VMware 2011 Annual Report Download - page 42

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 share and per share amounts) are in millions.
Overview
Our primary source of revenues is the licensing of virtualization and virtualization-based cloud infrastructure 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.
We have developed a multi-channel distribution model to expand our global presence and to reach various segments of the industry. In
2011, we derived over 85% of our sales from our channel partners, which include distributors, resellers, system vendors and systems integrators.
Sales to our channel partners often involve three tiers of distribution: a distributor, a reseller and an end-user customer. Our sales force works
collaboratively with our channel partners to introduce them to customers and new sales opportunities. As we expand geographically, we expect
to continue to add additional channel partners.
Although we believe we are currently the leading provider of virtualization infrastructure software solutions, we face competitive threats to
our leadership position from a number of companies, some of which have significantly greater resources than we do, which could result in
increased pressure to reduce prices on our offerings. As a result, we believe it is important to continue to invest in strategic initiatives related to
product research and development, market expansion and associated support functions to expand our industry leadership. We believe that we
will be able to continue to meet our product development objectives through continued investment in our existing infrastructure, supplemented
with strategic hires and acquisitions, funded through the operating cash flows generated from the sale of our products and services. We believe
this is the appropriate priority for the long-term health and growth of our business.
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”). Since the introduction of VMware vSphere in 2009, we have introduced more products that
build on the vSphere foundation, including VMware vSphere 5 and a comprehensive suite of cloud infrastructure technologies, as well as
VMware View 5. We plan to continue to introduce additional products in the future. We have made, and expect to continue to make, acquisitions
designed to strengthen our product offerings or extend our strategy to deliver solutions that can be hosted at customer data centers or at service
providers.
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. See “Non-GAAP Financial Measures” for further information on free cash flows. In evaluating our results, we
also focus on operating margin excluding certain expenses which are included in our total operating expenses calculated in accordance with
GAAP. The expenses excluded are stock-
based compensation, the net effect of the amortization and capitalization of software development costs
and certain other expenses consisting of employer payroll taxes on employee stock transactions, amortization of intangible assets and
acquisition-related items. We believe this measure reflects our ongoing business in a manner that allows meaningful period-to-period
comparisons. 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.
Although our customers continue to adopt our product platform as a strategic investment that improves efficiency and flexibility for their
business and enables substantial cost savings, we remain cautious about the macroeconomic environment. The volatility we are observing in both
the world economy and individual sovereign nations may impact IT spending and demand for our products and services in 2012. We expect to
continue to manage our resources prudently, while making key investments in support of our long-term growth objectives.
Income Statement Presentation
As we operate our business in one operating segment, our revenues and operating expenses are presented and discussed at the consolidated
level.
As a consequence of the timing differences in the recognition of license revenues and software maintenance revenues, variability in
operating margin can result from differences between when we quote and contract for our services and when the cost is incurred. Variability in
operating margin can also result when we recognize previously unearned foreign denominated
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ITEM 7. MANAGEMENT’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS