VMware 2009 Annual Report Download - page 55

Table of Contents
from R&D expense on our accompanying consolidated statements of income. The decrease in capitalized software development costs in 2009 as
compared with 2008 was primarily the result of the reduced costs capitalized on VMware vSphere. Most of the vSphere costs were capitalized
during the second half of 2008.
In 2009, 2008, and 2007, amortization expense from capitalized amounts was $82.9, $51.6, and $36.4, respectively. These amounts are
included in cost of license revenues on our accompanying consolidated statements of income. We amortized more costs during 2009 compared
with 2008 primarily due to the general release of VMware vSphere in the second quarter of 2009. We amortized more costs during 2008
compared with 2007 primarily due to the overall timing of when products became generally available.
Intangible Amortization & Other
Intangible amortization and the other remaining expenses shown in the table above were $18.7 in 2009, $28.9 in 2008, and $25.7 in 2007,
representing a decrease of $10.2 or 35% in 2009 and an increase of $3.1 or 12% in 2008. The decrease in these expenses between 2009 and 2008
was primarily due to the lack of expensed in-process research and development in 2009 and intangible amortization ceasing on historical
acquisitions offset in part by additional amortization for new acquisitions. The increase in these expenses between 2008 and 2007 was primarily
due to in-process research and development recognized in 2008, an increase in employer payroll tax on employee stock transactions, and
intangible amortization ceasing on historical acquisitions offset in part by additional amortization for new acquisitions.
Operating Expenses
Aside from the effects of, and changes relating to, stock-based compensation, employer payroll taxes on employee stock transactions,
amortization of intangible assets, the write-off of in-process research and development, acquisition-related items, and the net effect of the
amortization and capitalization of software development costs, the following discussion highlights the remaining factors that impacted our
operating expenses.
After taking into consideration the items in the table and discussed above, the increase between 2009 and 2008 was $127.8 or 9% in 2009
and $428.7 or 44% in 2008. The increase between 2009 and 2008 was primarily due to higher salaries and benefits expenses from incremental
headcount added to support the business and our international expansion, as well as a result of higher commission expense from increased sales
volumes. These increases were partially offset by the benefit from the austerity measures we introduced at the end of 2008. These austerity
measures included, but were not limited to, reduced travel and entertainment costs, decreased contractor costs, and hiring limited to roles that fit
our strategic initiatives. These measures also included suspensions of merit increases for our employees and our company match of pre-tax
employee contributions to 401(k) retirement plans. In the fourth quarter of 2009, we reinstated contributions to the 401(k) retirement plans,
subject to maximum limits, and we have budgeted for a merit increase effective in the second quarter of 2010. The purpose of our austerity
measures has been to enable us to maintain reasonable margins and preserve cash while at the same time execute on our core initiatives and
deliver value to our customers. The increase between 2008 and 2007 was primarily as a result of higher salaries and benefits expenses from
incremental headcount added to support the business, and to support feature functionality development, sustainment of existing products and
new product development. Additionally, the increase was due to commission expense on higher sales volumes, as well as increased marketing
expenses relating to our ongoing international market expansion and our branding initiative in 2008.
A portion of our operating expenses, primarily the cost of personnel to deliver technical support on our products and professional services,
marketing, and research and development, are denominated in foreign currencies, and are thus exposed to foreign exchange rate fluctuations.
Operating expenses benefited by $28.0 in 2009 and were negatively impacted by $10.6 in 2008 due to fluctuations in the exchange rates between
the U.S. Dollar and foreign currencies as compared with the respective prior year.
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