrued expenses and other on the consolidated balance sheet as of January 31, 2020 and the charge is included in general and administrative on the consolidated statement of income for the year ended January 31, 2020.
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 material loss is not probable and reasonably estimable. 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.
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 January 31, 2020, other than the Cirba litigation, 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.
Operating Leases and Other Contractual Commitments
VMware leases office facilities and equipment under various operating arrangements. VMware’s minimum future lease commitments and other contractual commitments at January 31, 2020 were as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Lease Commitments(1)
|
|
Purchase Obligations
|
|
Asset Retirement Obligations
|
|
Total
|
2021
|
$
|
144
|
|
|
$
|
168
|
|
|
$
|
1
|
|
|
$
|
313
|
|
2022
|
141
|
|
|
74
|
|
|
3
|
|
|
218
|
|
2023
|
127
|
|
|
13
|
|
|
2
|
|
|
142
|
|
2024
|
101
|
|
|
—
|
|
|
—
|
|
|
101
|
|
2025
|
77
|
|
|
—
|
|
|
2
|
|
|
79
|
|
Thereafter
|
612
|
|
|
—
|
|
|
5
|
|
|
617
|
|
Total
|
$
|
1,202
|
|
|
$
|
255
|
|
|
$
|
13
|
|
|
$
|
1,470
|
|
|
|
(1)
|
Amounts in the table above exclude legally binding minimum lease payments for leases signed but not yet commenced of $361 million, as well as expected sublease income.
|
The amount of the future lease commitments after fiscal 2025 is primarily for the ground leases on VMware’s Palo Alto, California headquarter facilities, which expire in fiscal 2047. As several of VMware’s operating leases are payable in foreign
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
currencies, the operating lease payments may fluctuate in response to changes in the exchange rate between the U.S. dollar and the foreign currencies in which the commitments are payable.
Guarantees and Indemnification Obligations
VMware enters into agreements in the ordinary course of business with, among others, customers, distributors, resellers, system vendors and systems integrators. Most of these agreements require VMware to indemnify the other party against third-party claims alleging that a VMware product infringes or misappropriates a patent, copyright, trademark, trade secret, and/or other intellectual property right. Certain of these agreements require VMware to indemnify the other party against certain claims relating to property damage, personal injury, or the acts or omissions of VMware, its employees, agents, or representatives.
VMware has agreements with certain vendors, financial institutions, lessors and service providers pursuant to which VMware has agreed to indemnify the other party for specified matters, such as acts and omissions of VMware, its employees, agents, or representatives.
VMware has procurement or license agreements with respect to technology that it has obtained the right to use in VMware’s products and agreements. Under some of these agreements, VMware has agreed to indemnify the supplier for certain claims that may be brought against such party with respect to VMware’s acts or omissions relating to the supplied products or technologies.
VMware has agreed to indemnify the directors and executive officers of VMware, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware’s by-laws and charter also provide for indemnification of directors and officers of VMware and VMware subsidiaries to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware also indemnifies certain employees who provide services with respect to employee benefits plans, including, for example, the members of the Administrative Committee of the VMware 401(k) Plan, and employees who serve as directors or officers of VMware’s subsidiaries.
In connection with certain acquisitions, VMware has agreed to indemnify the former directors and officers of the acquired company in accordance with the acquired company’s by-laws and charter in effect immediately prior to the acquisition or in accordance with indemnification or similar agreements entered into by the acquired company and such persons. VMware typically purchases a “tail” directors and officers insurance policy, which should enable VMware to recover a portion of any future indemnification obligations related to the former officers and directors of an acquired company.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the relatively small number of prior indemnification claims and the unique facts and circumstances involved in each particular situation. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s consolidated results of operations, financial position, or cash flows.
F. Business Combinations, Definite-Lived Intangible Assets, Net and Goodwill
Business Combinations
Fiscal 2020
Acquisition of Pivotal
During the fourth quarter of fiscal 2020, VMware completed the acquisition of Pivotal, a leading cloud-native platform provider, to enhance VMware’s cloud native Kubernetes portfolio. Refer to Note B for more information.
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.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Merger consideration totaling $18 million is held with a third-party paying agent and is payable to certain employees 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.
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.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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.
Other Fiscal 2020 Business Combinations
During the third quarter of fiscal 2020, VMware completed four other acquisitions, which were not material individually to the 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 $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 fiscal 2020 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.
Fiscal 2019
Acquisition of Heptio Inc.
During the fourth quarter of fiscal 2019, VMware completed the acquisition of Heptio Inc. (“Heptio”), a provider of products and services that help enterprises deploy and operationalize Kubernetes. VMware acquired Heptio to enhance VMware’s Kubernetes portfolio and cloud native strategy. The total purchase price was $420 million, net of cash acquired of $15 million. The purchase price primarily included $27 million of identifiable intangible assets and $392 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets primarily consisted of completed technology of $20 million, with an estimated useful life of five years. Management believes that the goodwill acquired represents the synergies expected from combining VMware’s solution offerings related to Kubernetes with those of Heptio.
Merger consideration totaling $117 million, including $24 million being held in escrow, is payable to certain employees of Heptio subject to specified future employment conditions and is being recognized as expense over the requisite service period of approximately four years on a straight-line basis. Compensation expense recognized during the year ended February 1, 2019 was not material.
The fair value of assumed unvested equity awards attributed to post-combination services was $47 million 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.
Acquisition of CloudHealth Technologies, Inc.
During the third quarter of fiscal 2019, VMware completed the acquisition of CloudHealth Technologies, Inc. (“CloudHealth Technologies”). CloudHealth Technologies delivers a cloud operations platform that enables customers to analyze and manage cloud cost, usage, security, and performance centrally for native public clouds, which expanded VMware’s portfolio of multi-cloud management solutions. The total purchase price was $495 million, net of cash acquired of $26 million. The purchase price primarily included $101 million of identifiable intangible assets and $394 million of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets included completed technology of $69 million and customer relationships of $18 million, with estimated useful lives of one to five years.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair value of assumed unvested equity awards attributed to post-combination services was $39 million and will be expensed over the remaining requisite service periods 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.
Other Fiscal 2019 Asset Acquisitions
During the first quarter of fiscal 2019, VMware completed four asset acquisitions, in which the Company acquired certain intangible assets classified as completed technology. The aggregate purchase price of the intangible assets acquired was $26 million.
The pro forma financial information assuming fiscal 2019 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.
Fiscal 2018
Acquisition of VeloCloud Networks, Inc.
During the fourth quarter of fiscal 2018, VMware completed the acquisition of VeloCloud Networks, Inc. (“VeloCloud”), a provider of cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. VMware acquired VeloCloud to build on its network virtualization platform, VMware NSX, and to expand its networking portfolio. The total purchase price was $449 million, net of cash acquired of $24 million. Prior to the closing of the acquisition, VMware held an ownership interest in VeloCloud. Upon completion of the step acquisition, VMware recognized a gain of $8 million in other income (expense), net for the remeasurement of its previously held ownership interest to fair value, which was $12 million.
Other 2018 Business Combinations
During the second quarter of fiscal 2018, VMware completed the acquisitions of Wavefront and Apteligent, Inc., which were not material to the consolidated financial statements. The aggregate purchase price for the two acquisitions was $238 million, net of cash acquired of $35 million. The aggregate purchase price included $36 million of identifiable intangible assets and $238 million of goodwill that is not expected to be deductible for tax purposes. Prior to the closing of the acquisition, VMware held an ownership interest in Wavefront. Upon completion of the step acquisition, VMware recognized a gain of $34 million in other income (expense), net for the remeasurement of its previously held ownership interest to fair value, which was $49 million. Upon closing of the acquisition, Dell was paid $20 million in cash for its non-controlling ownership interest in Wavefront.
The pro forma financial information assuming fiscal 2020 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.
