VMware 2010 Annual Report Download - page 58

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Table of Contents
software development costs of $10.1 in 2010 as compared with 2009 was primarily due to the timing of when products reached technological
feasibility. The decrease in capitalized software costs of $30.1 in 2009 as compared with 2008 was primarily due to $37.7 of reduced costs
capitalized for VMware vSphere 4.0 as most of the vSphere 4.0 costs were capitalized during the second half of 2008. This decrease was
partially offset by an increase of $14.5 related to the development of version 4.1 of VMware vSphere, which was released in the third quarter of
2010.
In 2010, 2009 and 2008, amortization expense from capitalized software development costs was $99.5, $82.9 and $51.6. These amounts
are included in cost of license revenues on our accompanying consolidated statements of income. The increase in the amortization of software
development costs of $16.6 in 2010 compared with 2009 was primarily due to the general release of VMware vSphere 4.0 in the second quarter
of 2009 and the subsequent release of version 4.1 in the third quarter of 2010. This resulted in an increase in amortization of $36.2 in 2010 as
compared with 2009 that was partially offset by $22.8 of amortization for certain capitalized projects that were fully amortized prior to the end
of 2009. The increase in the amortization of software development costs of $31.3 in 2009 compared with 2008 was primarily due to the general
release of VMware vSphere 4.0 in the second quarter of 2009, which resulted in an increase in amortization of $38.7 in 2009 as compared with
2008.
Other Operating Expenses
Other operating expenses, which consist of employer payroll tax on employee stock transactions, intangible amortization and acquisition-
related items, were $54.6 in 2010, $18.6 in 2009 and $28.9 in 2008, representing an increase of $35.9 in 2010 and a decrease of $10.3 in 2009.
The increase in 2010 was primarily due to additional intangible amortization of $20.6, primarily resulting from new acquisitions, as well as an
increase of $13.4 in employer payroll taxes on employee stock transactions, which was driven by the increase in the market value of our stock
and the number of awards exercised, sold or vested. The decrease in 2009 was primarily due to expensed in-
process research and development of
$6.6 in 2008, which was not repeated in 2009, and a decrease of $3.3 resulting from the completion of intangible amortization related to
historical acquisitions.
Investment Income
Investment income decreased by $1.6 or 19% to $6.6 in 2010, as compared with $8.2 in 2009. Investment income decreased by $20.1 or
71% in 2009, as compared with $28.3 in 2008. Investment income primarily consists of interest earned on cash, cash equivalents and short-term
investment balances partially offset by the amortization of premiums paid on fixed income securities. Investment income decreased in 2010
compared with 2009 primarily due to a decrease in the average rate of interest earned as a result of lower market interest rates. This decrease was
partially offset by higher yields earned on our fixed income securities during the second half of 2010 and increased cash equivalent and short-
term investment balances. During the second quarter of 2010, we began investing in fixed income securities in order to achieve investment
returns in line with our objectives of principal preservation and risk management. Investment income decreased in 2009 compared with 2008
primarily due to a decrease in the average rate of interest earned as a result of lower market interest rates.
Interest Expense with EMC, Net
Interest expense with EMC, net, decreased by $2.9 or 41%, to $4.1 in 2010, as compared with $7.0 in 2009 and by $11.3 or 62% to $7.0 in
2009, as compared with $18.3 in 2008. Interest expense with EMC, net primarily consists of interest expense incurred on the note issued to EMC
in April 2007. The interest rate on the note payable resets quarterly and is determined using the 90-day LIBOR rate plus 55 basis points, two
business days prior to the first day of each fiscal quarter. The decrease in interest expense in 2010 and 2009, as compared with 2009 and 2008,
respectively, was due to lower interest rates on the note. For 2010, 2009 and 2008, the weighted-average rate was 0.9%, 1.45% and 4.14%,
respectively.
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