VMware 2011 Annual Report Download - page 50

Table of Contents
In 2011, 2010 and 2009, we capitalized $86.4 (including $12.4 of stock-based compensation), $71.6 (including $10.9 of stock-based
compensation) and $83.5 (including $14.9 of stock-based compensation), respectively, of costs incurred for the development of software
products. These amounts have been excluded from R&D expense on our accompanying consolidated statements of income. Capitalized software
development costs increased by $14.7 in 2011 as compared with 2010 primarily due to an increase of $52.8 for the development of VMware
vSphere 5 year-over-year, which was partially offset by a decrease of $39.7 due to the timing of when certain products, including prior versions
of vSphere, reached technological feasibility. The change in our go-to-market strategy and resulting decrease in the length of time between
technological feasibility of our products and the date those products are available for general release to customers did not materially impact the
amount of software development costs we capitalized in 2011. Capitalized software development costs decreased by $10.1 in 2010 as compared
with 2009 primarily due to the timing of when products reached technological feasibility. In future periods, we expect our software development
costs to be recorded as R&D expense as incurred due to the aforementioned change in our go-to-market strategy.
In 2011 , 2010 and 2009 , amortization expense from capitalized software development costs were $84.7 , $99.5 and $82.9 , respectively.
These amounts are included in cost of license revenues on our accompanying consolidated statements of income. The decrease in amortization of
software development costs of $14.8 in 2011 as compared with 2010 was primarily due to a net decrease of $25.6 related to the amortization of
prior versions of vSphere, which was partially offset by an increase of $16.0 related to the general release of VMware vSphere 5.0 in the second
half of 2011. 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. In future periods, we expect our amortization expense from capitalized
software development costs to decline as software development costs are expected to be recorded as R&D expense as incurred given our current
go-to-market strategy.
Other Operating Expenses
Other operating expenses consist of employer payroll tax on employee stock transactions and intangible amortization, which are recorded to
each individual line of operating expense on our accompanying consolidated statements of income. Additionally, other operating expenses
include acquisition-related items, which are recorded to general and administrative expense on our income statement.
Other operating expenses were $85.3 in 2011 , $54.6 in 2010 and $18.6 in 2009 , representing an increase of $30.7 in 2011 and an increase
of $35.9 in 2010. The increase in 2011 was primarily due to additional intangible amortization of $29.8, primarily resulting from new
acquisitions, of which $22.3 was recorded to costs of license revenues on our income statement. The increase in 2010 was primarily due to
additional intangible amortization of $20.6, primarily resulting from new acquisitions, of which $12.1 was recorded to costs of license revenues
on our income statement. Additionally, in 2010, there was 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.
Investment Income
Investment income increased by $9.5 to $16.2 in 2011 from $6.6 in 2010 and decreased by $1.6 to $6.6 in 2010 from $8.2 in 2009 .
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 increased in 2011 as compared with 2010 primarily due to an
increase in the average rate of interest earned on our portfolio as a result of our shift from a cash and cash equivalents portfolio primarily
invested in money market funds to a short-
term investment portfolio of fixed income securities. We began investing in fixed income securities in
the second quarter of 2010 in order to achieve investment returns in line with our objectives of principal preservation and risk management.
Additionally, investment income increased in 2011 due to increased cash equivalent and short-term investment balances available for
investment. The decrease in investment income in 2010 compared with 2009 was not material.
Other Income (Expense), Net
Other income, net of $47.0 in 2011 changed by $61.2 as compared with other expense, net of $14.2 in 2010 . Other expense, net of $14.2 in
2010 changed by $17.1 from other income, net of $2.9 in 2009 . The change in 2011 compared with 2010 was primarily due to a $56.0 gain
recognized on the sale of our investment in Terremark Worldwide, Inc. in 2011. The change in 2010 compared with 2009 was primarily due to
$8.2 of foreign exchange loss from the net impact of underlying foreign currency exposure and foreign currency forward contracts, as well as a
gain of $5.9
recognized in 2009 from the remeasurement to fair value of a previously held equity interest in SpringSource in connection with our
acquisition of SpringSource.
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