Definite-Lived Intangible Assets, Net
The following table summarizes the changes in the carrying amount of definite-lived intangible assets during the periods presented (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Balance, beginning of the year
|
$
|
966
|
|
|
$
|
1,059
|
|
Additions to intangible assets related to business combinations
|
622
|
|
|
154
|
|
Amortization expense
|
(300
|
)
|
|
(247
|
)
|
Derecognized leasehold interest
|
(116
|
)
|
|
—
|
|
Balance, end of the year
|
$
|
1,172
|
|
|
$
|
966
|
|
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 consolidated balance sheets. Prior to adoption, these assets were classified as intangible assets, net on the consolidated balance sheets.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of the periods presented, definite-lived intangible assets consisted of the following (amounts in tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
Weighted-Average Useful Lives
(in years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
Purchased technology
|
5.7
|
|
$
|
1,030
|
|
|
$
|
(488
|
)
|
|
$
|
542
|
|
Customer relationships and customer lists
|
11.4
|
|
739
|
|
|
(200
|
)
|
|
539
|
|
Trademarks and tradenames
|
7.6
|
|
131
|
|
|
(58
|
)
|
|
73
|
|
Other
|
2.0
|
|
22
|
|
|
(4
|
)
|
|
18
|
|
Total definite-lived intangible assets
|
|
|
$
|
1,922
|
|
|
$
|
(750
|
)
|
|
$
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2019
|
|
Weighted-Average Useful Lives
(in years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
Purchased technology
|
6.4
|
|
$
|
1,001
|
|
|
$
|
(606
|
)
|
|
$
|
395
|
|
Leasehold interest
|
34.9
|
|
149
|
|
|
(33
|
)
|
|
116
|
|
Customer relationships and customer lists
|
13.6
|
|
513
|
|
|
(125
|
)
|
|
388
|
|
Trademarks and tradenames
|
8.3
|
|
106
|
|
|
(43
|
)
|
|
63
|
|
Other
|
3.9
|
|
7
|
|
|
(3
|
)
|
|
4
|
|
Total definite-lived intangible assets
|
|
|
$
|
1,776
|
|
|
$
|
(810
|
)
|
|
$
|
966
|
|
Amortization expense on definite-lived intangible assets was $300 million, $247 million and $179 million during the years ended January 31, 2020, February 1, 2019 and February 2, 2018, respectively.
Based on intangible assets recorded as of January 31, 2020 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):
|
|
|
|
|
2021
|
$
|
305
|
|
2022
|
261
|
|
2023
|
211
|
|
2024
|
165
|
|
2025
|
91
|
|
Thereafter
|
139
|
|
Total
|
$
|
1,172
|
|
Goodwill
The following table summarizes the changes in the carrying amount of goodwill during the periods presented (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Balance, beginning of the year
|
$
|
7,418
|
|
|
$
|
6,660
|
|
Increase in goodwill related to business combinations
|
1,911
|
|
|
784
|
|
Other adjustment
|
—
|
|
|
(26
|
)
|
Balance, end of the year
|
$
|
9,329
|
|
|
$
|
7,418
|
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. Realignment and Loss on Disposition
Realignment
During the fourth quarter of fiscal 2020, VMware approved a plan to streamline its operations, with plans to better align business priorities and shift positions to lower cost locations. As a result of these actions, approximately 1,100 positions were eliminated during the year ended January 31, 2020. VMware recognized $79 million of severance-related realignment expenses during the year ended January 31, 2020 on the consolidated statements of income. Actions associated with this plan are expected to be completed during fiscal 2021.
The following table summarizes the activity for the accrued realignment expenses for the year ended January 31, 2020 (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended January 31, 2020
|
|
Balance as of
February 1, 2019
|
|
Realignment
|
|
Utilization
|
|
Balance as of
January 31, 2020
|
Severance-related costs
|
$
|
—
|
|
|
$
|
79
|
|
|
$
|
(5
|
)
|
|
$
|
74
|
|
Disposition of VMware vCloud Air Business
During the second quarter of fiscal 2018, VMware completed the sale of its vCloud Air business (“vCloud Air”) to OVH US LLC. The loss recognized in connection with this transaction was $104 million during the year ended February 2, 2018 and was recorded in realignment and loss on disposition on the consolidated statements of income. Losses recognized on the disposition of vCloud Air included the impairment of fixed assets identified as part of the sale, as well as the costs associated with certain transition services, which primarily included employee-related expenses and costs associated with data-center colocation services. Transition services were performed over a period of 18 months, starting from the date of the sale.
H. 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 PSU awards, and stock options, including purchase options under VMware’s employee stock purchase plan, which included Pivotal’s employee stock purchase plan through the date of acquisition. 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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Net income attributable to VMware, Inc.
|
$
|
6,412
|
|
|
$
|
1,650
|
|
|
$
|
437
|
|
|
|
|
|
|
|
Weighted-average shares, basic for Classes A and B
|
417,058
|
|
|
413,769
|
|
|
410,315
|
|
Effect of other dilutive securities
|
8,177
|
|
|
7,362
|
|
|
10,572
|
|
Weighted-average shares, diluted for Classes A and B
|
425,235
|
|
|
421,131
|
|
|
420,887
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B
|
$
|
15.37
|
|
|
$
|
3.99
|
|
|
$
|
1.07
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B
|
$
|
15.08
|
|
|
$
|
3.92
|
|
|
$
|
1.04
|
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Anti-dilutive securities:
|
|
|
|
|
|
Employee stock options
|
34
|
|
|
50
|
|
|
51
|
|
Restricted stock units
|
315
|
|
|
255
|
|
|
140
|
|
Total
|
349
|
|
|
305
|
|
|
191
|
|
I. Cash and Cash Equivalents
Cash and cash equivalents as of the periods presented consisted of the following (tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
Cost or Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Aggregate Fair Value
|
Cash
|
$
|
655
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
655
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money-market funds
|
$
|
2,158
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,158
|
|
Demand deposits and time deposits
|
102
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Total cash equivalents
|
$
|
2,260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2019
|
|
Cost or Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Aggregate Fair Value
|
Cash
|
$
|
549
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
549
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money-market funds
|
$
|
2,930
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,930
|
|
Demand deposits and time deposits
|
53
|
|
|
—
|
|
|
—
|
|
|
53
|
|
Total cash equivalents
|
$
|
2,983
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,983
|
|
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 consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash as of January 31, 2020 and February 1, 2019 (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
2,915
|
|
|
$
|
3,532
|
|
Restricted cash within other current assets
|
83
|
|
|
35
|
|
Restricted cash within other assets
|
33
|
|
|
29
|
|
Total cash, cash equivalents and restricted cash
|
$
|
3,031
|
|
|
$
|
3,596
|
|
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.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
J. 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):
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
Effective Interest Rate
|
|
2020
|
|
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
|
|
|
|
Less: unamortized discount
|
(5
|
)
|
|
(7
|
)
|
|
|
Less: unamortized debt issuance costs
|
(16
|
)
|
|
(21
|
)
|
|
|
Net carrying amount
|
3,979
|
|
|
3,972
|
|
|
|
Current portion of long-term debt and other borrowings
|
1,248
|
|
|
—
|
|
|
|
Long-term debt
|
$
|
2,731
|
|
|
$
|
3,972
|
|
|
|
Interest is payable semiannually in arrears, on February 21 and August 21 of each year. During each of the years ended January 31, 2020, February 1, 2019 and February 2, 2018, interest expense was $129 million, $129 million and $58 million, respectively. Interest expense, which included amortization of discount and issuance costs, was recognized on the 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, 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 purchase. The Senior Notes rank equally in right of payment with VMware’s other unsecured and unsubordinated indebtedness. The Senior Notes also include 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.
Refer to Note D for disclosure regarding the note payable to Dell.
Revolving Credit Facilities
On September 12, 2017, 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 $1.0 billion, for general corporate purposes. Commitments under the 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 January 31, 2020 and February 1, 2019, there were no outstanding borrowings under the revolving credit facility. The credit agreement contains certain representations, warranties and covenants. Commitment fees, interest rates and other terms of borrowing under the revolving credit facility may vary based on VMware’s external credit ratings. The amount paid in connection with the ongoing commitment fee, which is payable quarterly in arrears, was not significant during the years ended January 31, 2020, February 1, 2019 and February 2, 2018.
On September 8, 2017, Pivotal entered into a senior secured revolving loan facility in an aggregate principal amount not to exceed $100 million. The revolving loan facility was amended on May 6, 2019 and terminated on October 22, 2019. During the years ended February 1, 2019 and February 2, 2018, $15 million and $20 million, respectively, were borrowed under the revolving loan facility. The total outstanding balance of $35 million was repaid during the year ended February 1, 2019.
Senior Unsecured Term Loan Facility
On September 26, 2019, VMware entered into a senior unsecured term loan facility (the “Term Loan”) with a syndicate of lenders that provides the Company with a borrowing capacity of up to $2.0 billion, for general corporate purposes. The
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company may borrow against the Term Loan two times up to its borrowing capacity of $2.0 billion until February 7, 2020. The Term Loan matures on the 364th day following the initial funding under the Term Loan. The Term Loan bears interest at the London interbank offered rate plus 0.75% to 1.25%, or an alternate base rate plus 0.00% to 0.25%, depending on VMware’s external credit ratings. As of January 31, 2020, the weighted-average interest rate on the outstanding Term Loan was 2.54%.
