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Table of Contents
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction
with our annual consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K.
All dollar amounts expressed as numbers in this MD&A (except per share amounts) are in millions. Certain tables may not add due to
rounding.
Overview
Our primary source of revenues is the licensing of virtualization infrastructure software solutions and related support and services for use
by businesses and organizations of all sizes and across numerous industries in their information technology (“IT”) infrastructure. Our solutions
run on industry-standard desktop computers and servers and support a wide range of operating system and application environments, as well as
networking and storage infrastructures. Our virtualization software solutions help eliminate the complexity of maintaining and managing IT
infrastructures, reduce both capital and operating costs, and provide a more flexible and dynamic IT environment to better support the needs of
business. With our latest platform, VMware vSphere (“vSphere”), we are helping companies along the path of cloud computing by providing
compatible IT infrastructures for both businesses and cloud service providers.
We have developed a multi-channel distribution model to expand our presence and to reach various segments of the industry. In 2009 we
derived over 75% of our revenues from our channel partners, which include distributors, resellers, x86 system vendors and system integrators.
The remainder is primarily derived from direct sales. We have also developed a network of indirect channel partners who fulfill orders through
our direct channel partners. The majority of our revenues result from contracts that include both perpetual software licenses and ongoing
software maintenance contracts. License revenues are recognized when the elements of revenue recognition for the licensed software are
complete. Software maintenance revenues are recognized ratably over the term of the software maintenance period, and include renewals of
software maintenance sold after the initial software maintenance period expires. We also recognize revenues from professional services provided
to our customers primarily as services are performed.
Our software products are typically sold with software maintenance services. Vendor-specific objective evidence (“VSOE”) of fair value
for software maintenance services is established by the rates charged in stand-
alone sales of software maintenance contracts or the stated renewal
rate for software maintenance included in the license agreement. Our software products may also be sold with professional services. VSOE of
fair value for professional services is based upon the standard rates we charge for such services when sold separately. The revenues allocated to
the software license included in multiple element contracts represent the residual amount of the contract after the fair value of the other elements
has been determined.
Our current financial focus is on long-term revenue growth to generate free cash flows to fund our expansion of industry segment share
and to evolve our virtualization-based products for data centers, desktop computers and cloud computing through a combination of internal
development and acquisitions. We expect to grow our business by broadening our virtualization infrastructure software solutions technology and
product portfolio, increasing product awareness, promoting the adoption of virtualization, and building long-term relationships with our
customers through the adoption of enterprise license agreements (“ELAs”). In the second quarter of 2009, VMware vSphere, the next generation
of VMware Infrastructure, became generally available. VMware View 4, which is integrated with VMware vSphere, became generally available
in the fourth quarter of
42
ITEM 7.
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Free cash flow, a non
-
GAAP financial measure, is defined as net cash provided by operating activities plus the excess tax benefits from stock
-
based compensation, less capital expenditures and capitalized software development costs. Each adjusting item is separately presented on our
consolidated statements of cash flows. See
“
Liquidity
—
Non
-
GAAP Financial Measures
”
for further information.
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