VMware 2010 Annual Report Download - page 55

Table of Contents
Operating margins increased from 10.8% in 2009 to 15.0% in 2010 and decreased from 16.6% in 2008 to 10.8% in 2009. The increase in
our operating margin in 2010 compared with 2009 primarily related to the increase in our revenues, which outpaced the increase in our expenses.
The decrease in our operating margin in 2009 compared with 2008 primarily related to slower revenue growth, which was negatively impacted
by the global economic downturn in 2009 and late 2008 and our continued investments in our products and the Company’s infrastructure. In
evaluating our results, we generally focus on core operating expenses. We believe that our core operating expenses reflect our ongoing business
in a manner that allows meaningful period-to-period comparisons. Our core operating expenses are reconciled to the most comparable GAAP
measure, “total operating expenses,” in the table above.
Core Operating Expenses
The following discussion of our core operating expenses and the components comprising our core operating expenses highlights the factors
that our management focuses upon in evaluating our operating margin and operating expenses. The increases or decreases in operating expenses
discussed in this section do not include changes relating to stock-based compensation, the net effect of the amortization and capitalization of
software development costs and certain other expenses, which consist of employer payroll taxes on employee stock transactions, amortization of
intangible assets and acquisition-related items set forth above.
Core operating expenses increased by $504.1 or 33% in 2010 compared with 2009 and $127.8 or 9% in 2009 compared with 2008. As
quantified below, these increases were primarily due to increases in employee-related expenses, which include salaries and benefits, bonuses,
commissions, and recruiting and training. The increases in employee-related expenses for both periods were largely a result of incremental
headcount from strategic hiring, business growth and business acquisitions, as well as from higher commission expense as a result of increased
sales volumes beginning in the fourth quarter of 2009 and continuing through 2010. In 2009, the increase in core operating expenses was
partially offset by the benefit from the austerity measures that we introduced at the end of 2008 in response to the global economic downturn.
These austerity measures included reduced travel and entertainment costs, decreased contractor costs, hiring limits and suspensions of merit pay
increases and matching contributions to employee 401(k) retirement plan accounts. We reinstated matching contributions to 401(k) retirement
plan accounts in the fourth quarter of 2009, and we reinstated a budget for merit pay increases effective in the second quarter of 2010.
A portion of our core operating expenses, primarily the cost of personnel to deliver technical support on our products and professional
services, marketing, and research and development, are denominated in foreign currencies, and are thus exposed to foreign exchange rate
fluctuations. Core operating expenses were negatively impacted by $4.1 in 2010 and benefited by $28.0 in 2009, as compared with their
respective prior years, due to the effect of fluctuations in the exchange rates between the U.S. Dollar and foreign currencies.
Cost of License Revenues
Core operating expenses in cost of license revenues increased by $21.6 or 70% in 2010 compared with 2009 and by $6.7 or 28% in 2009 as
compared with 2008. The increases were primarily due to increases of $19.2 and $8.1, respectively, in royalty and licensing costs for technology
licensed from third-party providers that is used in our products.
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Core operating expenses is a non
-
GAAP financial measure that excludes stock
-
based compensation, the net effect of the amortization and
capitalization of software development costs and certain other expenses from our total operating expenses calculated in accordance with
GAAP. The other expenses excluded are employer payroll taxes on employee stock transactions, amortization of intangible assets and
acquisition
-
related items. See
“
Non
-
GAAP Financial Measures
”
below for further information.
(1)