During the year ended January 31, 2020, the Company drew down an aggregate of $3.4 billion and repaid an aggregate of $1.9 billion. As of January 31, 2020, the outstanding balance on the Term Loan of $1.5 billion, net of unamortized debt issuance costs, was included in current portion of long-term debt and other borrowings on the consolidated balance sheets, with no remaining amount available for additional borrowings. The Term Loan contains certain representations, warranties and covenants. Commitment fees paid were not significant during the year ended January 31, 2020. Interest expense for the Term Loan, including amortization of issuance costs, was $15 million during the year ended January 31, 2020.
K. 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 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are noted as being 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.
|
As of January 31, 2020 and February 1, 2019, VMware’s Level 2 investment securities were generally priced using non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques.
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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
|
Money-market funds
|
$
|
2,158
|
|
|
$
|
—
|
|
|
$
|
2,158
|
|
Demand deposits and time deposits(1)
|
—
|
|
|
102
|
|
|
102
|
|
Total cash equivalents
|
$
|
2,158
|
|
|
$
|
102
|
|
|
$
|
2,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2019
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
Money-market funds
|
$
|
2,930
|
|
|
$
|
—
|
|
|
$
|
2,930
|
|
Demand deposits and time deposits(1)
|
—
|
|
|
53
|
|
|
53
|
|
Total cash equivalents
|
$
|
2,930
|
|
|
$
|
53
|
|
|
$
|
2,983
|
|
Short-term investments:
|
|
|
|
|
|
Marketable equity securities
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
19
|
|
Total short-term investments
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
19
|
|
(1) Demand deposits and time deposits were valued at amortized cost, which approximated fair value.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The note payable to Dell, the Senior Notes and the Term Loan were not adjusted to fair value. The fair value of the note payable to Dell was approximately $269 million and $252 million as of January 31, 2020 and February 1, 2019, respectively. The fair value of the Senior Notes was approximately $4.1 billion and $3.9 billion as of January 31, 2020 and February 1, 2019, respectively. The fair value of the Term Loan approximated its carrying value as of January 31, 2020 due to its short-term nature. Fair value for the note payable to Dell, the Senior Notes and the Term Loan 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. The net impact to the consolidated statements of income was not significant since changes in the fair value of the assets substantially 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 approximately $106 million and $77 million as of January 31, 2020 and February 1, 2019, respectively, and are included in other assets and other liabilities on the consolidated balance sheets.
Equity Securities Carried at Fair Value
As of February 1, 2019, VMware held a publicly traded equity security, which was measured at its fair value of $19 million using quoted prices for identical assets in an active market (Level 1). During the first quarter of fiscal 2020, VMware sold its investment in this equity security. The realized gain recognized on the consolidated statements of income during the year ended January 31, 2020 was not significant.
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 January 31, 2020 and February 1, 2019, investments in privately held companies, which consisted primarily of equity securities, had a carrying value of $159 million and $95 million, respectively, and were included in other assets on the consolidated balance sheets. During the year ended January 31, 2020 and February 1, 2019, the Company recognized unrealized gains of $37 million and unrealized losses of $13 million, respectively, on these securities. All gains and losses on these securities, whether realized or unrealized, are recognized in other income (expense), net on the consolidated statements of income.
L. 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, by monitoring credit ratings and credit spreads of, 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 consolidated balance sheets and is subsequently reclassified to the related operating expense line item on the consolidated statements of income in the same period that the underlying expenses are incurred. During the years ended January 31, 2020, February 1, 2019 and February 2, 2018, the effective portion of gains or losses reclassified to the consolidated statements of income was not significant. During the years ended February 1, 2019 and February 2, 2018, interest charges or “forward points” on VMware’s forward contracts were excluded from the assessment of hedge effectiveness and were recorded in other income (expense), net on the consolidated statements of income as incurred. Beginning February 2, 2019, the excluded component was recorded to the related operating expense line item on the consolidated statements of income in the same period that the underlying expenses are incurred.
These forward contracts have contractual maturities of twelve months or less, and as of January 31, 2020 and February 1, 2019, outstanding forward contracts had a total notional value of $480 million and $367 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract.
During the years ended January 31, 2020, February 1, 2019 and February 2, 2018, all cash flow hedges were considered effective.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 consolidated statements of income.
These forward contracts generally have a contractual maturity of one month, and as of January 31, 2020 and February 1, 2019, outstanding forward contracts had a total notional value of $1.1 billion 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.
During the years ended January 31, 2020 and February 1, 2019, VMware recognized gains of $54 million and $69 million, respectively, and a loss of $97 million during the year ended February 2, 2018, related to the settlement of forward contracts. Gains and losses are recorded in other income (expense), net on the consolidated statements of income.
The combined gains and losses related to the settlement of forward contracts and the underlying foreign currency denominated assets and liabilities during the year ended January 31, 2020 resulted in net gains of $31 million. 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 years ended February 1, 2019 and February 2, 2018. Net gains and losses are recorded in other income (expense), net on the consolidated statements of income.
M. Property and Equipment, Net
Property and equipment, net, as of the periods presented consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Equipment and software
|
$
|
1,404
|
|
|
$
|
1,448
|
|
Buildings and improvements
|
1,088
|
|
|
991
|
|
Furniture and fixtures
|
120
|
|
|
116
|
|
Construction in progress
|
106
|
|
|
56
|
|
Total property and equipment
|
2,718
|
|
|
2,611
|
|
Accumulated depreciation
|
(1,438
|
)
|
|
(1,449
|
)
|
Total property and equipment, net
|
$
|
1,280
|
|
|
$
|
1,162
|
|
As of January 31, 2020, construction in progress primarily represented various buildings and site improvements that had not yet been placed into service.
Depreciation expense was $234 million, $211 million and $206 million during the years ended January 31, 2020, February 1, 2019 and February 2, 2018, respectively.
N. Leases
VMware has operating and finance leases primarily related to office facilities and equipment, which have remaining lease terms of one month to 26 years. During the year ended January 31, 2020, lease expense recorded in the consolidated statements of income was $206 million.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of lease expense during the period presented were as follows (table in millions):
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
2020
|
Operating lease expense
|
$
|
167
|
|
|
|
Finance lease expense:
|
|
Amortization of ROU assets
|
$
|
4
|
|
Interest on lease liabilities
|
1
|
|
Total finance lease expense
|
$
|
5
|
|
|
|
Short-term lease expense
|
$
|
3
|
|
|
|
Variable lease expense
|
$
|
31
|
|
Total lease expense
|
$
|
206
|
|
From time to time, VMware enters into lease arrangements with Dell. Lease expense incurred for arrangements with Dell was not significant during the year ended January 31, 2020.
Supplemental cash flow information related to operating and finance leases during the period presented was as follows (table in millions):
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
167
|
|
Operating cash flows from finance leases
|
2
|
|
Financing cash flows from finance leases
|
1
|
|
ROU assets obtained in exchange for lease liabilities:
|
|
Operating leases
|
$
|
226
|
|
Finance leases
|
63
|
|
Supplemental balance sheet information related to operating and finance leases as of the period presented was as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
Operating Leases
|
|
Finance Leases
|
ROU assets, non-current(1)
|
$
|
886
|
|
|
$
|
58
|
|
|
|
|
|
Lease liabilities, current(2)
|
$
|
109
|
|
|
$
|
4
|
|
Lease liabilities, non-current(3)
|
746
|
|
|
55
|
|
Total lease liabilities
|
$
|
855
|
|
|
$
|
59
|
|
(1) ROU assets for operating leases are included in other assets and ROU assets for finance leases are included in property and equipment, net on the consolidated balance sheets.
(2) Current lease liabilities are included primarily in accrued expenses and other on the consolidated balance sheets. An immaterial amount is presented in due from related parties, net on the consolidated balance sheets.
(3) Operating lease liabilities are presented as operating lease liabilities on the consolidated balance sheets. Finance lease liabilities are included in other liabilities on the consolidated balance sheets.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Lease term and discount rate related to operating and finance leases as of the period presented were as follows:
|
|
|
|
|
January 31,
|
|
2020
|
Weighted-average remaining lease term (in years)
|
|
Operating leases
|
13.3
|
|
Finance leases
|
9.2
|
|
Weighted-average discount rate
|
|
Operating leases
|
3.8
|
%
|
Finance leases
|
3.1
|
%
|
The following represents VMware’s future minimum lease payments under non-cancellable operating and finance leases as of January 31, 2020 (table in millions):
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2021
|
$
|
138
|
|
|
$
|
6
|
|
2022
|
135
|
|
|
6
|
|
2023
|
120
|
|
|
7
|
|
2024
|
94
|
|
|
7
|
|
2025
|
70
|
|
|
7
|
|
Thereafter
|
577
|
|
|
35
|
|
Total future minimum lease payments
|
1,134
|
|
|
68
|
|
Less: Imputed interest
|
(279
|
)
|
|
(9
|
)
|
Total lease liabilities(1)
|
$
|
855
|
|
|
$
|
59
|
|
(1) Total lease liabilities as of January 31, 2020 excluded legally binding lease payments for leases signed but not yet commenced of $361 million.
Future lease payments under non-cancellable operating leases as of February 1, 2019 were as follows (table in millions):
|
|
|
|
|
2020
|
$
|
132
|
|
2021
|
104
|
|
2022
|
91
|
|
2023
|
78
|
|
2024
|
63
|
|
Thereafter
|
585
|
|
Total(1)
|
$
|
1,053
|
|
(1) Total future lease payments as of February 1, 2019 excluded legally binding minimum lease payments for leases signed but not yet commenced of $214 million.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
O. Accrued Expenses and Other
Accrued expenses and other as of the periods presented consisted of the following (table in millions)
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Accrued employee related expenses
|
$
|
845
|
|
|
$
|
780
|
|
Accrued partner liabilities
|
181
|
|
|
207
|
|
Customer deposits
|
247
|
|
|
239
|
|
Other(1)
|
878
|
|
|
438
|
|
Total
|
$
|
2,151
|
|
|
$
|
1,664
|
|
(1) Other primarily consists of litigation accrual, leases accrual, income tax payable and indirect tax accrual.
Accrued partner liabilities primarily relate to rebates and marketing development fund accruals for channel partners, system vendors and systems integrators. Accrued partner liabilities also include accruals for professional service arrangements for which VMware intends to leverage channel partners to directly fulfill the obligation to its customers.
As of January 31, 2020, other included $237 million litigation accrual related to Cirba patent and trademark infringement lawsuit and $155 million accrual for amounts owed to dissenting shareholders in connection with the Pivotal acquisition. Refer to Note E and Note B, respectively, for more information.
P. Income Taxes
The domestic and foreign components of income before income tax for the periods presented were as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
895
|
|
|
$
|
680
|
|
|
$
|
462
|
|
Foreign
|
543
|
|
|
1,149
|
|
|
1,115
|
|
Total income before income tax
|
$
|
1,438
|
|
|
$
|
1,829
|
|
|
$
|
1,577
|
|
VMware’s income tax provision (benefit) for the periods presented consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Federal:
|
|
|
|
|
|
Current
|
$
|
78
|
|
|
$
|
181
|
|
|
$
|
688
|
|
Deferred
|
(219
|
)
|
|
(92
|
)
|
|
275
|
|
|
(141
|
)
|
|
89
|
|
|
963
|
|
State:
|
|
|
|
|
|
Current
|
45
|
|
|
31
|
|
|
8
|
|
Deferred
|
(44
|
)
|
|
(10
|
)
|
|
21
|
|
|
1
|
|
|
21
|
|
|
29
|
|
Foreign:
|
|
|
|
|
|
Current
|
240
|
|
|
137
|
|
|
156
|
|
Deferred
|
(5,018
|
)
|
|
(8
|
)
|
|
4
|
|
|
(4,778
|
)
|
|
129
|
|
|
160
|
|
Total income tax provision (benefit)
|
$
|
(4,918
|
)
|
|
$
|
239
|
|
|
$
|
1,152
|
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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%. A discrete tax benefit of $4.9 billion was recognized with 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 an Irish subsidiary and was based on the intellectual property’s current fair value. Management applied significant judgment when determining the fair value of the IP, which serves as the tax basis of the deferred tax asset, and in evaluating the associated tax laws in the applicable jurisdictions. 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 consolidated statements of cash flows during the year ended January 31, 2020 was not material.
Income tax benefit during the year ended January 31, 2020 was primarily impacted by the discrete tax benefit recognized as a part of the IP Transfer.
Income tax provision during the year ended February 2, 2018 was primarily driven by a one-time expense of approximately $900 million resulting from the 2017 Tax Act. Key components of the tax expense relating to the 2017 Tax Act included provisional estimates for the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (“Transition Tax”) of approximately $800 million and the remeasurement of the Company’s deferred tax assets and liabilities of approximately $100 million resulting from the reduction in the U.S. statutory corporate tax rate from 35% to 21%, effective January 1, 2018. Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, the Company made reasonable estimates for the related tax effects and recorded provisional amounts on its consolidated financial statements for fiscal 2018. During fiscal 2019, the Company collected and prepared necessary data and finalized its income tax accounting analysis based on the guidance and interpretations issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies, and relevant authorities. The adjustment to the provisional amount was not material.
A reconciliation of VMware’s effective tax rate to the statutory federal tax rate for the periods presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Statutory federal tax rate(1)
|
21
|
%
|
|
21
|
%
|
|
34
|
%
|
State taxes, net of federal benefit
|
—
|
%
|
|
1
|
%
|
|
1
|
%
|
Tax rate differential for non-U.S. jurisdictions
|
(3
|
)%
|
|
(6
|
)%
|
|
(14
|
)%
|
U.S. tax credits
|
(17
|
)%
|
|
(11
|
)%
|
|
(5
|
)%
|
Excess tax benefits from stock-based compensation(2)
|
(11
|
)%
|
|
(6
|
)%
|
|
(7
|
)%
|
Transition Tax due to 2017 Tax Act(3)
|
—
|
%
|
|
—
|
%
|
|
50
|
%
|
Rate change due to 2017 Tax Act(3)
|
—
|
%
|
|
—
|
%
|
|
10
|
%
|
Discrete tax benefit due to IP Transfer(4)
|
(343
|
)%
|
|
—
|
%
|
|
—
|
%
|
Permanent items
|
9
|
%
|
|
14
|
%
|
|
4
|
%
|
Effective tax rate
|
(344
|
)%
|
|
13
|
%
|
|
73
|
%
|
(1) The 2017 Tax Act reduced the U.S. statutory corporate income tax rate from 35% to 21%, effective January 1, 2018, which resulted in a blended U.S. statutory corporate tax rate of 34% during the year ended February 2, 2018.
|
|
(2)
|
VMware adopted ASU 2016-09 during the first quarter of fiscal 2018. As a result, net excess tax benefits recognized in connection with stock-based awards are included in the income tax provision on the consolidated statements of income. Prior to adopting the updated standard, such amounts were recognized in additional paid-in capital on the Company’s consolidated balance sheets.
|
(3) The effective tax rate during the year ended February 2, 2018 was impacted by key components of the 2017 Tax Act, including the Transition Tax, and the remeasurement of VMware’s deferred tax assets and liabilities due to the reduction in the U.S. statutory corporate tax rate.
(4) A discrete tax benefit of $4.9 billion was recognized with a deferred tax asset during fiscal 2020. This deferred tax asset was recognized as a result of the book and tax basis difference on the IP transferred to an Irish subsidiary.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred tax assets and liabilities are recognized for future tax consequences resulting from differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities as of the periods presented consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Accruals and other
|
$
|
169
|
|
|
$
|
79
|
|
Lease liabilities
|
152
|
|
|
—
|
|
Unearned revenue
|
390
|
|
|
295
|
|
Stock-based compensation
|
88
|
|
|
83
|
|
Tax credit and net operating loss carryforwards
|
583
|
|
|
349
|
|
Other assets, net
|
51
|
|
|
32
|
|
Intangible and other non-current assets
|
4,804
|
|
|
—
|
|
Gross deferred tax assets
|
6,237
|
|
|
838
|
|
Valuation allowance
|
(332
|
)
|
|
(283
|
)
|
Total deferred tax assets
|
5,905
|
|
|
555
|
|
Deferred tax liabilities:
|
|
|
|
Deferred commissions
|
(133
|
)
|
|
(129
|
)
|
ROU Assets
|
(131
|
)
|
|
—
|
|
Property, plant and equipment, net
|
(101
|
)
|
|
(90
|
)
|
Intangibles and other assets, net
|
—
|
|
|
(108
|
)
|
Total deferred tax liabilities
|
(365
|
)
|
|
(327
|
)
|
Net deferred tax assets
|
$
|
5,540
|
|
|
$
|
228
|
|
Net deferred tax assets were comprised of deferred tax assets of $5.6 billion and $290 million as of January 31, 2020 and February 1, 2019, respectively, partially offset by deferred tax liabilities of $16 million and $62 million as of January 31, 2020 and February 1, 2019, respectively. Deferred tax liabilities were included in other liabilities on the consolidated balance sheets for the periods presented.
