VMware 2010 Annual Report Download - page 64

Table of Contents
operating cash flows and free cash flows provides investors and others with an important perspective on cash that we may choose to make
available for strategic acquisitions and investments, the repurchase of shares, ongoing operations and other capital expenditures.
We deduct capitalization of software development costs from both measures because these costs are considered to be a necessary
component of our ongoing operations and the amount capitalized under GAAP can vary significantly from period-to-period depending upon the
timing of products reaching technological feasibility and being made generally available. Consequently, software development costs paid out
during a period that are capitalized under GAAP and do not impact GAAP operating cash flows for that period do result in a decrease to our
measures of non-GAAP operating cash flows and non-GAAP free cash flows, thereby providing management with useful measures of cash
flows generated from operations during the period. We add back the excess income tax benefits from stock-based compensation to our measures
of non-GAAP operating cash flows and free cash flows as management internally views cash flows arising from income taxes as similar to
operating cash flows rather than as financing cash flows as required under GAAP. Furthermore, we exclude capital expenditures on property and
equipment from free cash flows because these expenditures are also considered to be a necessary component of ongoing operations.
Limitations on the use of Non-GAAP financial measures
A limitation of our non-GAAP financial measures of core operating expenses, non-GAAP operating cash flows and free cash flows is that
they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies,
and therefore comparability may be limited. Thus, our non-GAAP measures of core operating expenses, non-GAAP operating cash flows and
free cash flows should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
Additionally, in the case of stock-based compensation, if we did not pay out a portion of compensation in the form of stock-based compensation
and related employer payroll taxes, the cash salary expense included in costs of revenues and operating expenses would be higher which would
affect our cash position. Further, the non-GAAP measure of core operating expenses has certain limitations because it does not reflect all items
of income and expense that affect our operations and are reflected in the GAAP measure of total operating expenses.
We compensate for these limitations by reconciling core operating expenses to the most comparable GAAP financial measure.
Management encourages investors and others to review our financial information in its entirety, not to rely on any single financial measure and
to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.
See “Results of Operations—Operating Expenses” for a reconciliation of the non-GAAP financial measure of core operating expenses to
the most comparable GAAP measure, “total operating expenses,” for the years ended December 31, 2010, 2009 and 2008.
See “Liquidity and Capital Resources” for a reconciliation of non-GAAP operating cash flows and free cash flows to the most comparable
GAAP measure, “net cash provided by operating activities,” for the years ended December 31, 2010, 2009 and 2008.
Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments
Guarantees and Indemnification Obligations
We enter into agreements in the ordinary course of business with, among others, customers, distributors, resellers, system vendors and
systems integrators. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products
infringes or misappropriates a patent, copyright,
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