VMware 2007 Annual Report Download - page 49

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Table of Contents
Research and Development (
“R&D”) Expenses
Our R&D expenses were $285.9 in 2007, $148.3 in 2006 and $72.6 in 2005, representing year-over-year increases of $137.7 or 93% in
2007 and $75.7 or 104% in 2006. As a percentage of revenues, R&D expenses were 22%, 21% and 19% in 2007, 2006 and 2005, respectively.
The modest annual increases in R&D expenses as a percentage of revenues were primarily attributable to incremental headcount to support the
growth of our business. The increase in R&D expenses consisted primarily of increased salaries, benefits expense, stock-based compensation
expense and consulting fees, resulting from the deployment of additional resources to support new product development. Salaries, benefits
expense, and consulting fees increased by $98.2 in 2007 and $50.9 in 2006. Administrative costs, including travel, equipment, facilities and
depreciation, increased by $31.4 in 2007 and $10.4 in 2006. Total stock-based compensation expense attributable to R&D personnel increased
by $16.6 in 2007 and $11.7 in 2006. These increases are partially offset by an increase in software capitalization of $13.8 to $56.8 (including
$9.1 of stock-based compensation) in 2007, compared with $43.0 (including $10.5 of stock-based compensation) in 2006, due primarily to more
resources working on products that reached technological feasibility in 2007. Additionally, software capitalization increased by $17.9 to $43.0 in
2006, compared with $25.1 in 2005 due primarily to our Virtual Infrastructure software product reaching technological feasibility.
Sales and Marketing Expenses
Our sales and marketing expenses were $450.2 in 2007, $238.3 in 2006 and $125.0 in 2005, representing year-over-year increases of
$211.9 or 89% in 2007 and $113.4 or 91% in 2006. As a percentage of revenues, sales and marketing expenses were 34%, 34% and 32% in
2007, 2006 and 2005, respectively. The increases in sales and marketing expenses in absolute dollars were primarily the result of higher salaries,
benefits expense and stock-based compensation expense due to both increases in sales and marketing personnel and higher commission expense
resulting from increased sales volume. Salaries and benefits expense, including commissions, increased by $128.2 in 2007 and $51.3 in 2006.
Administrative costs, including travel, equipment, facilities and depreciation, increased by $38.0 in 2007 and $7.3 in 2006, marketing programs
increased by $12.9 in 2007 and $15.1 in 2006, and stock-based compensation expense increased by $14.3 in 2007 and $6.7 in 2006.
General and Administrative Expenses
Our general and administrative expenses were $135.7 in 2007, $69.6 in 2006 and $30.8 in 2005, representing year-over-year increases of
$66.1 or 95% in 2007 and $38.8 or 126% in 2006. As a percentage of revenues, general and administrative expenses were 10%, 10% and 8% in
2007, 2006 and 2005, respectively. These expenses increased primarily as a result of additional salaries, benefits expense and stock-based
compensation expense resulting from the additional resources to support the growth of our business and to expand our own administrative
functions, including our finance and legal functions, in response to being a public company. Salaries and benefits expense increased by $27.2 in
2007 and $9.5 in 2006. Administrative costs, including travel, equipment, facilities and depreciation, increased by $13.8 in 2007 and $11.7 in
2006. Stock-based compensation expense increased by $6.2 in 2007 and $4.6 in 2006. Other administrative costs, such as legal, audit and tax
fees increased by $7.2 in 2007 and $1.1 in 2006. Partially offsetting these cost increases was a reimbursement of $3.3 received in 2005 of legal
fees incurred in previous years. Other administrative costs increased in 2007 increased primarily as a result of the costs related to the voluntary
exchange offer we conducted in connection with our initial public offering of our Class A common stock in August 2007, that permitted our
eligible employees to exchange their existing EMC stock options and restricted stock awards for our new VMware Class A common stock
options and restricted Class A common stock awards (the “Exchange Offer”), and non-capitalizable costs related to the IPO.
Stock
-Based Compensation Expense
Stock-based compensation expenses were $92.4 in 2007, $51.2 in 2006 and $27.1 in 2005, representing year-over-year increases of $41.2
or 80% in 2007 and $24.2 or 89% in 2006. Stock-
based compensation primarily increased in absolute dollars in 2007 compared with 2006 due to
broad-based stock option and
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