The increase in net deferred tax assets from February 1, 2019 to January 31, 2020 was primarily driven by the $4.9 billion deferred tax asset recognized as a result of the book and tax basis difference on the IP transferred to Ireland, as well as the increase in tax attributes related to current year acquisitions as of January 31, 2020 as compared to February 1, 2019.
VMware has federal, state and foreign net operating loss carryforwards of $971 million, $940 million and $199 million, as of January 31, 2020, respectively. VMware has federal, state and foreign net operating loss carryforwards of $257 million, $592 million and $189 million as of February 1, 2019, respectively. The federal and state net operating loss carryforwards will start to expire in fiscal 2023, if not utilized. These net operating losses have various carryforward periods, including certain portions that can be carried over indefinitely. The majority of the Company’s foreign net operating loss carryforwards can be carried forward indefinitely.
VMware has federal research and development (“R&D”) tax credit carryforwards of $34 million as of January 31, 2020. The amount of federal R&D tax credit carryforwards as of February 1, 2019 was not significant. The federal R&D tax credit will start to expire in fiscal 2026, if not utilized. VMware also has California and other state R&D credit carryforwards for income tax purposes of $287 million and $228 million as of January 31, 2020 and February 1, 2019, respectively. The California R&D tax credit carryforwards can be carried over indefinitely and the other state R&D tax credit carryforwards will start to expire in fiscal 2024, if not utilized. In addition, the amount of foreign tax credit carryforwards held as of January 31, 2020 and February 1, 2019 was not significant. VMware also had non-U.S. capital loss carryforwards of approximately $22 million as of January 31, 2020, which can be carried forward indefinitely. The amount of non-U.S. capital loss carryforwards as of February 1, 2019 was not significant.
VMware determined that the realization of deferred tax assets relating to portions of the state net operating loss carryforwards, state R&D tax credits and foreign capital loss carryforwards did not meet the more-likely-than-not threshold.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accordingly, a valuation allowance of $332 million and $283 million was recorded as of January 31, 2020 and February 1, 2019, respectively. If, in the future, new evidence supports the realization of the deferred tax assets related to these items, the valuation allowance will be reversed and a tax benefit will be recorded accordingly.
VMware believes it is more-likely-than-not that the net deferred tax assets as of January 31, 2020 and February 1, 2019, will be realized in the foreseeable future as VMware believes that it will generate sufficient taxable income in future years. VMware's ability to generate sufficient taxable income in future years in appropriate tax jurisdictions will determine the amount of net deferred tax asset balances to be realized in future periods. During the year ended January 31, 2020, the total change in the valuation allowance was $49 million, which was primarily due to California R&D credits generated in the current year, partially offset by the California R&D usage.
For the periods presented, VMware’s rate of taxation in non-U.S. jurisdictions was lower than the U.S. tax rate. VMware’s non-U.S. earnings are primarily earned by its subsidiaries organized in Ireland, where the statutory rate is 12.5%. Prior to the year ended February 2, 2018, the Company did not recognize a deferred tax liability related to undistributed foreign earnings of its subsidiaries because such earnings were considered to be indefinitely reinvested in its foreign operations, or were remitted substantially free of U.S. tax. Under the 2017 Tax Act, all foreign earnings are subject to U.S. taxation. As a result, the Company repatriated, and expects to continue to repatriate, a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings. As of January 31, 2020, the amount of deferred tax liability related to the potential repatriation of foreign earnings was not material. Further developments in non-U.S. tax jurisdictions and unfavorable changes in non-U.S. tax laws and regulations, such as foreign tax laws enacted in response to the 2017 Tax Act, could result in adverse changes to global taxation and materially affect VMware’s financial position, results of operations, or annual effective tax rate.
Tax Sharing Agreement with Dell
On December 30, 2019, VMware entered into a second tax sharing agreement with Dell in connection with, and effective as of, the Pivotal acquisition. The tax sharing agreement with Dell, 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.
Although VMware’s results are included in the Dell consolidated return for U.S. federal income tax purposes, VMware’s income tax provision is calculated primarily as though VMware were a separate taxpayer. However, under certain circumstances, transactions between VMware and Dell are assessed using consolidated tax return rules.
VMware has made payments to Dell pursuant to the tax sharing agreement. The following table summarizes the payments made during the periods presented (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Payments from VMware to Dell, net
|
$
|
159
|
|
|
$
|
243
|
|
|
$
|
54
|
|
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 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 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 year ended January 31, 2020 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 years ended February 1, 2019 and February 2, 2018 was not significant.
As a result of the activity under the tax sharing agreement with Dell, amounts due to and from Dell was $529 million and $646 million as of January 31, 2020 and February 1, 2019, respectively, primarily related to VMware’s estimated tax obligation resulting from the Transition Tax. 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 six years.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pivotal Tax Sharing Agreement with Dell
During the fourth quarter of fiscal 2020, VMware completed the acquisition of Pivotal. Pivotal will continue to file its 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. Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for the tax benefits derived from the inclusion of its losses in certain Dell U.S. federal and state group returns. Payments received from Dell were recognized as a component of additional paid-in capital. During the years ended January 31, 2020, February 1, 2019 and February 2, 2018, $25 million, $15 million and $66 million, respectively, was recognized in additional paid-in capital related to Pivotal’s tax sharing agreement with Dell. This has reduced the amount of benefit or expense received by Pivotal since the IPO to the amount of benefit or expenses Dell realizes from Pivotal’s inclusion on unitary state tax returns.
In April 2019, Pivotal and Dell amended their tax sharing agreement with regard to the treatment of certain 2017 Tax Act implications not explicitly covered by the original terms of the tax sharing agreement. The amendment resulted in a one-time payment of $27 million by Dell to Pivotal in August 2019.
During the years ended February 1, 2019 and February 2, 2018, payment received from Dell pursuant to the tax sharing agreement was $44 million and $36 million, respectively.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties associated with unrecognized tax benefits, for the periods presented is as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Balance, beginning of the year
|
$
|
385
|
|
|
$
|
305
|
|
|
$
|
265
|
|
Tax positions related to current year:
|
|
|
|
|
|
Additions
|
116
|
|
|
57
|
|
|
63
|
|
Tax positions related to prior years:
|
|
|
|
|
|
Additions
|
98
|
|
|
44
|
|
|
2
|
|
Reductions
|
(7
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Settlements
|
(28
|
)
|
|
(4
|
)
|
|
(9
|
)
|
Reductions resulting from a lapse of the statute of limitations
|
(83
|
)
|
|
(8
|
)
|
|
(24
|
)
|
Foreign currency effects
|
(2
|
)
|
|
(8
|
)
|
|
10
|
|
Balance, end of the year
|
$
|
479
|
|
|
$
|
385
|
|
|
$
|
305
|
|
Of the net unrecognized tax benefits, including interest and penalties, $323 million and $296 million were included in income tax payable on the consolidated balance sheets as of January 31, 2020 and February 1, 2019, respectively. Approximately $313 million and $266 million, respectively, would, if recognized, benefit VMware's annual effective income tax rate. VMware includes interest expense and penalties related to income tax matters in the income tax provision. VMware had accrued $48 million and $56 million of interest and penalties associated with unrecognized tax benefits as of January 31, 2020 and February 1, 2019, respectively. Income tax expense during the year ended February 1, 2019 included interest and penalties associated with uncertain tax positions of $15 million. Interest and penalties associated with uncertain tax positions included in income tax expense (benefit) were not significant during the years ended January 31, 2020 and February 2, 2018.
The Dell-owned EMC consolidated group is routinely under audit by the IRS. All U.S. federal income tax matters have been concluded for years through 2015 while VMware was part of the Dell-owned EMC consolidated group. The IRS has started its examination of fiscal years 2015 through 2019 for the Dell consolidated group, which VMware was part of beginning fiscal 2017. In addition, VMware is under corporate income tax audits in various states and non-U.S. jurisdictions. Consistent with the Company’s historical practices under the tax sharing agreement with EMC, when VMware becomes subject to federal tax audits as a member of Dell’s consolidated group, the tax sharing agreement provides that Dell has authority to control the audit and represent Dell’s and VMware’s interests to the IRS.
Open tax years subject to examinations for larger non-U.S. jurisdictions vary beginning in 2008. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. When considering the outcomes and the timing of tax examinations, the expiration of statutes of limitations for specific jurisdictions, or the timing and result of ruling requests from
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
taxing authorities, it is reasonably possible that total unrecognized tax benefits could be potentially reduced by approximately $17 million within the next 12 months.
Q. Stockholders’ Equity
Special Dividend
On July 1, 2018, VMware’s board of directors declared a conditional $11.0 billion Special Dividend, payable pro-rata to VMware stockholders as of the record date. During the fourth quarter of fiscal 2019, the conditions of the Special Dividend were met. The Special Dividend was paid on December 28, 2018 to stockholders of record as of the close of business on December 27, 2018 in the amount of $26.81 per outstanding share of VMware common stock.
