VMware 2007 Annual Report Download - page 43

Table of Contents
Our current financial focus is on sustaining our growth in revenue to generate cash flow to expand our market segment share and our
virtualization solutions. Although we are currently the leading provider of virtualization solutions, we believe the use of virtualization solutions
is at very early stages by customers. We expect to face competitive threats to our leadership from a number of companies, some of whom may
have significantly greater resources than we do. As a result, we believe it is important to continue to invest in our research and product
development, sales and marketing and the support function to maintain or expand our leadership in the virtualization solutions market. This
investment could result in contracting operating margins as we invest in our future. We believe that we will be able to continue to fund our
product development through operating cash flows as we continue to sell our existing products and services. We believe this is the right priority
for the long-term health of our business.
In evaluating our results, we focus on operating margin excluding stock-based compensation, amortization of intangible assets, the write-
off of in-process research and development, and the net effect of the amortization and capitalization of software development costs incurred in
the research and development of new software products. A portion of our service revenue is recognized in periods of up to five years subsequent
to the initial contract, whereas most of our license revenue is recognized within the first quarter of contract signing. As a result, variability in
operating margin can result from differences in when we price our service and when the cost is incurred. Substantially all of our international
revenue is for contracts in U.S. dollars to international channel partners. A portion of our operating expenses is in currencies other than the U.S.
dollar. This difference may cause variability in operating margins due to fluctuations in the U.S. dollar compared to other currencies. We are not
currently focused on short-
term operating margin expansion, but rather on investing at appropriate rates to support our growth and future product
offerings in what may be a substantially more competitive environment.
Prior to our IPO in August 2007, we were a wholly-owned subsidiary of EMC Corporation (“EMC”), and as such we relied on EMC to
provide a number of administrative support services and facilities in other countries. Although we will continue to operate under an
administrative services agreement and continue to receive support from EMC, our administrative costs may increase. We also are investing in
expanding our own administrative functions, including our finance and legal functions, which may be at a higher cost than the comparable
services currently provided by EMC. We are incurring additional costs as a public company, including audit, investor relations, stock
administration and regulatory compliance costs.
Our Relationship with EMC
As of December 31, 2007, EMC owned 26,500,000 shares of Class A common stock and all 300,000,000 shares of Class B common stock,
representing approximately 85% of our total outstanding shares of common stock and 98% of the combined voting power of our outstanding
common stock.
In 2007 and 2006, we recognized professional service revenue of $11.8 and $1.4, respectively, for services provided to EMC customers
pursuant to contractual agreements with EMC. In 2007, we entered into an enterprise license agreement with EMC to provide server and desktop
products. All $4.3 of revenue related to this arrangement was included in deferred revenue as of December 31, 2007.
In 2007, 2006 and 2005, we purchased $7.2, $2.9 and $0.6, respectively, of storage systems from EMC. Through the third quarter of 2007,
and for 2006 and 2005, the amounts purchased from EMC were at EMC’s cost. In the fourth quarter of 2007, the practice was changed to
purchasing from EMC at a discount off of EMC’s list price.
The financial statements include expense allocations for certain corporate functions provided by EMC, including accounting, treasury, tax,
legal and human resources. These allocations were based on estimates of the level of effort or resources incurred on our behalf. The total costs
allocated from EMC were $7.7, $5.1 and $5.3 in 2007, 2006 and 2005, respectively. Additionally, certain other costs incurred by EMC for our
direct benefit, such as rent, salaries and benefits have been included as expenses in our financial statements. The total of these other costs were
$116.1, $69.6 and $27.1 in 2007, 2006 and 2005, respectively. As part of our tax sharing
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