VMware 2011 Annual Report Download - page 57

Table of Contents
a predictable cycle.
Non-GAAP operating cash flows and free cash flows
We define non-GAAP operating cash flows as net cash provided by operating activities less capitalized software development costs plus the
excess tax benefits from stock-based compensation. We define free cash flows as non-GAAP operating cash flows less capital expenditures.
Management uses non-GAAP operating cash flows as another measure of cash flows from operations because this measure offers a perspective
of our operating cash flows that aligns with how management internally views our overall and individual functional group operating results.
When viewing operating results for evaluating our past performance and for planning purposes, management excludes certain items, including
the effect of capitalizing and amortizing software development costs and items related to stock-based compensation, which are also excluded in
the non-
GAAP operating cash flows measure. Management uses free cash flows as a measure of financial progress in our business, as it balances
operating results, cash management and capital efficiency. In addition to quarterly free cash flows, management also focuses on trailing twelve
month free cash flows, as free cash flows can be volatile in the short-term.
We believe that our measures of non-GAAP operating cash flows and free cash flows provide useful information to investors and others, as
they allow for meaningful period-to-period comparisons of our operating cash flows for analysis of trends in our business. Additionally, we
believe that information regarding non-GAAP 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, 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 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 our 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, 2011, 2010 and 2009.
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, 2011, 2010 and 2009.
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, trademark, trade secret or other intellectual
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