Stock awards that were outstanding at the time of the Special Dividend were adjusted pursuant to anti-dilution provisions in the Company’s stock plan documents that provide for equitable adjustments to be determined by VMware’s Compensation and Corporate Governance 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 December 28, 2018 was used to adjust the stock awards outstanding at the time of the Special Dividend. The adjustments to awards included increasing the number of outstanding restricted stock units and stock options, as well as reducing the exercise prices of outstanding 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.
VMware Class B Common Stock Conversion Rights
Each share of Class B common stock is convertible into one share of Class A common stock. If VMware’s Class B common stock is distributed to security holders of Dell in a qualified distribution, the Class B shares will no longer be convertible into shares of Class A common stock unless a stockholder vote is obtained after certain conditions are satisfied. Prior to any such distribution, all Class B shares automatically convert into shares of Class A common stock if Dell transfers such shares to a third party that is not a successor or a Dell subsidiary or at such time as the number of shares of common stock owned by Dell or its successor falls below 20% of the outstanding shares of VMware’s common stock. As of January 31, 2020, 307.2 million shares of Class A common stock were reserved for conversion.
VMware Equity Plan
In June 2007, VMware adopted its 2007 Equity and Incentive Plan (the “2007 Plan”). On June 25, 2019, VMware amended its 2007 Plan to increase the number of shares available for issuance by 13.0 million shares of Class A common stock. As of January 31, 2020, the number of authorized shares under the 2007 Plan was 145.2 million, including 6.1 million shares automatically added to the share reserve pursuant to anti-dilution provisions of the 2007 Plan triggered by payment of the Special Dividend (the “Anti-Dilution Adjustment”). The number of shares underlying outstanding equity awards that VMware assumes in the course of business acquisitions are also added to the 2007 Plan reserve on an as-converted basis. VMware has assumed 11.3 million shares, which accordingly have been added to authorized shares under the 2007 Plan reserve.
Awards under the 2007 Plan may be in the form of stock-based awards, such as restricted stock units, or stock options. VMware’s Compensation and Corporate Governance Committee determines the vesting schedule for all equity awards. Generally, restricted stock grants made under the 2007 Plan have a three-year to four-year period over which they vest and vest 25% the first year and semi-annually thereafter. The per share exercise price for a stock option awarded under the 2007 Plan shall not be less than 100% of the per share fair market value of VMware Class A common stock on the date of grant. Most options granted under the 2007 Plan vest 25% after the first year and monthly thereafter over the following three years and expire between six and seven years from the date of grant. VMware utilizes both authorized and unissued shares to satisfy all shares issued under the 2007 Plan. As of January 31, 2020, there was an aggregate of 23.8 million shares of common stock available for issuance pursuant to future grants under the 2007 Plan, including 2.5 million shares included in the Anti-Dilution Adjustment.
Pivotal Equity Plan
Prior to the acquisition of Pivotal, Pivotal granted stock-based awards, such as restricted stock units or stock options to its employees. Pivotal’s restricted stock grants generally vested over four years and options granted generally vested over 48 months. Upon completion of the acquisition by VMware, no further awards will be granted under the plan. Pivotal’s outstanding unvested RSUs and options on the date of the acquisition were converted to VMware RSUs and options and valued at their historical carrying amounts.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 can 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.
The following table summarizes stock repurchase authorizations approved by VMware’s board of directors, which were open or completed during the years ended January 31, 2020, February 1, 2019 and February 2, 2018 (amounts in table in millions):
|
|
|
|
|
|
|
|
Announcement Date
|
|
Amount Authorized
|
|
Expiration Date
|
|
Status
|
May 29, 2019
|
|
$1,500
|
|
January 29, 2021
|
|
Open
|
August 14, 2017
|
|
1,000
|
|
August 31, 2019
|
|
Completed in fiscal 2020
|
January 26, 2017
|
|
1,200
|
|
February 2, 2018
|
|
Completed in fiscal 2018
|
In the aggregate, $1.0 billion remained available for repurchase as of January 31, 2020.
The following table summarizes stock repurchase activity, including shares purchased from Dell, during the periods presented (aggregate purchase price in millions, shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Aggregate purchase price(1)
|
$
|
1,334
|
|
|
$
|
42
|
|
|
$
|
1,449
|
|
Class A common stock repurchased
|
7,664
|
|
|
286
|
|
|
13,977
|
|
Weighted-average price per share
|
$
|
174.02
|
|
|
$
|
148.07
|
|
|
$
|
103.66
|
|
(1) The aggregate purchase price of repurchased shares is classified as a reduction to additional paid-in capital until the balance is reduced to zero and the excess is recorded as a reduction to retained earnings.
VMware and Pivotal Restricted Stock
VMware’s restricted stock primarily consists of RSU awards, which have been 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 common stock.
VMware’s restricted stock also includes PSU awards, which have been granted to certain VMware executives and employees. The PSU awards include performance conditions and, in certain cases, a time-based or market-based vesting component. Upon vesting, PSU awards convert into VMware’s Class A common stock at various ratios ranging from 0.1 to 2.0 shares per PSU, depending upon the degree of achievement of the performance or market-based target designated by each award. If minimum performance thresholds are not achieved, then no shares are issued.
Pivotal’s restricted stock consisted of RSU awards. The value of the grant was based on Pivotal’s stock price on the date of the grant. Upon the completion of the acquisition by VMware, all outstanding Pivotal RSUs were converted to VMware RSUs using a conversion ratio of 0.1.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes restricted stock activity for VMware and Pivotal since February 3, 2017 (units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware RSUs
|
|
Pivotal RSUs
|
|
Number of Units
|
|
Weighted-Average Grant Date Fair Value
(per unit)
|
|
Number of Units
|
|
Weighted-Average Grant Date Fair Value
(per unit)
|
Outstanding, February 3, 2017
|
20,451
|
|
|
$
|
67.41
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
7,838
|
|
|
93.84
|
|
|
—
|
|
|
—
|
|
Vested
|
(9,070
|
)
|
|
67.89
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(1,859
|
)
|
|
72.68
|
|
|
—
|
|
|
—
|
|
Outstanding, February 2, 2018
|
17,360
|
|
|
78.62
|
|
|
—
|
|
|
—
|
|
Granted
|
6,663
|
|
|
146.61
|
|
|
9,854
|
|
|
15.78
|
|
Special Dividend adjustment
|
3,236
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Vested
|
(7,370
|
)
|
|
75.45
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(1,674
|
)
|
|
86.90
|
|
|
(353
|
)
|
|
16.09
|
|
Outstanding, February 1, 2019(1)
|
18,215
|
|
|
90.06
|
|
|
9,501
|
|
|
15.77
|
|
Granted(2)
|
9,074
|
|
|
157.07
|
|
|
20,504
|
|
|
16.02
|
|
Vested
|
(8,179
|
)
|
|
80.28
|
|
|
(4,009
|
)
|
|
15.56
|
|
Forfeited(3)
|
(1,636
|
)
|
|
101.29
|
|
|
(25,996
|
)
|
|
16.01
|
|
Outstanding, January 31, 2020
|
17,474
|
|
|
128.38
|
|
|
—
|
|
|
—
|
|
|
|
(1)
|
The weighted-average grant date fair value of outstanding RSU awards as of February 1, 2019 reflects the adjustments to the awards as a result of the Special Dividend.
|
(2) RSUs granted under the VMware equity plan includes 2.2 million RSUs issued for outstanding unvested RSUs assumed as part of the Pivotal acquisition.
(3) RSUs forfeited under the Pivotal equity plan includes 21.7 million RSUs that were converted to VMware RSUs as part of the Pivotal acquisition, using a conversion ratio of 0.1.
As of January 31, 2020, the 17.5 million units outstanding included 16.3 million of RSUs and 1.2 million of PSUs. The above table includes RSUs issued for outstanding unvested RSUs in connection with business combinations.
Restricted stock that is expected to vest as of January 31, 2020 was as follows (units in thousands, aggregate intrinsic value in millions):
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value(1)
|
Expected to vest
|
15,670
|
|
|
2.39
|
|
$
|
2,320
|
|
|
|
(1)
|
The aggregate intrinsic value represents the total pre-tax intrinsic values based on VMware's closing stock price of 148.06 as of January 31, 2020, which would have been received by the RSU holders had the RSUs been issued as of January 31, 2020.
|
The aggregate vesting date fair value of VMware’s restricted stock that vested during the years ended January 31, 2020, February 1, 2019 and February 2, 2018 was $1.4 billion, $1.1 billion and $946 million, respectively. As of January 31, 2020, restricted stock representing 17.5 million shares of VMware’s Class A common stock were outstanding, with an aggregate intrinsic value of $2.6 billion based on VMware’s closing stock price as of January 31, 2020.
