VMware 2011 Annual Report Download - page 48

Table of Contents
Operating margins increased from 15.0% in 2010 to 19.5% in 2011 and increased from 10.8% in 2009 to 15.0% in 2010 . The increases in
our operating margins in 2011 and 2010 compared with their respective prior years primarily related to the increases in our revenues, which
outpaced the increases in our expenses. In evaluating our results, we focus on core operating expenses. We believe that our core operating
expenses reflect our 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 we focus on when 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 acquired
intangible assets and acquisition-related items.
Core operating expenses increased by $556.4 or 27% in 2011 compared with 2010 and by $504.1 or 33% in 2010 compared with 2009 . 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 an increase in
headcount of over 2,000 employees during 2011, driven by strategic hiring, business growth and business acquisitions. 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 $48.2 in 2011 and by $4.1 in 2010 , 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 $22.4 or 43% in 2011 compared with 2010 and by $21.6 or 70% in 2010
compared with 2009. The increases were primarily due to increases of $11.3 and $19.2, respectively, in royalty and licensing costs for
technology licensed from third-party providers that is used in our products. Additionally, cost of license revenues increased by $7.6 in 2011 for
IT development costs.
Cost of Services Revenues
Core operating expenses in cost of services revenues increased by $92.5 or 32% in 2011 compared with 2010 and by $74.6 or 34% in 2010
compared with 2009. The increase in 2011 was primarily due to growth in employee-related expenses of $48.3, which was largely driven by
incremental growth in headcount, as well as an increase in expenses of $16.2 for IT development costs. Additionally, our third-
party professional
services costs increased by $13.1 to provide technical support and professional services primarily in connection with increased services
revenues. Fluctuations in the exchange rate between the U.S. Dollar and foreign currencies also contributed $9.4 to the overall increase in costs
of services revenues. The increase in 2010 was primarily due to growth in employee-related expenses of $41.1, which was largely driven by
incremental growth in headcount, as well as an increase in third-party professional services costs of $19.1 to provide professional services and
training, primarily associated with increased services revenues.
Research and Development Expenses
Core operating expenses for R&D increased by $124.1 or 23% in 2011 compared with 2010 and by $96.2 or 22% in 2010 compared with
2009. The increases in 2011 and 2010 were primarily due to growth in employee-related expenses of $95.0 and $80.3, respectively, which were
primarily driven by incremental growth in headcount.
Sales and Marketing Expenses
Core operating expenses for sales and marketing increased by $291.2 or 31% in 2011 compared with 2010 and by $256.2 or 38% in 2010
compared with 2009. The increase in 2011 was primarily due to growth in employee-related expenses of $168.8, driven by incremental growth
in headcount and by higher commission expense due to increased sales volumes. Additionally, the costs of marketing programs increased by
$33.3 and travel and entertainment expense increased by $18.0 in support of our expanding markets and sales efforts. The negative impact of
$30.5 from fluctuations in the exchange rate between the U.S. Dollar and foreign currencies further contributed to the increase. The increase in
2010 was primarily due to
42
(1) 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 acquired intangible assets
and acquisition-related items. See “Non-GAAP Financial Measures” below for further information.