VMware 2011 Annual Report Download - page 49

Table of Contents
growth in employee-related expenses of $159.3 driven by incremental headcount from strategic hiring and business acquisitions as well as by
higher commission expense due to increased sales volumes. In support of our expanding markets and sales efforts, the costs of marketing
programs increased by $36.9, and travel and entertainment expense increased by $19.9. We also incurred additional expenses of $20.6 for IT
infrastructure development to support revenue growth, as well as consulting projects.
General and Administrative Expenses
Core operating expenses for general and administrative increased by $26.1 or 11% in 2011 compared with 2010 and by $55.5 or 32% in
2010 compared with 2009. The increase in 2011 was primarily due to an increase of $27.5 related to employee-related expenses primarily due to
incremental growth in headcount. The increase in 2010 was primarily due to an increase of $21.2 related to corporate expenses, including
contributions to our charitable foundation and legal fees. Also contributing to the increase in expenses in 2010 was depreciation and equipment
expenses of $11.3 and employee-related expenses of $10.9 due to the incremental growth in headcount.
Stock-Based Compensation Expense
Stock-based compensation expense was $347.6 in 2011 , $302.6 in 2010 and $246.4 in 2009 , representing year-over-year increases of
$45.0
and $56.2 , respectively. The increase in stock-based compensation expense in 2011 over 2010 was primarily due to an increase of $74.3 from
new awards issued to our existing employees both in the second half of 2010 and the second quarter of 2011, as well as an increase of $32.9 for
awards made to new employees. These increases were partially offset by a decrease of $71.7 primarily related to fully vested grants. The
increase in stock-based compensation expense in 2010 over 2009 was primarily due to an increase of $29.9 for grants made to new employees in
2010, an increase of $28.2 from new awards made to our existing employees, and an increase of $20.8 from equity awards issued in connection
with the acquisition of SpringSource late in the third quarter of 2009. These increases were offset in part by a decrease of $20.8 primarily related
to fully vested grants.
Stock-based compensation is recorded to each operating expense category based upon the function of the employee to whom the stock-
based compensation relates and fluctuates based upon the value and number of awards granted. Compensation philosophy varies by function,
resulting in different weightings of cash incentives versus equity incentives. As a result, functions with larger cash-based components, such as
sales commissions, will have comparatively lower stock-based compensation expense than other functions.
As of December 31, 2011, the total unamortized fair value of our outstanding equity-based awards held by our employees was
approximately $622.9 and is expected to be recognized over a weighted-average period of approximately 1.6 years.
Capitalized Software Development Costs, Net
Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when the product's
technological feasibility has been established and ending when the product is available for general release. Judgment is required in determining
when technological feasibility is established and as our business, products and go-to-market strategy have evolved, we have continued to
evaluate when technological feasibility is established. Following the release of vSphere 5 and the comprehensive suite of cloud infrastructure
technologies in the third quarter of 2011, we determined that VMware's go-to-
market strategy had changed from single solutions to product suite
solutions. As a result of this change in strategy, and the related increased importance of interoperability between our products, the length of time
between achieving technological feasibility and general release to customers significantly decreased. For future releases, we expect our products
to be available for general release soon after technological feasibility has been established. Given that we expect the majority of our product
offerings to be suites or to have key components that interoperate with our other product offerings, the costs incurred subsequent to achievement
of technological feasibility are expected to be immaterial in future periods. In the fourth quarter of 2011, all software development costs were
expensed as incurred.
Our R&D expenses and amounts that we have capitalized as software development costs may not be comparable to our peer companies due
to differences in judgment as to when technological feasibility has been reached or differences in judgment regarding when the product is
available for general release. Additionally, future changes in our judgment as to when technological feasibility is established, or additional
changes in our business, including our go-to-market strategy, could materially impact the amount of costs capitalized. For example, if the length
of time between technological feasibility and general availability was to increase again in the future, the amount of capitalized costs would likely
increase.
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For the Year Ended December 31,
2011
2010 2009
Stock-based compensation, excluding amounts capitalized
$
335.2
$
291.7
$
231.5
Stock-based compensation capitalized
12.4
10.9
14.9
Stock-based compensation, including amounts capitalized
$
347.6
$
302.6
$
246.4