The aggregate vesting date fair value of Pivotal’s restricted stock that vested during the year ended January 31, 2020, prior to the acquisition, was $68 million. No restricted stock vested during the years ended February 1, 2019 and February 2, 2018.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware and Pivotal Employee Stock Purchase Plans
In June 2007, VMware adopted its 2007 Employee Stock Purchase Plan (the “ESPP”), which is intended to be qualified under Section 423 of the Internal Revenue Code. On June 25, 2019, VMware amended its ESPP to increase the number of shares available for issuance by 9.0 million shares of Class A common stock. As of January 31, 2020, the number of authorized shares under the ESPP was a total of 32.3 million shares. Under the ESPP, eligible VMware employees are granted options to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. The option period is generally twelve months and includes two embedded six-month option periods. Options are exercised at the end of each embedded option period. If the fair market value of the stock is lower on the first day of the second embedded option period than it was at the time of grant, then the twelve-month option period expires and each enrolled participant is granted a new twelve-month option. As of January 31, 2020, 14.3 million shares of VMware Class A common stock were available for issuance under the ESPP.
The following table summarizes ESPP activity for VMware during the periods presented (cash proceeds in millions, shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Cash proceeds
|
$
|
172
|
|
|
$
|
161
|
|
|
$
|
65
|
|
Class A common stock purchased
|
1,489
|
|
|
1,895
|
|
|
903
|
|
Weighted-average price per share
|
$
|
115.51
|
|
|
$
|
84.95
|
|
|
$
|
72.40
|
|
As of January 31, 2020, $95 million of ESPP withholdings were recorded as a liability in accrued expenses and other on the consolidated balance sheets for the purchase that occurred on February 29, 2020.
Prior to the acquisition of Pivotal, Pivotal granted options to eligible Pivotal employees to purchase shares of its Class A common stock at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value of the Pivotal stock at the time of exercise. Pivotal’s ESPP activity was not material during the periods presented.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware and Pivotal Stock Options
The following table summarizes stock option activity for VMware and Pivotal since February 3, 2017 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Stock Options
|
|
Pivotal Stock Options
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
(per share)
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
(per share)
|
Outstanding, February 3, 2017
|
1,991
|
|
|
$
|
69.38
|
|
|
39,361
|
|
|
$
|
6.72
|
|
Granted
|
745
|
|
|
13.79
|
|
|
20,323
|
|
|
9.73
|
|
Forfeited
|
(36
|
)
|
|
55.44
|
|
|
(2,380
|
)
|
|
8.13
|
|
Expired
|
(3
|
)
|
|
93.87
|
|
|
(1,290
|
)
|
|
6.24
|
|
Exercised
|
(1,050
|
)
|
|
53.50
|
|
|
(1,626
|
)
|
|
5.99
|
|
Outstanding, February 2, 2018
|
1,647
|
|
|
54.63
|
|
|
54,388
|
|
|
7.82
|
|
Granted
|
574
|
|
|
16.07
|
|
|
2,832
|
|
|
14.03
|
|
Special Dividend adjustment
|
348
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Forfeited
|
(31
|
)
|
|
24.44
|
|
|
(2,028
|
)
|
|
9.35
|
|
Expired
|
—
|
|
|
—
|
|
|
(273
|
)
|
|
7.02
|
|
Exercised
|
(569
|
)
|
|
46.73
|
|
|
(9,018
|
)
|
|
6.89
|
|
Outstanding, February 1, 2019(1)
|
1,969
|
|
|
36.50
|
|
|
45,901
|
|
|
8.31
|
|
Granted(2)
|
1,571
|
|
|
73.19
|
|
|
—
|
|
|
—
|
|
Forfeited(3)
|
(149
|
)
|
|
52.83
|
|
|
(10,822
|
)
|
|
10.65
|
|
Expired
|
—
|
|
|
—
|
|
|
(128
|
)
|
|
10.10
|
|
Exercised(4)
|
(776
|
)
|
|
39.94
|
|
|
(34,951
|
)
|
|
7.59
|
|
Outstanding, January 31, 2020
|
2,615
|
|
|
56.58
|
|
|
—
|
|
|
—
|
|
|
|
(1)
|
The weighted-average exercise price of options outstanding as of February 1, 2019 reflects the adjustments to the options as a result of the Special Dividend.
|
(2) Stock option granted under the VMware equity plan includes 0.6 million options issued for unvested options assumed as part of the Pivotal acquisition.
(3) Stock options forfeited under the Pivotal equity plan includes 6.2 million options converted to VMware options as part of the Pivotal acquisition, using a conversion ratio of 0.1.
(4) Stock options exercised under the Pivotal equity plan includes 22.4 million of vested options that were settled in cash as part of the Pivotal acquisition.
The above table includes stock options granted in conjunction with unvested stock options assumed in business combinations. As a result, the weighted-average exercise price per share may vary from the VMware stock price at time of grant
The stock options outstanding as of January 31, 2020 had an aggregate intrinsic value of $239 million based on VMware’s closing stock price as of January 31, 2020.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Options outstanding that are exercisable and that have vested and are expected to vest as of January 31, 2020 were as follows (outstanding options in thousands, aggregate intrinsic value in in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Stock Options
|
|
Outstanding Options
|
|
Weighted- Average Exercise Price
|
|
Weighted- Average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value(1)
|
Exercisable
|
945
|
|
|
$
|
47.24
|
|
|
3.81
|
|
$
|
95
|
|
Vested and expected to vest
|
2,589
|
|
|
56.13
|
|
|
6.41
|
|
238
|
|
|
|
(1)
|
The aggregate intrinsic values represent the total pre-tax intrinsic values based on VMware's closing stock price of $148.06 as of January 31, 2020, which would have been received by the option holders had all in-the-money options been exercised as of that date.
|
The total fair value of VMware stock options that vested during the years ended January 31, 2020, February 1, 2019 and February 2, 2018 was $64 million, $35 million and $32 million, respectively. Total fair value of Pivotal stock options that vested during the years ended January 31, 2020, February 1, 2019 and February 2, 2018 was $27 million, $41 million and $23 million, respectively.
The VMware stock options exercised during the years ended January 31, 2020, February 1, 2019 and February 2, 2018 had a pre-tax intrinsic value of $103 million, $56 million, and $62 million, respectively. The Pivotal options exercised during the years ended January 31, 2020 and February 1, 2019 had a pre-tax intrinsic value of $278 million and $97 million, respectively, and was not material during the year ended February 2, 2018. The pre-tax intrinsic value of Pivotal options exercised during the year ended January 31, 2020 includes vested options that were settled in cash as part of the Pivotal acquisition.
VMware Shares Repurchased for Tax Withholdings
During the years ended January 31, 2020, February 1, 2019 and February 2, 2018, VMware repurchased 3.0 million, 2.6 million, 3.3 million, respectively, of Class A common stock, for $521 million, $373 million, $348 million, respectively, to cover tax withholding obligations in connection with such equity awards. These amounts may differ from the amounts of cash remitted for tax withholding obligations on the consolidated statements of cash flows due to the timing of payments. Pursuant to the respective award agreements, these shares were withheld in conjunction with the net share settlement upon the vesting of restricted stock and restricted stock units (including PSUs) during the period. The value of the withheld shares, including restricted stock units, was classified as a reduction to additional paid-in capital.
Net Excess Tax Benefits
Net excess tax benefits recognized in connection with stock-based awards are included in income tax provision on the consolidated statements of income. Net excess tax benefits recognized during the years ended January 31, 2020, February 1, 2019 and February 2, 2018 were $182 million, $116 million and $106 million, respectively.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-Based Compensation
The following table summarizes the components of total stock-based compensation included in VMware’s consolidated statements of income during the periods presented (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Cost of license revenue
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Cost of subscription and SaaS revenue
|
13
|
|
|
7
|
|
|
5
|
|
Cost of services revenue
|
83
|
|
|
58
|
|
|
53
|
|
Research and development
|
459
|
|
|
391
|
|
|
363
|
|
Sales and marketing
|
293
|
|
|
226
|
|
|
205
|
|
General and administrative
|
168
|
|
|
117
|
|
|
84
|
|
Stock-based compensation
|
1,017
|
|
|
800
|
|
|
712
|
|
Income tax benefit
|
(347
|
)
|
|
(253
|
)
|
|
(232
|
)
|
Total stock-based compensation, net of tax
|
$
|
670
|
|
|
$
|
547
|
|
|
$
|
480
|
|
As of January 31, 2020, the total unrecognized compensation cost for stock options and restricted stock was $1.8 billion and will be recognized through fiscal 2024 with a weighted-average remaining period of 1.5 years. Stock-based compensation related to VMware equity awards held by VMware employees is recognized on VMware’s consolidated statements of income over the awards’ requisite service periods.
