VMware 2011 Annual Report Download - page 56

Table of Contents
future cash outflows to repurchase our shares to cover tax withholding obligations will depend upon, and could fluctuate significantly from
period-to-period based on, the market value of our stock, the number of awards exercised, sold or vested, the tax benefit realized and the tax-
affected compensation recognized.
Note Payable to EMC
As of December 31, 2011 , $450.0 remained outstanding on a note payable to EMC, with interest payable quarterly in arrears. In June 2011,
we and EMC amended and restated the note to extend the maturity date of the note to April 16, 2015 and to modify the principal amount of the
note to reflect the outstanding balance of $450.0 . The interest rate continues to reset quarterly and bears an interest rate of the 90-day LIBOR
plus 55 basis points.
To date, inflation has not had a material impact on our financial results.
Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use
of non-GAAP financial information. Our measures of core operating expenses, non-GAAP operating cash flows and free cash flows each meet
the definition of a non-GAAP financial measure.
Core Operating Expenses
Management uses the non-GAAP measure of core operating expenses to understand and compare operating results across accounting
periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, to calculate bonus payments and to evaluate
our financial performance, the performance of its individual functional groups and the ability of operations to generate cash. Management
believes that core operating expenses reflect our 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 our operating results.
We define core operating expenses as our total operating expenses excluding the following components, which we believe are not reflective
of our 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.
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• Stock-based compensation. Stock-based compensation expense is generally fixed at the time the stock-based instrument is granted and
amortized over a period of several years. Although stock-based compensation is an important aspect of the compensation of our
employees and executives, determining the fair value of certain of the stock-based instruments we utilize involves a high degree of
judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting, future
exercise or termination of the related stock-
based awards. Furthermore, unlike cash compensation, the value of stock options, which is an
element of our ongoing stock-based compensation expense, 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.
Capitalized software development costs encompasses capitalization of
development costs and the subsequent amortization of the capitalized costs over the useful life of the product. Amortization and
capitalization of software development costs can vary significantly depending upon the timing of products reaching technological
feasibility and being made generally available. 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, which 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. 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. For additional information, see "Results of Operations - Capitalized Software
Development Costs, Net"
above.
• 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. 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. However, we do not acquire
businesses on