VMware 2010 Annual Report Download - page 63

Table of Contents
operating expenses reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in
our business, as they exclude certain expenses that are not reflective of ongoing operating results.
We define core operating expenses as our total operating expenses excluding the following components, which we believe are not
reflective of our ongoing operational expenses. In each case, for the reasons set forth below, management believes that excluding the component
provides useful information to investors and others in understanding and evaluating our operating results and future prospects in the same
manner as management, in comparing financial results across accounting periods and to those of peer companies and to better understand the
long-term performance of our core business.
Non-GAAP operating cash flows and free cash flows
We define non-GAAP operating cash flows as net cash provided by operating activities less capitalized software development costs plus
the excess tax benefits from stock-based compensation. We define free cash flows as non-GAAP operating cash flows less capital expenditures.
Management uses non-GAAP operating cash flows as another measure of cash flows from operations because this measure offers a perspective
of our operating cash flows that aligns with how management internally views our overall and individual functional group operating results.
When viewing operating results for evaluating our past performance and for planning purposes, management excludes certain items, including
the effect of capitalizing and amortizing software development costs and items related to stock-based compensation, which are also excluded in
the non-
GAAP operating cash flows measure. Management uses free cash flows as a measure of financial progress in our business, as it balances
operating results, cash management and capital efficiency. In addition to quarterly free cash flows, management also focuses on trailing twelve
month free cash flows, as free cash flows can be volatile in the short-term.
We believe that our measures of non-
GAAP operating cash flows and free cash flows provide useful information to investors and others, as
they allow for meaningful period-to-period comparisons of our operating cash flows for analysis of trends in our business. Additionally, we
believe that information regarding non-GAAP
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• Stock-based compensation. Although stock-based compensation is an important aspect of the compensation of our employees and
executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the
expense recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-
based awards. Furthermore, unlike cash compensation, the value of stock-based compensation is determined using a complex
formula that incorporates factors, such as market volatility, that are beyond our control.
•
Amortization and capitalization of software development costs.
Amortization and capitalization of software development costs can
vary significantly depending upon the timing of products reaching technological feasibility and being made generally available.
•
Other expenses.
Other expenses excluded are employer payroll taxes on employee stock transactions, amortization of intangible
assets and acquisition-related items. The amount of employer payroll taxes on stock-based compensation is dependent on our stock
price and other factors that are beyond our control and do not correlate to the operation of the business. Regarding the amortization of
intangible assets, a portion of the purchase price of our acquisitions is generally allocated to intangible assets, such as intellectual
property, and is subject to amortization. However, we do not acquire businesses on a predictable cycle. Additionally, the amount of
an acquisition’s purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are
unique to each acquisition. Acquisition-related items include direct costs of acquisitions, such as transaction fees, which vary
significantly and are unique to each acquisition. Additionally, we do not acquire businesses on a predictable cycle.