Fair Value of VMware and Pivotal Options
The fair value of each option to acquire VMware Class A common stock and Pivotal Class A common stock granted during the periods presented was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
VMware Stock Options
|
2020
|
|
2019
|
|
2018
|
Dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
34.0
|
%
|
|
31.9
|
%
|
|
29.1
|
%
|
Risk-free interest rate
|
1.5
|
%
|
|
2.9
|
%
|
|
1.7
|
%
|
Expected term (in years)
|
2.7
|
|
|
3.2
|
|
|
3.3
|
|
Weighted-average fair value at grant date
|
$
|
98.00
|
|
|
$
|
143.01
|
|
|
$
|
83.62
|
|
Pivotal Stock Options
|
|
|
|
|
|
Dividend yield
|
n/a
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
n/a
|
|
|
33.4
|
%
|
|
34.3
|
%
|
Risk-free interest rate
|
n/a
|
|
|
2.8
|
%
|
|
2.0
|
%
|
Expected term (in years)
|
n/a
|
|
|
6.08
|
|
|
6.08
|
|
Weighted-average fair value at grant date
|
n/a
|
|
|
$
|
5.23
|
|
|
$
|
3.58
|
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
VMware Employee Stock Purchase Plan
|
2020
|
|
2019
|
|
2018
|
Dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
27.4
|
%
|
|
33.5
|
%
|
|
22.6
|
%
|
Risk-free interest rate
|
1.7
|
%
|
|
2.0
|
%
|
|
1.2
|
%
|
Expected term (in years)
|
0.6
|
|
|
0.8
|
|
|
0.9
|
|
Weighted-average fair value at grant date
|
$
|
35.66
|
|
|
$
|
34.72
|
|
|
$
|
21.93
|
|
The weighted-average grant date fair value of VMware stock options can fluctuate from period to period primarily due to higher valued options assumed through business combinations with exercise prices lower than the fair market value of VMware’s stock on the date of grant.
For equity awards granted under the VMware equity plan, volatility was based on an analysis of historical stock prices and implied volatilities of VMware’s Class A common stock. The expected term was based on historical exercise patterns and post-vesting termination behavior, the term of the option period for grants made under the ESPP, or the weighted-average remaining term for options assumed in acquisitions. VMware’s expected dividend yield input was zero as the Company has not historically paid, nor expects in the future to pay, regular dividends on its common stock. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options.
For equity awards granted under the Pivotal equity plan, volatility was based on the volatility of a group of comparable public companies based on size, stage of life cycle, profitability, growth and other factors. The expected term was estimated using the simplified method and was determined based on the vesting terms, exercise terms and contractual lives of the options. Pivotal’s expected dividend yield input was zero as the Company has not historically paid regular dividends on its common stock. The risk-free interest rate was based on a U.S. Treasury instrument whose term was consistent with the expected term of the stock options.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accumulated Other Comprehensive Income (Loss)
The changes in components of accumulated other comprehensive income (loss) during the periods presented were as follows (tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on
Available-for-Sale Securities
|
|
Unrealized Gain (Loss) on
Forward Contracts
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balance, February 2, 2018
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
11
|
|
Adjustments related to adoption of ASU 2016-01 and 2018-02
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Unrealized gains (losses), net of tax (benefit) of $—, $—, $—, and $—
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income, net of tax (provision) benefit of $10, $—, $— and $10
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
(26
|
)
|
|
(26
|
)
|
Other comprehensive income (loss), net
|
30
|
|
|
2
|
|
|
(26
|
)
|
|
6
|
|
Less: Change in other comprehensive income (loss) attributable to non-controlling interests
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
Balance, February 1, 2019
|
—
|
|
|
2
|
|
|
(4
|
)
|
|
(2
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income, net of tax (provision) benefit of $—, $—, $— and $—
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Other comprehensive income (loss), net
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Balance, January 31, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
Unrealized gains and losses on VMware’s available-for-sale securities are reclassified to investment income on the consolidated statements of income in the period that such gains and losses are realized.
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 consolidated statements of income in the same period that the underlying expenses are incurred. The amounts recorded to their related operating expense functional line items on the consolidated statements of income were not significant to the individual functional line items during the periods presented.
R. Segment Information
VMware operates in one reportable operating segment, thus all required financial segment information is included in the 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 deciding how to allocate resources and assessing performance. VMware’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue by type during the periods presented was as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
License
|
$
|
3,181
|
|
|
$
|
3,042
|
|
|
$
|
2,628
|
|
Subscription and SaaS
|
1,877
|
|
|
1,303
|
|
|
927
|
|
Total license and subscription and SaaS
|
5,058
|
|
|
4,345
|
|
|
3,555
|
|
Services:
|
|
|
|
|
|
Software maintenance
|
4,754
|
|
|
4,351
|
|
|
3,919
|
|
Professional services
|
999
|
|
|
917
|
|
|
862
|
|
Total services
|
5,753
|
|
|
5,268
|
|
|
4,781
|
|
Total revenue
|
$
|
10,811
|
|
|
$
|
9,613
|
|
|
$
|
8,336
|
|
Revenue by geographic area during the periods presented was as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
January 31,
|
|
February 1,
|
|
February 2,
|
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
5,405
|
|
|
$
|
4,696
|
|
|
$
|
4,200
|
|
International
|
5,406
|
|
|
4,917
|
|
|
4,136
|
|
Total
|
$
|
10,811
|
|
|
$
|
9,613
|
|
|
$
|
8,336
|
|
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 years ended January 31, 2020, February 1, 2019 and February 2, 2018.
Long-lived assets by geographic area, which primarily include property and equipment, net, as of the periods presented were as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 1,
|
|
2020
|
|
2019
|
United States
|
$
|
860
|
|
|
$
|
849
|
|
International
|
209
|
|
|
113
|
|
Total
|
$
|
1,069
|
|
|
$
|
962
|
|
No individual country other than the U.S. accounted for 10% or more of these assets as of January 31, 2020 and February 1, 2019.
VMware’s product and service solutions are organized into three main product groups:
|
|
•
|
Software-Defined Data Center
|
|
|
•
|
Hybrid and Multi-Cloud Computing
|
|
|
•
|
Digital Workspace—End-User Computing
|
VMware develops and markets product and service offerings within each of these three product groups. Additionally, synergies are leveraged across these three product areas. VMware’s products and service solutions from each of its product groups may also be bundled as part of an enterprise agreement arrangement or packaged together and sold as a suite. Accordingly, it is not practicable to determine revenue by each of the three product groups described above.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
S. Selected Quarterly Financial Data (unaudited)
Quarterly financial data for fiscal 2020 and 2019 were as follows (tables in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020
|
Q1 2020(1)
|
|
Q2 2020(1)
|
|
Q3 2020(1)
|
|
Q4 2020
|
Total revenue
|
$
|
2,450
|
|
|
$
|
2,632
|
|
|
$
|
2,656
|
|
|
$
|
3,073
|
|
Net income attributable to VMware, Inc.
|
380
|
|
|
5,303
|
|
|
407
|
|
|
321
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B
|
$
|
0.91
|
|
|
$
|
12.72
|
|
|
$
|
0.98
|
|
|
$
|
0.77
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B
|
$
|
0.89
|
|
|
$
|
12.47
|
|
|
$
|
0.96
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
Q1 2019(1)
|
|
Q2 2019(1)
|
|
Q3 2019(1)
|
|
Q4 2019(1)
|
Total revenue
|
$
|
2,159
|
|
|
$
|
2,332
|
|
|
$
|
2,363
|
|
|
$
|
2,759
|
|
Net income attributable to VMware, Inc.
|
299
|
|
|
433
|
|
|
422
|
|
|
496
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, basic for Classes A and B
|
$
|
0.73
|
|
|
$
|
1.04
|
|
|
$
|
1.01
|
|
|
$
|
1.19
|
|
Net income per weighted-average share attributable to VMware, Inc. common stockholders, diluted for Classes A and B
|
$
|
0.71
|
|
|
$
|
1.03
|
|
|
$
|
1.00
|
|
|
$
|
1.17
|
|
(1) Adjusted to reflect the recast of prior period information due to the Pivotal acquisition, which was accounted for as a transaction between entities under common control (refer to Note B).
T. Coronavirus (COVID-19) Impact
The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the disease is contained. We expect this to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. In preparing our consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.