VMware 2007 Annual Report Download - page 51

Table of Contents
Intangible Assets
In the years ending December 31, 2007, 2006 and 2005, we amortized $25.7, $25.5 and $26.1, respectively, for purchased intangible
assets. Amortization expense was comparatively flat in 2007 compared to 2006 and 2006 compared to 2005 due to additional amortization for
new acquisitions offset by decreasing amortization for historical acquisitions. The amortization expense was classified as follows in the
consolidated income statements (table in millions):
Operating Income
Our operating income was $235.3 in 2007, $120.6 in 2006 and $93.6 in 2005, representing year-over-year increases of $114.7 or 95% in
2007 and $27.0 or 29% in 2006. Operating margins were 18% in 2007, 17% in 2006 and 24% in 2005. Most of the decrease in operating income
in 2006 as compared to 2005 as a percentage of revenue was a result of increased salaries and benefits as we expanded our research and
development, sales and marketing and general and administrative spending to support our revenue growth and to expand future product offerings
in what may be a substantially more competitive environment.
The net effect of capitalizing and amortizing software development costs contributed to the increase in operating margin in 2007. Net
capitalized software development costs increased operating income by $20.4 in 2007 due primarily to more resources working on products that
reached technological feasibility in 2007, and increased operating income by $20.7 in 2006 primarily because our Virtual Infrastructure software
product reached technological feasibility.
A portion of our costs of revenues, primarily the costs of personnel to deliver technical support on our products, and a portion of our
operating expense primarily related to sales, sales support and research and development, are denominated in foreign currencies, primarily the
Euro, the British pound, the Japanese yen, the Indian rupee, the Australian dollar and the Canadian dollar. These costs and the resulting effect on
operating income are exposed to foreign exchange rate fluctuations. As a result of fluctuations in foreign currency values compared to the U.S.
dollar, operating income decreased by $18.6 in 2007 and $2.8 in 2006. The effect in 2005 was not significant. If the dollar continues to weaken
in relation to other currencies such as the Euro throughout 2008, we expect this to have a negative effect on our operating margins in 2008.
Investment Income
Investment income was $22.9 in 2007, $2.5 in 2006 and $0.5 in 2005. Investment income consists of interest earned on cash and cash
equivalent balances. Investment income increased in 2007 compared to 2006 due to higher cash and cash equivalent balances primarily a result
of the proceeds we received from our IPO and the sale of shares of our Class A common stock to Intel Capital.
Interest Income (Expense) with EMC, Net
Interest expense with EMC, net, was $17.8 in 2007, and interest income with EMC, net, was $0.3 and $2.1 in 2006 and 2005, respectively.
In 2007, interest expense with EMC, net, consisted primarily of $26.6 in interest expense incurred on the note issued to EMC in April 2007,
offset by interest income of $8.8 earned on amounts due to us from EMC on our intercompany balance. In 2006 and 2005, the balance consisted
of interest income (expense) earned (incurred) on our intercompany balance with EMC.
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For the Year Ended December 31,
2007 2006 2005
Costs of license revenues
$
21.2
$
21.8
$
23.4
Sales and marketing
2.6
2.2
1.8
General and administrative
1.9
1.5
0.9
$
25.7
$
25.5
$
26.1